Dan Weil has worked as a reporter at Bloomberg, Reuters and Dow Jones, where his work appeared in The New York Times and The Wall Street Journal. He is now a freelancer, and his work has appeared in Institutional Investor, CBS Money Watch, Bankrate.com, Slate, The Fiscal Times, The Street.com, The Real Deal, Foxsports.com and Tennis magazine.
Physical Retailers Aren't Dead Yet
Brick-and-mortar stores can still thrive by focusing on experience and adjusting their real estate strategy.
January 20, 2016
During the dotcom boom, many observers may have expected shoppers to be fully committed to online-only retailers by 2016. But online sales, which totaled $334 billion last year, still account for only 10 percent of the approximately $3.3 trillion in annual retail sales, according to Forrester Research. “Pure-play Internet sales are still pretty insignificant. I don’t think they will make brick and mortar obsolete,” says Todd Caruso, a senior managing director at CBRE in Chicago.
However, while brick-and-mortar stores and malls are far from extinct today, retailers are looking for new ways to thrive in this evolving commercial environment.
Something You Can’t Get Online
Online competitors affect some retail categories more than others. Big-box consumer electronics stores already have suffered at the hands of the Internet, and stand-alone apparel stores also “will struggle over time,” says Wayne Caplan, senior vice president at Sperry Van Ness in Chicago.
“The categories that do well are ones you can’t buy online — restaurants, bowling, theater, and groceries. You can order food online, but people like to pick out their own.”
Caplan and others say that for physical retailers to fend off the Internet, they must make visits to their store something above and beyond simple shopping. For example, consumers at Lego stores can try their hands at building something beautiful right there. And some grocery stores have differentiated themselves by offering copious samples, including beer and wine.
“It can be as simple as a furniture retailer making coffees or cookies,” Caplan says. “Stores that want to stay relevant have to create experiences. It can’t just be a place to buy goods.”
Smaller, Techier Spaces
Technology can also play a role in brick-and-mortar retailers’ quest to draw customers. Retailers already are using beacon technology, which can alert smartphone users when they are near a store carrying a product in which the shoppers have shown interest online, among other things. This sort of technology is especially important for millennials, who shop more at retail locations than any other age group, Caruso says: “They are accustomed to customized experiences.”
Cynthia Shelton, CCIM, Orlando-based director of investment sales for Colliers International in central Florida, agrees that technology can make a difference. But she notes that tools such as beacon technology can encounter resistance. She and her husband, who are in their 60s, as well as her daughter and son-in-law, who are in their 20s, avoid it by turning off location features on their smart phones. Some analysts say shoppers are concerned about the idea of Big Brother.
In terms of pure real estate issues, Shelton says some retailers are reducing the size of their stores, so they can establish more of them, making their locations convenient for more customers. “An aerobics class provider might take half the space it used to have and open another location two miles away,” she says. “National chains like Dunkin Donuts are doing the same thing.”
Real estate professionals may soon encounter retailers seeking either to shrink their space or allocate some of it to create special experiences for shoppers, Caplan says. “Generally they would use a less-is-more approach,” he says. But that could cause a revenue problem for some areas. Fewer retailers and smaller footprints mean fewer sales and less tax revenue, and this is an especially troubling trend in states where online sellers don’t have to pay sales tax, Caplan says. “The vibrancy of downtowns and shopping malls is at risk if less space is being absorbed,” he says.
However, absorption isn’t an issue at this point, says Suzanne Mulvee, director of research for CoStar Group in Boston. The firm found that net absorption of retail real estate has been positive for every quarter since the recession ended in 2009, totaling 33.9 million square feet in the third quarter.
Tom McGee, president of the International Council of Shopping Centers, agrees the situation isn’t dire for his organization’s members, with the occupancy rate running at 94 percent for shopping centers.
Online and In-Store Interdependence
Mulvee warns that brick-and-mortar retailers with a substantial online presence need to be careful when shedding physical stores. “Their online sales are directly impacted when they close stores. People like to make returns to a store. Physical stores also create brand awareness and allow for window shopping,” she says.
The relationship flows the other way, too. Internet usage can boost sales at stores, Caruso notes. Indeed, Forrester Research estimated that the Internet influences about 40 percent of offline retail sales, as shoppers use the web as a price comparison tool. Overall, the Internet is helping retailers, McGee says. “Technology is being used as an enabler in retail decision-making. It’s brick and clicks, not bricks versus clicks.”
During the most recent holiday season, more than 60 percent of those making purchases in stores did online research first, according to ICSC. About one-third of people purchasing items online picked them up at a store, and more than 70 percent of them bought something else while there. “At the end of the day, [the Internet] will have a positive impact on brick-and-mortar retailers,” McGee says.