October 7, 2015
Will omnichannel success drive up retail store rents?
In its "Envision 2020" report, the International Council of Shopping Centers (ICSC) predicts rent calculations across retail will evolve into a new formula that incorporates how physical stores are driving digital transactions.
The range of potential models includes more traditional approaches such as fixed rent and base plus percentage rents, as well as models that incorporate a calculation of click-and-collect via in-store and online sales into the percentage rent.
"The provision of the real estate itself will only be one part of the overall service that real estate providers will be able to offer to retailers," said Steven Lowy, co-CEO, Westfield Corp, in ICSC’s statement. "That will require leadership on behalf of leading retailers and real estate providers. Both are starting to invest heavily in technology, and for that technology to work together, commercial arrangements will need to be put in place."
Photo: RetailWire
The report, outlining where the industry will be in five years, includes other predictions about how technology will reinvent shopping centers:
Unification of brick-and-mortar and online retail: Shopping centers are already offering sophisticated digital interfaces, innovative websites, and mobile communications for web-savvy consumers. Conversely, Bonobos and Amazon.com are among a number of e-tailers rolling out brick-and-mortar stores.
Unprecedented intimacy with the consumer: Mobile apps, social media, and beacon/geo-fencing technology are helping centers engage with shoppers. Last year, the Westlake Shopping Center, owned by Kimco Realty, found that consumers who logged into the center’s free Wi-Fi stayed twice as long as consumers who did not log in.
Mall environments that engage Millennials: Customized, personalized and sustainable features are being added to shopping centers for Millennials, projected to surpass Boomers this year as the nation’s largest living generation.
Incorporating distribution into shopping centers: Shopping centers are increasingly doubling as distribution centers for online orders. According to a A.T. Kearney, 23 percent of customers purchase additional items when picking up an online order in-store, and up to 20 percent make an additional purchase when returning an online order in-store.
Accelerated developer-retailer collaboration: General Growth Properties finds retailers much more willing to share information once considered proprietary, such as traffic patterns and demographic data, helping both sides spend marketing funds more wisely and avoid duplication. Through its "Clicks to Bricks" program, Kimco offers qualified online retailers one year of rent-free tenancy and provides merchants with a "personal business counselor" to assist with site selection and store build-out.
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Discussion Questions
How do you see the merging of digital and physical retailing impacting rent negotiations and other real estate dealings? Do you see technology driving more collaborative and less adversarial relationships between landlords and retailers?
Poll
This post by Tom Ryan is a spot on forecast of the future of retail!
Retail is no longer about “space” … it has become all about “place” … and place transcends the physical store. What Tom is describing is already happening right now. The best executions are based upon more collaborative partnerships that share data and channel it back through mobile apps. The best part — it is all measurable!
To make this happen will require investment in infrastructure. And that infrastructure needs to be maintained and managed.
So yes, rents will increase if measured by square foot costs. But what retailers need to evaluate is the ROI they can achieve in terms of increased traffic, as well as conversion in-store and online.
There will always be an adversarial relationship.
I see the trends a bit differently. Rather than try to discern where the online sales come from the trend will go more and more into a fixed rent, not related to a particular store. Retailers who try to apply which store should get credit for online sales create an impediment to omnichannel strategy. A sale is a sale, it doesn’t matter where it comes from.
The real challenge for the landlords will ultimately be how to fill the space. Retail square footage is going to trend down, and in the next ten years, very significantly.
The conclusions of the report on the future of retail seem spot on. The prediction of a rent formula whereby mall owners collect rent based on online sales for a retailer sounds like a bedtime story for property managers.
These technological advances are aimed to serve the shopper more effectively. If that happens consistently, both the retailers and the landlords will see benefits. The leverage for any particular retailer comes in when they are able to capture new growth from shoppers coming into the malls who were not there in the past.
The ICSC’s report makes a number of good points, but unfortunately for them, none of them provides a cogent reason for increasing rents. LOL.
It is easily possible that a landlord MIGHT think more creatively about retailing than do his “merchant-warehousemen” tenants. I use that term “merchant-warehouseman” very tentatively relative to mall retailers, who are much more shopper service oriented than are mass FMCG merchants. A lot of the distinction comes down to the SELF-service of “pile it high, and let it fly” which virtually DROVE mass prosperity across much of the world, as compared to staff assisted selling which is far more common in malls.
The point here is that a mall operator with multiple malls across the world should afford the building of an “Amazon-like” interface that can be customized for each of their tenants—globally. This might require greater understanding of shoppers than “real estate developers” might be expected to have. But I know some for whom I think this is a feasible idea.
Remember, “Selling Like Amazon… in Bricks & Mortar Stores!” could be leveraged across mall retailers by the real estate developer, to the massive benefit of all parties—especially the shoppers!!!
If mall owners want to treat stores as lead gen for online sales (with a pay for performance model), then they need to be ready to lower the fixed portion of their rents. That will happen the day after I’m elected President.
The other trends are pretty much spot on. If malls don’t do a better job attracting Millennials and Gen Z, the rest of this won’t matter much.
Agree with Herb’s comments on how retailers and malls have the potential to counter some of the draw of online marketplaces like Amazon.
However to do so requires immense cooperation among the shopping center owners and their tenants to bring consumers back to these centers more frequently. Any leasing model that penalizes the retailers for bringing omnichannel customers back to a physical location is short-sighted.
Landlords may also not realize that sophisticated retailers already have the ability to send those customers to locations where they wouldn’t have to pay a penalty to fulfill an omnichannel order.
These technologies are also quickly spreading in adoption to even smaller retailers. So enforcing extra fees on omnichannel sales will eventually have the effect of less traffic to these malls and shopping centers.
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This post by Tom Ryan is a spot on forecast of the future of retail!
Retail is no longer about “space” … it has become all about “place” … and place transcends the physical store. What Tom is describing is already happening right now. The best executions are based upon more collaborative partnerships that share data and channel it back through mobile apps. The best part — it is all measurable!
To make this happen will require investment in infrastructure. And that infrastructure needs to be maintained and managed.
So yes, rents will increase if measured by square foot costs. But what retailers need to evaluate is the ROI they can achieve in terms of increased traffic, as well as conversion in-store and online.
There will always be an adversarial relationship.
I see the trends a bit differently. Rather than try to discern where the online sales come from the trend will go more and more into a fixed rent, not related to a particular store. Retailers who try to apply which store should get credit for online sales create an impediment to omnichannel strategy. A sale is a sale, it doesn’t matter where it comes from.
The real challenge for the landlords will ultimately be how to fill the space. Retail square footage is going to trend down, and in the next ten years, very significantly.
The conclusions of the report on the future of retail seem spot on. The prediction of a rent formula whereby mall owners collect rent based on online sales for a retailer sounds like a bedtime story for property managers.
These technological advances are aimed to serve the shopper more effectively. If that happens consistently, both the retailers and the landlords will see benefits. The leverage for any particular retailer comes in when they are able to capture new growth from shoppers coming into the malls who were not there in the past.
The ICSC’s report makes a number of good points, but unfortunately for them, none of them provides a cogent reason for increasing rents. LOL.
It is easily possible that a landlord MIGHT think more creatively about retailing than do his “merchant-warehousemen” tenants. I use that term “merchant-warehouseman” very tentatively relative to mall retailers, who are much more shopper service oriented than are mass FMCG merchants. A lot of the distinction comes down to the SELF-service of “pile it high, and let it fly” which virtually DROVE mass prosperity across much of the world, as compared to staff assisted selling which is far more common in malls.
The point here is that a mall operator with multiple malls across the world should afford the building of an “Amazon-like” interface that can be customized for each of their tenants—globally. This might require greater understanding of shoppers than “real estate developers” might be expected to have. But I know some for whom I think this is a feasible idea.
Remember, “Selling Like Amazon… in Bricks & Mortar Stores!” could be leveraged across mall retailers by the real estate developer, to the massive benefit of all parties—especially the shoppers!!!
If mall owners want to treat stores as lead gen for online sales (with a pay for performance model), then they need to be ready to lower the fixed portion of their rents. That will happen the day after I’m elected President.
The other trends are pretty much spot on. If malls don’t do a better job attracting Millennials and Gen Z, the rest of this won’t matter much.
Agree with Herb’s comments on how retailers and malls have the potential to counter some of the draw of online marketplaces like Amazon.
However to do so requires immense cooperation among the shopping center owners and their tenants to bring consumers back to these centers more frequently. Any leasing model that penalizes the retailers for bringing omnichannel customers back to a physical location is short-sighted.
Landlords may also not realize that sophisticated retailers already have the ability to send those customers to locations where they wouldn’t have to pay a penalty to fulfill an omnichannel order.
These technologies are also quickly spreading in adoption to even smaller retailers. So enforcing extra fees on omnichannel sales will eventually have the effect of less traffic to these malls and shopping centers.