E-tailers Vs. Storefronts

Online and in-store retailers square off for consumer dollars. Will retail stores hit the bricks?

January 1, 2000

Hamid Moghadam, president and CEO of AMB, a San Francisco-based retail and industrial REIT, took a hard look at his books and growth projections early last year. Then he walked away from the retail real estate business--picking up a cool $950 million in the process.

With the retail economy raging like a power shopper at a sale, what possessed Moghadam to dump a quarter of AMB’s portfolio, $4 billion in grocery- and drug-anchored shopping centers?

“A reasonably conservative assumption about how retail is going to perform because of the threat of the Internet,” Moghadam says. “Conservatively, we figure we’ll lose 10 percent to 15 percent of our sales to alternative formats over the next 10 years.” That doesn’t sound like a lot, but as Moghadam figured it, AMB would be losing up to 60 percent of its growth rate.

E-commerce’s precise impact on retail sales remains hazy. But few question that there’ll be an impact--a large one. Business-to-consumer e-commerce sales spiked from $7.8 billion in 1998 to $14.9 billion in 1999, according to Jupiter Communications’ analyst Ken Cassar.

Even with its growth, e-commerce isn’t putting a halt to store openings, experts note. Although projections of online retail have convinced some that the growth opportunities in bricks-and-mortar retail space will wane, others see new space opening up. There’ll be a need for more warehouse than storefront space in anticipation of increasing online sales; stores located more conveniently to shoppers’ homes; and vast, dramatic spaces that’ll accommodate experiential shopping--the music, videos, cafés, kiosks, and entertainment that many retailers are using to make in-person shopping more fun than the point-and-click variety.

What’s adding to the uncertainty about the future of retail space is a red-hot U.S. economy. “Retailers are operating in a very strong retail environment, and the wealth effect of the market is spurring them to continue to develop their bricks and mortar,” says Sheila Stoltz, a vice president with REIT analyst Cohen and Steers, New York.

She believes that demographic trends and the power of the economy will keep existing storefronts very strong, but retailers must be watchful. “The Internet is another distribution channel, and a potentially more dominant one,” says Stoltz. “Unless the retail pie gets bigger, e-commerce will hurt bricks and mortar.”

Retail specialists who are concerned about the impact of e-commerce on their business may want to put more of their eggs in the industrial basket or in other ventures. Moghadam is playing the e-commerce and industrial sides of the fence by investing in warehouse space and “promising e-commerce businesses. I’ll become their partner on the real estate side to build or acquire facilities where they can conduct their business.”

Hard goods lead the way

Experts say retailers who sell books, music, videos, electronics, and software will be the first and hardest hit by the growth of e-commerce. Cassar predicts “conservatively”that49 percent of software industry sales, 40 percent of PC sales, 14 percent of book sales, and 14 percent of music sales will move online by 2003.

Already the book industry is experiencing challenges to its business model. Just as superstores edged out independents, those booksellers--especially the remaining small independents--that didn’t establish an online presence early are feeling Amazon.com’s sting, says Seema Williams, a consumer e-commerce analyst with Forrester Research in Boston.

Even apparel sales, which lend themselves to tactile, in-person shopping, may see some marginal drift--9 percent, or $27 billion--to the Internet by 2004, according to Williams. Pushing them there will be clothiers whose Web sites maintain records of people’s sizes and preferences, show you how to put a stylish outfit together, and let you dress cyber mannequins with your body type.

Necessity retailing may not be immune, either.Jupiter forecasts that 1.5 percent, or $7.5 billion, of the $450 billion-a-year grocery industry will move online by 2003.

Moghadam agrees that grocery shopping will eventually move online. “Webvan in northern California, which is planning to expand nationally, has an unbelievably efficient model for home delivery that will bypass the grocery store model. It has 300,000- to 400,000-square-foot warehouses in dense neighborhoods that serve the function of 20 grocery stores. You dial up the company’s Web site and schedule your delivery in a half-hour window. [The delivery person] can take returns on the spot.” In addition, Moghadam notes that 15,000 to 20,000 square feet of individual grocery store space today houses banking, film processing, and video departments, all of which “are subject to disintermediation by the Internet.”

But Joe Edens, CEO of Columbia, S.C.-based Edens & Avant, a developer and owner of $1.3 billion in necessity retailing, such as grocery stores, isn’t concerned about e-commerce crimping his bottom line. “We’re not oblivious to the fact that it can have some impact. But we don’t think [our portfolio] will be nearly as impacted as other forms of retailing.” Edens believes that, like e-commerce, necessity retailing is driven by convenience (lots of stores near shoppers’ homes) and therefore will remain vital.

Whose numbers are to be believed?

Economic researchers concur that e-commerce numbers will explode, but by how much? Forrester Research estimates that a projected $20.3 billion in online sales (everything from electronics and housewares to pet supplies and tickets) for 1999 will sprout to $184 billion by 2003. Cassar breaks out online commerce according to U.S. business-to-consumer sales and predicts $61.4 billion in sales of hard goods will be online by 2003.

International Council of Shopping Centers spokesperson Malachy Kavanaugh says there’s a lot of “misinformation and misunderstanding” related to e-commerce statistics, which are small compared with the entire $2 trillion retail pie and often don’t reflect true retail numbers. “Some of the stats include business-to-business, stock, and hotel transactions,” he says, rather than only hard goods to consumers. And he believes that “the Internet isn’t going to replace brick-and-mortar stores. It’s going to be an adjunct the way catalog and home shopping channels are.”

Barnes and Noble also believes that’s true. Not only is its online division going strong--it reports a 235 percent increase in sales in the first nine months of 1999, compared with the same period in 1998--but its cyberstore has “increased brand awareness for Barnes and Noble Inc., which in turn adds more interest in the retail stores,” says spokesperson Lisa Lanspery.Barnes and Noble Inc. reports a 13.7 percent increase in in-store second-quarter sales between 1998 and 1999.

Now showing: stores!

Barnes & Noble’s setup may end up as a classic example of what’s become known as “clicks and mortar,” the combination of store and cyber retailing. The concept is popping up all over the place in different forms. Some stores are incorporating in-store Internet access on the theory that if they don’t have your size or color, you can order the product from their Web site and have it delivered to the store or your home.

Others, like Chicago-based shopping center owner and developer General Growth Properties Inc., have created an e-business department to drive traffic to the malls and help its mall properties reach “the new generation of Web-savvy shoppers--virtual and physical.” In an attempt to create community, the GGP Web site http://www.ggpi.comoffers quizzes, virtual postcards, and merchandise for sale.

Barbara Baker, vice president of investor relations for Taubman Centers Inc., Bloomfield Hills, Mich., believes that brick-and-mortar retailers will find ways to create entertainment for shoppers, providing a sensory and social experience that cyberstores can’t. That doesn’t mean Taubman isn’t taking precautions. It recently added an online retail venture to its portfolio, purchasing a $7 million stake in http://www.fashionmall.com, a site that sells clothing and accessories. “The Internet enhances the shopping experience, so we made this investment to understand how that happens,” Baker says. “[For instance,] we see that customers gather information online and then come to the stores knowing what they want.”

Retailers aren’t just turning up the fun quotient but are also actually setting up shop in more locations. A Merrill Lynch study of 36 REITs found that retailers opened more than 3,000 stores in 1999, compared with 2,196 in 1998. “We were curious to see whether anyone was pulling back on lease commitments given the growth in e-commerce,” says Craig Schmidt, vice president of security, research, and economics at Merrill Lynch in New York. “But we found that across the board--The Gap, Dollar General, Circuit City, Dayton-Hudson--retailers are stepping it up.”

Drug retailers, such as Walgreen’s and CVS, are building more stores than ever before, says Cynthia Shelton, CCIM, vice president of acquisitions for Commercial Net Lease Realty, Orlando, Fla., which buys and builds retail space. Sure, pharmaceuticals are going strong on the Internet, but many shoppers--retirees, for instance--like to visit the pharmacy. “Going to the drugstore is part of my parents’ routine,” Shelton observes. “And when I’m sick, I don’t want to order prescriptions over the Internet—I want them right then.”

E-commerce is also generating new brick-and-mortar buyers and renters, Shelton notes. Gateway, the computer dealer, originally sold online exclusively, but now it has opened small showrooms called Gateway Country http://www.gateway.com/about/country/index.shtml, where customers test-drive computers and work with sales reps to configure a system.

Successful retailers, like Gateway, are finding that it’s best to cover their bases in all three venues--catalogs, Internet, and brick-and-mortar stores. Even L.L. Bean, the Maine-based catalog and Internet seller, is breaking ground on an out-of-state store, at Tyson’s Corner Center, Tyson’s Corner, Va., in summer 2000.

Edens says hard goods retailers can dam the e-commerce tsunami by offering shoppers a more convenient option than the toe-tapping wait for an Internet-purchased delivery. His solution: Retailers who traditionally locate stores in regional malls could open multiple small stores within three to 10 minutes of shoppers, where they can buy or return merchandise.

“Wal-Mart is doing something similar with its ‘baby’ Wal-Marts, which it’s opening in multiple locations closer to customers in their neighborhoods.”

Real estate practitioners will be frontline spectators as retail’s online and off-line business enterprises learn to compete and cooperate, Williams says.

The only thing that’s certain is that the competition will be fierce. Even Moghadam acknowledges that retail real estate is far from dead. “I don’t believe for a minute that people are going to sit around, do everything on their computers, and never leave their homes.”

Christina Hoffmann
Content Manager

Christina Hoffmann is the content manager for consumer homeownership, buying, and selling site HouseLogic.com, which is produced by NAR.

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