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March 22, 2019

Retail Survival Guide 2019: Everything You Need to Know to Weather the Storm

There is considerable discussion, debate, and doubt concerning the fate of the American shopping mall, and the retail industry as a whole. Malls once were considered the primary place people went to buy things and to hang out. They were essentially a community’s town hall. The emergence of online shopping has shifted that paradigm, much to the angst of mall owners, department stores and big box retailers across the country.

That change is partly what’s behind many of the recent store closures, a list that has grown to more than 4,500 stores. This thinning of the herd follows a fundamental shift in the way people transact that’s transpired over the last decade. And those changing habits of the American consumer has resulted in the need for fewer stores today.

To be sure, the battle is reflective of the larger issues that the sector must address to survive, yet industry experts advise looking beyond the negative headlines to discover a different perspective. People are still buying, they are just taking different routes to get what they want and need. Most consumers split their shopping across three categories: value retail, convenient delivery and click-and-collect, or higher margin high-touch specialty and luxury retail. But it isn’t a death knell.

Countering the notion that the retail sector is suffering a prolonged death are a host of reports and statistics suggesting otherwise.

Total retail sales for 2018 were up 5% over 2017, and December retail sales were 2.3% higher than the previous year. Holiday sales were the best in nearly a decade, and there are many retailers such as Target, Ulta, Hobby Lobby, TJX and AtHome that continue to expand. Additionally, there’s a growing list of digitally-native retailers such as Untuckit, Casper and others, that have big plans to expand into physical stores.

The National Retail Federation (NRF) forecasted retail sales during 2019 will increase between 3.8% and 4.4% to more than $3.8 trillion.

Real Capital Analytics’ (RCA) reported that mall transaction volume was up 846% in 2018. And Reis’ reported that despite the numerous store closures across the U.S., the vacancy rate experienced minimal changes and rents held up.

Those numbers show just how well the retail sector has withstood the structural changes and challenges.

Redevelopment

To meet the challenge, retailers must create an experience to capture consumers interest or face the reality of losing them to other environments that do. Today, that typically means focusing on placemaking, creating connectivity and giving people a compelling reason to explore the world outside their homes and away from their computer, while embracing a tech-savvy, smartphone-wielding mobile consumer.

Many of today’s top performing retail centers have shifted their understanding of what constitutes an anchor tenant. They now lean towards restaurants, fitness and service offerings that people aren’t able to get online. In some cases, that involves creative thinking by adding big gym anchors, or restaurants, or food halls, or knocking down big boxes to get more shop space. It also requires a deeper understanding of the demographics of a trade area, so the tenant mix is aligned and supported with a dynamic marketing and merchandise strategy.

An example of that strategy played out in Orange County. Several years ago, The Irvine Company faced a decision following news that Macy’s planned to close 40 stores in the U.S., one of which was located in its Irvine Spectrum Center. The mall owner proactively unveiled a $200-million reinvestment plan designed to help the center remain vibrant and relevant. The popular center is more vibrant today because it introduced more than 30 curated stores closely aligned with consumer’s changing-tastes in new buildings that replaced the former Macy’s.

That type of proactive planning was also evident when Taubman Centers took the wraps off its $500 million reimagination of Beverly Center in Los Angeles. It was not a shock to find a variety of new dining options had claimed central positions in the center. The mall owner recognized the importance food plays in today’s landscape.

Food Halls

The explosive growth of food-related retail and specifically food halls reflects another trend that’s showing up as the ultimate property amenity. These chef-driven concepts have rapidly evolved from being mainly about convenience to focusing on quality.

Food halls now are firmly entrenched as a key anchor component at the heart of a project and are serving as catalysts for community revitalizations across the country. These popular food and entertainment beacons can make leasing or selling the rest of the space easier because they serve as a major anchor and drive foot traffic, which strengthens a project.

The best ones offer unique architecture and design, well-conceived layouts and quality merchandising, along with highly-creative marketing and branding. Food halls can deliver a modern anchor under one roof that’s filled by an internet-resistant tenant base. They can also be a lower cost alternative to big box anchors, while commanding higher rents with less TI expense. The flexibility and small size of the spaces allow owners to backfill when needed quickly.

Mixed-Use

Outdated malls that are no longer relevant are ripe candidates for redevelopment to better reflect the changes in the economy, retail landscape, and consumers' lifestyles. Mall owners continue to explore a mix of alternative uses for vacant or functionally obsolete space. The days may be numbered for a mall containing 100% retail. Ideas rising to the top include introducing a residential component or incorporating a hospital facility to help create a vibrant center. That could unlock value. Often an anchor in a traditional mall may have been paying substantially below market rents. It makes sense for that space to be repurposed for retail tenants willing to pay higher rents or be converted to a different property type, such as residential, hotel or office space.

Examples of former retail space being converted to other uses such as creative office space include San Diego’s Horton Plaza and Los Angeles’ Westside Pavilion. Macerich and Hudson Pacific Properties are transforming the former Westside Pavilion retail center into a modern office environment. Google liked what they were doing and recently signed a deal to take 584,000 square feet at what is now named One Westside.

Co-Working

Repurposing vacant storefronts into co-working space is another option to consider. Not only can converting obsolete mall stores into shared working space bring value to the landlord, but there’s also strong demand for co-working space in all types of environments.

Macerich was one of the first to introduce co-working spaces to a shopping mall setting. The mall owner established a national partnership with premium workplace operator Industrious as part of a multi-property rollout. The first Industrious location in the Macerich partnership opened in January 2019 at Scottsdale Fashion Square in Scottsdale, AZ.

Micro-Retailing

A slight twist to the pop-up or cart program is a micro-retail concept that brings together both established and emerging brands to pilot new products in an interactive and experiential retail space that blurs the lines of physical space. Simon introduced The Edit@Roosevelt Field on Long Island, NY.

These micro areas offer brands the opportunity to showcase a strategic and curated product selection in 20- to 200-square-foot spaces that encourage consumers to discover new products in a high-touch, low-barrier environment that elevates the experience of interactive shopping. It was the first foray into a brick and mortar space for some of the participating brands that operated only online previously.

This segment of the retail sector is quickly evolving to encompass incubator retailing, specialization, flash retail, or inspired marketplaces. These concepts are becoming a norm that focuses on the creation of a dynamic merchandising plan. This segment of the retail sector typically involves shorter leases, shared space, short-term stores, and maker tenants. Though they appear organic, there’s a purposeful plan to merchandise buildings or marketplaces with brand experience concepts that create significant interest.

These spaces allow retailers to test a product in several markets and collect customer feedback so they can identify trends and potential top performers. Based on the feedback, the retailer can refine the product for a larger roll out. Examples where this type of retail is cropping up include Showfields in New York, Ponce City Market in Atlanta, and Santana Row in San Jose.

Digital-to-Physical

Once retailers come to grips with their initial fear surrounding online shopping, they may discover new opportunities and synergies exist. There’s a new category of tenant emerging, too. Online retailers continue to shift into physical storefronts as a way to grow sales, expand brand awareness or deploy a multichannel strategy. One benefit of that may be that more people are brought to a property when retailers conduct fulfillment for online orders from a store location.

On a larger scale, Shopping Fulfillment Centers (SFC) are a new model set to emerge. SFC’s are a blend of next-generation omnichannel technology, retail, and logistics services for retailers. This “all-encompassing suite” includes online fulfillment, drive-through pickup, regional distribution to other stores, store design and even operations.

New York-based Case Equity Partners are introducing one of the first examples of this new retail industry concept at a cluster of five suburban retail properties in major cities. This hybrid retail and fulfillment concept is expected to increase sales while cutting retailing costs and time to market. The SFC is also expected to drastically reduce the burden of returns.

These are essentially turn-key multi-season shops specifically curated for a retailer that is supported by an on-site last-mile fulfillment center. SFC’s deliver the infrastructure encompassing both sales channels to allow digital native brands to accelerate quickly from having no stores to being able to cover an entire market. Besides inventory and store design, the up-front investment is minimal.

While adopting omnichannel strategies are one path to consider, surviving in today’s fast-paced retail environment requires tenacity and creativity. The approach may encompass creating authentic and amenitized places for people to connect and gather – such as a shared culinary table or an outdoor community “living room” – which will give them reasons to return. But they will also involve the use of new technologies, such as Augmented Reality (AR), Artificial Intelligence (AI), as well as the continued adoption of social media experiences. Doing so will allow shopping mall owners to remain relevant and engaging during the time people are at a property, as well as staying connected to consumers once they’ve left.

Retail properties that are likely to find success in the future are ones that integrate great workplaces, restaurants, and entertainment near where people live. That’s because of the convenience of live, work, play environments allow people to stay within their own neighborhood, and thus gain the gift of time. For many, that’s enough to end the debate about the future of the mall.

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