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March 28, 2018

Experience a Retail Rising

Creating Experiential Retail Environments on the West Coast

Shifts in consumer preferences to a shopping environment that features experience over pure buying has forced shopping malls and retailers to rethink how they’ve traditionally operated. While certain buying periods, like the Christmas holiday season or back-to-school, remain major drivers of a retailer’s success, the emergence of online shopping has thrown a monkey wrench into the mix.

Many retailers and mall owners are finding and adopting innovative solutions to reinvent themselves for the 21st century, though it is tough to ignore those who’ve not kept pace with changes and have sunk into bankruptcy. There is hope, even for a sector facing severe challenges.

A report by Deloitte, “The Great Retail Bifurcation: Why the retail ‘apocalypse’ is really a renaissance” revealed that retail brands that cater to either the affluent or those who are budget driven, such as dollar stores, are fairing quite well these days. The report found “High-end and price-conscious retailers have seen massive revenue gains (growing 81% and 37%, respectively) in the last five years, while those that aim to be jacks-of-all-trades struggle to stay afloat, with just 2% revenue growth.”

Set against that backdrop, a trend toward experiences has clearly emerged in the retail sector, especially for younger consumers, typically Millennials, who place a premium on quality of life and doing things over buying things. And while online retail sales have provided consumers with an easier and more efficient way to shop, e-commerce cannot replace a consumers’ desire to shop in a physical store.

“Developers have been incorporating more experiential elements like entertainment venues,” said Kidder Mathews’ retail specialist, Damian Sevilla. “Retailers are adding experiences in order to continue to be relevant in the ever-changing market of retail. In this post-MTV era, where every consumer is able to purchase things on their phones with as much (and often more) frequency as a retail shop, better pricing, less tax, and easier access, retailers themselves need to be agile to compete.”

A few of the more interesting ways malls have adopted to the changing retail landscape include:

  • Department store space is being converted into new uses. They’ve found fitness centers, churches, medical clinics and data centers work well in these larger spaces.
  • Food courts are being revamped into clusters of higher-priced restaurants, which serve as great gathering spaces for community groups or child daycare centers.
  • Under-utilized atriums in malls are emerging as ideal venues for event spaces to host car shows or fashion shows.
  • Shop space is being redeveloped as apartments, art galleries, indoor farms, classrooms, and public libraries, DMV or even government offices.
  • Vast parking lots are being reborn. They can become transportation connection points by adding light rail stations, or be developed with residential properties or landscaped into a public space with walking paths and plazas to hold farmer’s markets or other events.
  • Malls are becoming destinations by adding experiential attractions such as movie theaters, bars, casinos, restaurants, rock climbing walls, laser tag, theme parks and roller coasters.

Real World Examples

Retailers who look beyond what has been done before, and apply an innovative eye to appeal to today’s customers, are coming up with imaginative experiences, too.

Sevilla cited Alderwood Mall in Lynwood, Washington as an example of a center that has successfully created an interesting experience for shoppers. “The center has an REI, and they have led as an innovative tenant that has interactive classes, demo’s on rental gear, educational seminars and other things to have the experiential portion,” said Sevilla. “The mall has also migrated towards meandering common areas with outdoor fireplaces, lingering spaces, making the center feel like a place to be and an experience all on its own.”

Sevilla believes that type of strategy could work, “but as with everything in this market, it will likely be a trend and they’ll have to do a remodel or re-adjust every few years to remain relevant.” He points out that the effort “is driving traffic, and offering up a differentiator for a consumer to experience the product.”

There are a host of categories within the retail sector who are successfully blending experiences into the retail mix today. For example, movie theaters are adding luxury seating, expanded menus, full-service bars, in-seat food service and a mix of pricing options to bring in viewers.

Food halls are another example of the types of experiences rapidly emerging in traditional mall settings. The growth is fueled by a foodie culture that seeks authenticity, quality and diversity.

Themed or curated bars are gaining in popularity too. That includes such experiences as axe throwing contests, or a live version of karaoke night where customers join a band on-stage and get to sing a favorite song.

The specialty fitness club segment has experienced 70% growth from 2012 to 2015. These smaller-format gyms offer customized classes, and the shared experience is proving to be a powerful combination, not to mention one that people will pay a premium for.

Eater-tainment is an emerging category of retail. They typically involve anchor-sized venues that feature a mash-up of games, arcades, restaurants and bars. These venues account for roughly 20% of mall space in 2017, that’s up from just 10% a decade ago.

An example of how these experiences can become a draw at a mall is the highly popular Royal Kids (www.royalkids.us) indoor playground concept. Kidder Mathews’ Stephan Ktorza and Shelby Dopps are working with several mall and shopping centers landlords to bring this use to their property.

Another way that malls are adding different experiences into the environment is by expanding the pop-up shop concept to a new level. That may be a blend of entrepreneurs trying out bigger settings, experimenting with a new concept or simply an e-commerce brand testing the waters. Some retailers are using these micro-store formats to bring products into a different environment, without a big lease commitment. And malls have opened up or created spaces just for these kinds of retailers.

Getting it Right

The strategic shift by brick-and-mortar to incorporate online shopping trends has also introduced other considerations. Kidder Mathews’ Susan Zimmerman, a member of the retail group, said, “Retailers are doing both online strategies as well as adjusting their physical footprints. They realize the Millennial customer base buys predominately online. Yet, the size of the retail store is right sizing or downsizing. Retailers need to have enough inventory in store as well.”

That’s a delicate, ever-changing balance to try to find, and one not lacking challenges. Kidder Mathew’s Carol Cunha notes that “Omni channel marketing has been on the tips of retailers tongues for the last 15 years. The result has been to not try to carry as much inventory in the stores, and reducing their footprints,” she said. “Best Buy has reduced its new store footprint, but they are subleasing space in their old footprints and creating departments in their larger stores.”

Tenants definitely need to be agile to adjust and be able to compete with the online strategies of companies such as Amazon, which is becoming more and more active in the brick-and-mortar market every day.

Among the innovative technologies being deployed to facilitate this new environment include offering free WiFi and direct access to the tenant’s websites. “This can serve as a unique benefit, registering the customer to the tenant’s site, providing them data on who their customers are, and also in turn, giving the customer more exposure to other items that are for sale that the physical store may not carry or display in the store itself. Also, many of the stores are now using their brick-and-mortar stores as marketing flags, and keep their experience high and their inventories low,” Sevilla said.

Retail’s Stronger Future

TH Real Estate’s “THINK US Retail: De-cluttering the Retail Landscape” report recently looked at all the negativity surrounding the retail sector and concluded while there are vulnerable areas, high-performing retail doesn’t face the same value declines.

The report notes the shifts now occurring in the retail industry are real, though the de-cluttering via natural selection could result in a stronger sector in the future. “E-commerce and technology are causing significant changes in retailers’ business models, and weak retailers are being pushed out of business faster than ever before, said TH Real Estate’s US Head of Retail John Ragland. “The end result will be a set of financially healthier retailers and shopping centers that offer customers more compelling products and curated experiences. Ultimately, we believe this disruption is causing opportunities on which savvy investors can capitalize.”

Interestingly, the components that set high-performing retail assets apart today appear to be strong experiential components, continual adaptions that complement e-commerce, and strategic, forward-looking capital improvements that address shifts in consumer behavior and adapt to current technology. All of which adds up to a compelling argument that those centers that adopt such strategies emerge as dominant players, which is in-demand by both real estate investors and consumers.

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