I attended the SVN Commercial Real Estate Economic Forum last week hosted by Curt Arthur.  When the topic turned to the retail market, Curt asked a very insightful question: “How many of you in the audience (there were about 200 people attending) have not received a package delivered to your home in the last 90 days?”  Only one hand was raised.  Only one out of 200.   I wonder if that question were asked five years ago how many hands would have shot up?  Certainly, a lot more.

Online Shopping Causing Big Box Retailers to Suffer

It comes as no surprise that online retailers in recent years are increasingly taking a larger percentage of all retail purchases made in the U.S.  This trend will become even more dominant in the years ahead.

And it comes as no surprise that many brick and mortar retailers are suffering because of it.  According to Cushman and Wakefield, more than 12,000 stores are expected to close in 2018, up from roughly 9,000 in 2017.  There could be as many as 25 retailers filing for bankruptcy this year, with Sears being the most well known.

Chore Shopping vs. Experiential Shopping

Retail can be divided into “chore” shopping and “experiential” shopping.  The “chore” buying (buying things because we have to) will continue the trend towards online purchasing.  Let’s face it, most of us enjoy the convenience of shopping from home.  So as a result of this trend big box retailers – Sears, Macy’s, Kmart, JC Penny and even Nordstrom will be closing stores this year.

Experiential shopping on the other hand, allows consumers to buy an experience not just an object or service.  When a person buys a cup of coffee at Starbucks, they are not just buying the coffee they are buying the ambiance of the store.  Those retailers that provide experiential opportunities for consumers will be less affected by online shopping.

Shopping Malls Put at Risk

Shopping malls are being put at risk of going out of business as a result of these big box retailers closing stores.  CoStar has estimated that nearly a quarter of all malls in the US are at risk of losing an anchor tenant.  The loss of one anchor tenant at a mall can cause a downward spiral in the property’s potential rent.  Malls don’t only lose the income and shopper traffic from the anchor tenant, but such closings in many instances trigger lease clauses that allow the remaining mall tenants to exercise their right to either terminate their leases or lower their rents.  That’s a great opportunity for the remaining retailers in the short run, but it could potentially cause malls to go out of business if they can’t stop the spiraling down of rents.

Grocery Stores the Next to Innovate

Chore shopping, buying commodities because we have to, also includes grocery shopping.  So it comes as no surprise that Amazon, who bought Whole Foods last year, is introducing Amazon Go stores.  Amazon recently opened in Seattle a grocery store that allows the customer to fill their cart and walk out without the hassle of the checkout line.  Other retailers are experimenting with the convenience of home delivery.  It will be interesting to see how these new trends develop over time.

Discount and Convenience Stores Doing Well

It would be misleading to say that all chore shopping is at risk to online buying.  Many discount and convenience retailers are doing quite well.  In 2017 Dollar General added 1,290 stores, Dollar Tree added 650 stores, and 7-Eleven added 412 stores.  I believe this suggests that we are experiencing a shrinking middle class with an ever-larger demographic that can’t afford shopping at stores that are now beyond their family budget.

Fast Food Restaurants Doing Well

This trend is also expressing itself in the demand for restaurants.  Restaurants are by their very nature immune to online shopping.  At the same time though, most restaurants can’t be categorized as experiential shopping.  Getting a quick bite to eat (chore shopping so to speak) that’s easy on the budget is doing well.  Dunkin’ Donuts, Chipotle, Domino’s, Chick-Fil-A, Taco Bell, KFC to name just a few are increasing their numbers of restaurant locations.  My guess is that due to a shrinking middle class the next tier up in price for restaurants – like Appelbee’s, Ruby Tuesday, etc – are probably feeling the pinch.

3 Things Retail Stores Must Do to Survive

I believe retailers are now beginning to realize they must change or go the way of the dinosaur.  Brick and mortar stores will need to do three things to survive:

  1. Ramp up their social media marketing. They need to create and nuture their “tribe of followers.”
  2. Innovate their stores so that coming to one of their stores is not chore shopping it is experiential shopping (e.g., the ambience of a Starbucks store).
  3. They will need to figure out ways that give customers more control and convenience of the buying process (e.g., Amazon Go grocery stores).

Are brick and mortar stores doomed?  Absolutely not.  But they have their work cut out for them to successfully transition in this changing retail environment.

Those are my thoughts.  What are yours?  Any real estate brokers specializing in retail properties want to weigh in?

Sources: Retail Trends for 2018 by Walter Loeb, Forbes, December 29, 2017; There Will Be More Stores Opening Than Closing in 2017 by Richard Kestenbaum, Forbes, September 11, 2017; 2018 Retail Trends and Predictions, by Vaughn Rowsell, www.vendhq.com; A tsunami of store closings is about to hit the US – and it’s eclipse the retail carnage of 2017, by Hayley Peterson, www.businessinsider.com, January 1, 2018.