February 28, 2007
Full Sites and Empty Stores
By Bernice Hurst, Managing Director, Fine Food Network
There are many problems and not enough solutions when it comes to facilitating consumption.
John Clare, chief executive of DSG, the British company whose electrical goods brands, Dixons and Currys, have been high street stalwarts for decades, told attendees at the IPD/CBI Property In Business conference in London that landlords must become more flexible if they want to keep their stores occupied.
“Space requirements will substantially reduce over time as internet retailing continues to explode,” he said.
Mr. Clare’s comments come on the heels of a holiday season where internet sales rocketed up by 40 percent leading up to Christmas. According to the Financial Times, analysts estimate almost all the growth in total U.K. retail sales, up two percent in 2006, came from online sales. Physical store sales have been stagnant for several years.
“A lot of retailers are saying they don’t want to take more space on, travel agencies are cutting back space like mad, banks need less space, you are not seeing CD or DVD retailers opening new stores,” he commented.
Mr Clare’s own business now sells about 12 per cent of its products online. “Three years ago I predicted the figure would eventually hit 10 percent but few people guessed how fast it would grow,” he said. “I now expect 20 percent within the next three years, perhaps much more. It could be double that.”
Suggestions about the way forward ranged from focusing on shopping centers that create a “social” atmosphere by providing restaurants, bars, coffee shops, cinemas and fitness facilities to developing “internet pick-up point parks.”
The contradiction from the U.K. consumer’s perspective is that this comes at a time when people are being advised to spend less time in cars. Locating stores outside of town centers (which, in any case, have little or no convenient parking for shoppers or those collecting items ordered online) goes against the trend.
Encouraging customers to travel further, particularly in the U.K., could only be seen as a positive in a cynical way. As the government is introducing trials for road charging to ease congestion, some critics might say that forcing more people onto the roads is just a way of getting them to pay more for what they want to buy.
The other paradox lies in what they will find when they get to the store. If it is simply a pick-up point for items already ordered, there will be little or no stock. Deliveries of smaller quantities of a possibly bigger range could be interpreted as uneconomical. Or, stores might try to increase customer spend by increasing their range and encouraging collectors to have a look around and buy even more.
If such a scenario actually came to be, what we might see is fewer, smaller, emptier stores to which customers have to travel further. On the other hand, the extra facilities could encourage socializing and a new form of community. Perhaps there is a silver lining after all.
Discussion Questions: How will the growth of online sales affect physical retail space (stores and/or distribution centers) and rent/lease/ownership costs? Do you see John Clare’s description of what is happening in the U.K. taking place here?
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Online sales will impact the total square footage need of retailers but not significantly and any change will occur over a period of time. The US consumer is not anywhere close to losing its “drive” to shop. The real push will be for the look and feel of websites to mirror the retail experience and to enhance the experience by allowing the consumer to gain information to help them make a better decision while they’re in the store. A good example of this is how Amazon.com and other book retailer websites help drive in-store book sales and how in-store visits drive online sales. This category has not seen a decrease in the total square footage of retail space although it has seen dramatic shifts in how the space is used.
I have heard commentators talking about the U.S. being “over-stored” for at least 30 years. But one person put it well: “Are we over-stored or under-retailed?” It’s hard to argue that there are pockets of unproductive real estate throughout the country but there continue to be outer-ring and exurban areas in most cities that are ripe for development.
The long-term evolution of retail seems able to provide new formats to use in old space. Think of it almost like a “tear-down” where you are buying a house to build over on the same property. And it’s possible the Web can help brick-and-mortar retail reinvent itself by creating demand for new formats that didn’t exist before.
America has way too much selling space, and this problem long predates the internet. The number of square feet per shopper is just too large, which leads to high costs and low margins, and ultimately a mediocre return on investment for most retailers.
There are 2 types of bricks and mortar experiences: convenience versus selection. If you want a store at every intersection, you’ll sacrifice selection. For great selection, you have to accept fewer locations. There will always be more convenience stores than supermarkets and more clothing specialty stores than department stores.
Internet stores can most easily present huge selections. The penalty: customers wait for delivery. The winner? It varies by retail category. There’s no doubt that eBay has downsized the face-to-face antiques and collectibles business as well as the used car business. Internet grocery is largely a failure, with almost no market share, except for FreshDirect in New York City. There’s no doubt that Amazon and Barnes & Noble’s e-commerce volume took a lot of potential growth away from physical bookstore locations.
Retail real estate development in the US slowed down a number of years ago. Let’s see if developers reduce the number of square feet available by recycling underutilized space into something more productive (not retail). Certainly local towns in New Jersey still haven’t gotten the memo. They’re still trying to revive their shopping districts with new sidewalks and street light poles instead of converting them into other, higher-potential uses. BTW, when was the last time you heard a shopper say, “Let’s do our buying there. They have new light poles!”?
Obviously I am still the only cynic participating in RW discussions. There was just a teensy weensy bit of my brain that took Mr. Clare’s comments as a not very subtle hint that retailers would be bargaining harder in future for better terms from their landlords. I can’t honestly see Dixons and Currys totally abandoning bricks and mortar any time soon although many of their sites may close down and they may take a fresh look at locations. This is something that other retailers may also do but, more to the point, I think they’ll be looking for lower rents, payment holidays and anything else they can get.
I could not disagree more…retail is about change and adjustments and yes, certain categories have not been able to adjust as well as others, like the travel agencies, banks and CD or DVD retailers mentioned but for each one of those there are Zara’s, Apple Stores, and hundreds of other forward moving (in all channels) retailers who will happily lease applicable space for their concepts and pay market prices.
As Jag Sheth, Professor of Marketing at Emory University, said a few years ago, we are in the process of switching from a gravity-centered shopping experience (only being able to shop when the stores are open and choosing from the items carried) to an electronic-centered shopping experience (consumers can buy what the want, when they want, at the price they want, and have it delivered they way they want). With the major foundation shifting for retail outlets, they need to rethink their purpose and function. Other research suggests that about 1/3 of the consumers still prefer shopping at a store. What about the other 2/3s? Why and when would they want to visit a retail outlet? Unless the need is identified and answered, it will be difficult for retailers to respond to this dramatic change.
For some categories, the shift to online retailing is ubiquitous, whereas for others it is not. Some people like to shop online (and this number is increasing) and others do not, as it is clearly shown by the fact that NAICS 454 category (Non-store retailers) sales released monthly by the Census is still only around 7% of total retail sales.
Some of the reasons why online retailing is on the rise are not really things commercial property developers can control. To name a couple, time commitment involved in Bricks and Mortar shopping, price comparison options available in online shopping (with the exception of really Fast Moving Consumer Goods and perishables, you will inevitably get a better price online).
There are also those factors that will always protect the bricks and mortar business from extinction, like identity theft fear, which is very real these days and categories where there may be a greater inclination to physically handle the item before purchase (apparel, shoes etc). There are also multi-channel shoppers like myself who will use both.
That said, there is a definite downward pressure on commercial real estate in terms of demand and I agree that developers could be more creative with the incentives they offer both retailers and shoppers, like providing better parking or alternatively providing shuttle services to key commuter hubs or external parking facilities, offer better rates to traffic generators like restaurants, cinemas, beauty salons and even innovative options like day-care centers to take care of the little ones while you shop!
The most likely impact I see from a retail space perspective is that more will be dedicated to DCs such as Macy’s has done for its online business. Square footage at stores may shrink some but I’m not looking for major changes in that regard.
I recall an industry conference I attended in 1995. At the conference there were several retail executives debating the advent of the internet and the affect it would have on brick and mortar stores in the next 10 years. The conclusion they came to was that retail stores, as we knew them, were destined to go away as everyone made their purchases over the internet. I was one of those arguing that online shopping wouldn’t replace the personal experience and that the internet would complement, not replace, shopping in a physical store.
Twelve years later I still believe that brick and mortar stores are here to stay. Much like the competitive nature of retailing, the competition in commercial real estate will necessitate that real estate brokers be competitive. And if the cost of opening stores begins to hurt retailers to the point that they slow down opening new stores, the real estate market will adjust accordingly.
But that’s a tough question. Rents will get lower a) by how much and b) from other causes. I’m sure they will get lower because baby boomers will start to buy less, but not that much. Delivery is a serious limit on web sales. Also there’s education and trust. Actually, brick retail and virtual can work together, with web terminals, show rooms and pickup points in the same location. The Dell mall kiosks (but with an instant pickup) are a good example.
The pressure for rent reductions is as likely driven by the inevitable slow down in consumer spending as it is by the fall in bricks and mortar retail sales. In an environment where the retailer’s ability to influence sales in a static market is limited, there is always going to be a focus on costs. Property costs are one of the biggest on the P&L so they were bound to get some attention sooner or later.
In the rush to declare virtual shopping the winner in the retail evolutionary game, one thing seems to have been forgotten. Shopping is not just a functional activity but a social experience, with similar characteristics to many other leisure activities. It is also ingrained in our society. Online will replace some forms of shopping, primarily in services or for generic products, where aesthetics of product design are unimportant. What it won’t replace is the social leisure activity of just going shopping any time soon.
I believe stores ARE here to stay — people Want to GO shopping — HOWEVER — those stores, in the future, may not be what we are accustomed to. For one thing, in the Midwest you are seeing entire empty and difficult to fill locations at former destination centers as the available department store stable continues to dwindle. Some mall operators are responding with tear downs and new innovative uses that will likely revitalize interest, but in some places you see big hulking empty 200,000 to 240,000 square feet parcels of buildings — empty.
Rents may indeed drop as the glut of space increases — and retailers should take full advantage of this by expanding SPACE on their selling floors. There is a LOT to be said for not bumping into displays and merchandise when trying to maneuver through a store !! Customers often complain about this across a wide range of retail concepts and price levels.
They should also continue to take advantage of the click-order-pick-up possibilities that the internet allows as well–although direct shipping is much preferable from the retailer perspective.
The number one reason for customers avoiding retail stores is the lack of service, in-depth knowledge of the products sold, and the rudeness and lack of personal attention to the customer.
The so-called high-end store like Nordstrom, Saks 5th Avenue, Tiffany’s, etc., have known this for years and cultivated service and enforced it by management, cultivated in-depth knowledge with training sessions paid for by the company with refreshments served and enforced by management, and civility, pampering and warmth in sales people through training, selectivity of personel, and enforcement by management. If only 1 out of 3 people buy because of price or deals (Auditories), 1 out of 3 people buy because of prestige named brands or celebrity endorsements (Visuals), and 1 out of 3 people buy because of how they feel about the product, store and sales people (Kinestetics) the best way for stores or webstores to sell to all 3 types is by adjusting their sales presentations and styles to fit the customer in front of them by training the sales people in Nuero-Linguistic Programming Personality Types and use these tools in advertising and all functions of a retailer! People buy from people and stores they like!
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Online sales will impact the total square footage need of retailers but not significantly and any change will occur over a period of time. The US consumer is not anywhere close to losing its “drive” to shop. The real push will be for the look and feel of websites to mirror the retail experience and to enhance the experience by allowing the consumer to gain information to help them make a better decision while they’re in the store. A good example of this is how Amazon.com and other book retailer websites help drive in-store book sales and how in-store visits drive online sales. This category has not seen a decrease in the total square footage of retail space although it has seen dramatic shifts in how the space is used.
I have heard commentators talking about the U.S. being “over-stored” for at least 30 years. But one person put it well: “Are we over-stored or under-retailed?” It’s hard to argue that there are pockets of unproductive real estate throughout the country but there continue to be outer-ring and exurban areas in most cities that are ripe for development.
The long-term evolution of retail seems able to provide new formats to use in old space. Think of it almost like a “tear-down” where you are buying a house to build over on the same property. And it’s possible the Web can help brick-and-mortar retail reinvent itself by creating demand for new formats that didn’t exist before.
America has way too much selling space, and this problem long predates the internet. The number of square feet per shopper is just too large, which leads to high costs and low margins, and ultimately a mediocre return on investment for most retailers.
There are 2 types of bricks and mortar experiences: convenience versus selection. If you want a store at every intersection, you’ll sacrifice selection. For great selection, you have to accept fewer locations. There will always be more convenience stores than supermarkets and more clothing specialty stores than department stores.
Internet stores can most easily present huge selections. The penalty: customers wait for delivery. The winner? It varies by retail category. There’s no doubt that eBay has downsized the face-to-face antiques and collectibles business as well as the used car business. Internet grocery is largely a failure, with almost no market share, except for FreshDirect in New York City. There’s no doubt that Amazon and Barnes & Noble’s e-commerce volume took a lot of potential growth away from physical bookstore locations.
Retail real estate development in the US slowed down a number of years ago. Let’s see if developers reduce the number of square feet available by recycling underutilized space into something more productive (not retail). Certainly local towns in New Jersey still haven’t gotten the memo. They’re still trying to revive their shopping districts with new sidewalks and street light poles instead of converting them into other, higher-potential uses. BTW, when was the last time you heard a shopper say, “Let’s do our buying there. They have new light poles!”?
Obviously I am still the only cynic participating in RW discussions. There was just a teensy weensy bit of my brain that took Mr. Clare’s comments as a not very subtle hint that retailers would be bargaining harder in future for better terms from their landlords. I can’t honestly see Dixons and Currys totally abandoning bricks and mortar any time soon although many of their sites may close down and they may take a fresh look at locations. This is something that other retailers may also do but, more to the point, I think they’ll be looking for lower rents, payment holidays and anything else they can get.
I could not disagree more…retail is about change and adjustments and yes, certain categories have not been able to adjust as well as others, like the travel agencies, banks and CD or DVD retailers mentioned but for each one of those there are Zara’s, Apple Stores, and hundreds of other forward moving (in all channels) retailers who will happily lease applicable space for their concepts and pay market prices.
As Jag Sheth, Professor of Marketing at Emory University, said a few years ago, we are in the process of switching from a gravity-centered shopping experience (only being able to shop when the stores are open and choosing from the items carried) to an electronic-centered shopping experience (consumers can buy what the want, when they want, at the price they want, and have it delivered they way they want). With the major foundation shifting for retail outlets, they need to rethink their purpose and function. Other research suggests that about 1/3 of the consumers still prefer shopping at a store. What about the other 2/3s? Why and when would they want to visit a retail outlet? Unless the need is identified and answered, it will be difficult for retailers to respond to this dramatic change.
For some categories, the shift to online retailing is ubiquitous, whereas for others it is not. Some people like to shop online (and this number is increasing) and others do not, as it is clearly shown by the fact that NAICS 454 category (Non-store retailers) sales released monthly by the Census is still only around 7% of total retail sales.
Some of the reasons why online retailing is on the rise are not really things commercial property developers can control. To name a couple, time commitment involved in Bricks and Mortar shopping, price comparison options available in online shopping (with the exception of really Fast Moving Consumer Goods and perishables, you will inevitably get a better price online).
There are also those factors that will always protect the bricks and mortar business from extinction, like identity theft fear, which is very real these days and categories where there may be a greater inclination to physically handle the item before purchase (apparel, shoes etc). There are also multi-channel shoppers like myself who will use both.
That said, there is a definite downward pressure on commercial real estate in terms of demand and I agree that developers could be more creative with the incentives they offer both retailers and shoppers, like providing better parking or alternatively providing shuttle services to key commuter hubs or external parking facilities, offer better rates to traffic generators like restaurants, cinemas, beauty salons and even innovative options like day-care centers to take care of the little ones while you shop!
The most likely impact I see from a retail space perspective is that more will be dedicated to DCs such as Macy’s has done for its online business. Square footage at stores may shrink some but I’m not looking for major changes in that regard.
I recall an industry conference I attended in 1995. At the conference there were several retail executives debating the advent of the internet and the affect it would have on brick and mortar stores in the next 10 years. The conclusion they came to was that retail stores, as we knew them, were destined to go away as everyone made their purchases over the internet. I was one of those arguing that online shopping wouldn’t replace the personal experience and that the internet would complement, not replace, shopping in a physical store.
Twelve years later I still believe that brick and mortar stores are here to stay. Much like the competitive nature of retailing, the competition in commercial real estate will necessitate that real estate brokers be competitive. And if the cost of opening stores begins to hurt retailers to the point that they slow down opening new stores, the real estate market will adjust accordingly.
But that’s a tough question. Rents will get lower a) by how much and b) from other causes. I’m sure they will get lower because baby boomers will start to buy less, but not that much. Delivery is a serious limit on web sales. Also there’s education and trust. Actually, brick retail and virtual can work together, with web terminals, show rooms and pickup points in the same location. The Dell mall kiosks (but with an instant pickup) are a good example.
The pressure for rent reductions is as likely driven by the inevitable slow down in consumer spending as it is by the fall in bricks and mortar retail sales. In an environment where the retailer’s ability to influence sales in a static market is limited, there is always going to be a focus on costs. Property costs are one of the biggest on the P&L so they were bound to get some attention sooner or later.
In the rush to declare virtual shopping the winner in the retail evolutionary game, one thing seems to have been forgotten. Shopping is not just a functional activity but a social experience, with similar characteristics to many other leisure activities. It is also ingrained in our society. Online will replace some forms of shopping, primarily in services or for generic products, where aesthetics of product design are unimportant. What it won’t replace is the social leisure activity of just going shopping any time soon.
I believe stores ARE here to stay — people Want to GO shopping — HOWEVER — those stores, in the future, may not be what we are accustomed to. For one thing, in the Midwest you are seeing entire empty and difficult to fill locations at former destination centers as the available department store stable continues to dwindle. Some mall operators are responding with tear downs and new innovative uses that will likely revitalize interest, but in some places you see big hulking empty 200,000 to 240,000 square feet parcels of buildings — empty.
Rents may indeed drop as the glut of space increases — and retailers should take full advantage of this by expanding SPACE on their selling floors. There is a LOT to be said for not bumping into displays and merchandise when trying to maneuver through a store !! Customers often complain about this across a wide range of retail concepts and price levels.
They should also continue to take advantage of the click-order-pick-up possibilities that the internet allows as well–although direct shipping is much preferable from the retailer perspective.
The number one reason for customers avoiding retail stores is the lack of service, in-depth knowledge of the products sold, and the rudeness and lack of personal attention to the customer.
The so-called high-end store like Nordstrom, Saks 5th Avenue, Tiffany’s, etc., have known this for years and cultivated service and enforced it by management, cultivated in-depth knowledge with training sessions paid for by the company with refreshments served and enforced by management, and civility, pampering and warmth in sales people through training, selectivity of personel, and enforcement by management. If only 1 out of 3 people buy because of price or deals (Auditories), 1 out of 3 people buy because of prestige named brands or celebrity endorsements (Visuals), and 1 out of 3 people buy because of how they feel about the product, store and sales people (Kinestetics) the best way for stores or webstores to sell to all 3 types is by adjusting their sales presentations and styles to fit the customer in front of them by training the sales people in Nuero-Linguistic Programming Personality Types and use these tools in advertising and all functions of a retailer! People buy from people and stores they like!