Fiddling with the Roofs

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\"RetailRemember the old adage that “retail follows the rooftops”?

If you do, then you probably have fond memories of the Eisenhower administration, the post World War II suburban building boom when Sears Roebuck and J.C. Penney ruled the retail roost, and Sam Walton’s 5&10 variety store in Bentonville, Ark.

So much for nostalgia!

For 2015 and beyond, following those rooftops — the population centers retailers crave to be near — will get trickier. Fewer of them are being built, and they are no longer where they once were. Concurrently, premium locations are getting more expensive and some lenders, unsure of what new retail formats will look like, are keeping a lot of cash on the sidelines until they see another shakeout.

Maybe it’s time to adopt a new mantra. Namely, that retail follows the population and the population follows jobs and new technology. With that as a guide, we should be looking at two major factors that are already having an enormous impact on store development:

  • Migration of younger consumers (Millennials) to urban areas in top tier as well as secondary and tertiary cities.
  • Channel migration in which omnichannel and e-commerce initiatives, including mobile, are cannibalizing in-store sales and more than making up for any reductions in physical square footage.

Retail Schizophrenia

These trends are major challenges for retailers whose financial models are bound by the old idea that bigger is better. As such, we are seeing a sort of retail schizophrenia. One voice says expand or die. Another says expand and die. The question, to borrow a line from the movies, is “if you build it, they will come?”

A bewildering blitzkrieg of new technologies has put a retail store on every digital device and radically changed shopping habits. Has brick-and-mortar retailing as we knew become obsolete — or far less important — for a new “storeless” generation of shoppers?

Even developers, always anxious to get new projects out of the ground, are only cautiously optimistic. In their hearts, they admit that the old if-you-build-it-they-will-come attitude doesn’t work the way it did in decades past — especially when it comes to large anchor tenants.

Everyone is coming to the difficult realization that unbridled building of more retail space is economically unsustainable and fiscally irresponsible in an already overstored industry.

\"retailReduced Productivity

This was underscored by Accenture, whose analysis of 29 top U.S. retailers revealed that from 2005 to 2010, total square footage increased 38 percent while store count increased 21 percent. Unfortunately, sales per square foot during that period declined 5 percent. Less productive stores reported a 25 percendrop in return on invested capital. The majority of traditional retailers are overstored. Even with store closings over the past four years, there’s no reason to believe this trend hasn’t continued.

The result is an industry that must change the way retail real estate is viewed, obtained and developed. No one is suggesting a slash and burn strategy when it comes to store counts, but a comprehensive analysis of store portfolios. This could also be an opportunity to renegotiate leases with landlords who no longer have the upper hand.

Back to the Future

This transition is also taking the industry back to its roots — smaller footprints that cost less to build and stock and, in the process, create a more profitable store network. This speaks to the redevelopment of the inner core or the “18-hour city” — areas that are becoming more vibrant at night and during the day due to the influx of younger consumers who are patronizing local stores as well as shopping on their phones and laptops.

Even Walmart, the supercenter’s most ardent cheerleader, has concluded that building simply for the sake of getting bigger is a recipe for disaster. Consequently, the company’s investments and experimentation with smaller formats like Walmart Express, On Campus and Neighborhood Market, is a clear indication that the 200,000-250,000 square foot behemoth is no longer the dominant and fear-inducing format it once was.

The same is true of retailers like Target, with TargetExpress and CityTarget, Best Buy and others that are expanding into smaller formats that are a better fit for revitalized inner-city locations.

These and other formats are also geared to quick fill-in grocery trips enabling them to compete more effectively against dollar stores, drug stores and small formats like Aldi and Trader Joe’s — both of which are expanding into some of Walmart’s markets. Of course, small footprint stores, in and of themselves, are no guarantee of success as Tesco’s Fresh & Easy stores discovered after burning through several billion in capital.

Managing Change

Aside from the fact that the real estate needed for supercenters is getting more expensive and harder to find, consumers want more manageable alternatives. They no longer have the time or patience to walk miles of aisles when smaller stores and specialty shops have everything they need. This doesn’t point to the demise of the one-stop shopping concept. Rather, the industry has to adapt and create a compelling shopping experience in less space or in mixed-use developments that are going up across the country.

Meanwhile, we are seeing the remodeling and redevelopment of regional malls into family entertainment centers with more innovative restaurants to augment or replace overcrowded fast food courts, cinemas and more fun things to do in architecturally pleasing environments. An example is the Mall of America in Bloomington, Minn., which has its own aquarium on site. Here I have to steal a quote from Starbucks’ CEO Howard Schultz, who said: “You walk into a retail store, and if there’s a sense of entertainment, excitement and electricity — you want to be there.”

On another front, neighborhood shopping centers, usually anchored by supermarkets, are attracting attention as one of the main drivers of real estate demand. In some cases, they are replacing regional malls as the center of center of consumer activity. In effect, they are becoming the lifeblood of many communities and increasingly desirable locations for every segment of retailing.

One question that’s emerged about local shopping centers as well as malls is whether cheap leases signed during the recession and now coming to an end will throw a lot of excess real estate on the market. We could see more empty spaces dumped by retailers that are unwilling to renew at exorbitantly higher rents. But many insiders feel there is enough demand to absorb the space.

Another major trend that is likely to have a significant impact on physical space is hybrid retailing, or so-called “click and collect” operations, that enable customers to buy online and pick up purchases in store rather than waiting for home delivery by companies like Amazon or other providers. The customer convenience angle is undeniable. But will it turn brick-and-mortar stores into nothing more than fulfillment centers that exhibit little more creativity than a warehouse? Overall, the competition for good, productive space is going to intensify this year in many locales across the United States. So let me end with this quote from the comedian Milton Berle: “If opportunity doesn’t knock, build a door.”



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