By Greg Miller, Chief Executive Officer and President of Henry S. Miller Cos.
The retail market, both online and in physical stores, is evolving dramatically due in large part to Amazon’s continuing domination of online sales — i.e. the “Amazon effect.” However, there is no retail apocalypse, just ever increasing disruption.
Consumer spending is the main driver of our economy. According to ITR Economics, U.S. retail sales for 2018 are expected to be over $6 Trillion, up 5 percent from last year. Overall retail sales rose 6.4 percent in July year over year, and sales from non-store retailers, which include online merchants, soared nearly 9 percent. Sales at stores that specialize in merchandise like clothing, electronics, furniture and home furnishings also had healthy gains, between 3.5 percent and 6.4 percent.
Online retail sales are rising at an accelerating pace and were up over 16 percent on a year over year basis. Currently, 90 percent of retail sales occur in brick-and-mortar stores, but that is expected to decrease to 80 percent in five years. However, online sales vary significantly by product, from approximately 2 percent for groceries to over 20 percent for apparel. Digital products, such as music and games, are overwhelmingly purchased online.
Nationwide, retailers are expected to close approximately 111 million square feet this year, surpassing last year's record of 105 Million. However, more than half of that space is concentrated among five retailers — including the bankruptcies of Bon-Ton Stores, Sports Authority and Toys “R” Us as well as store closures of JC Penney and Sears.
In Dallas-Fort Worth, the retail market is very healthy. Fewer than normal projects have been built in recent years. We have historically low vacancy, higher rents and massive population and job growth. People have more income, which means more buying power. According to CoStar, approximately 4.4 million square feet of retail will be completed this year, which is down from 5.5 million delivered last year. There was a 2 percent average rental rate increase over last year. The vacancy rate is well below 5 percent, declining for the ninth straight year.
With the advent of online sales, retailers are evolving and adapting as rapidly as technology. Successful retailers must omnichannel, which means a seamless shopping experience where consumers engage with a company in brick-and-mortar stores, on a website or mobile app, or through a catalog or social media. Retailers must have a robust online sales platform plus well-located physical stores with good salespeople. Potential customers must be able to easily find and order their products online. Convenient deliveries and returns to and from home are a necessity.
Amazon’s purchase of Whole Foods Market makes them a major retail store operator. Previously online-only companies are opening physical stores, such as Warby Parker, Bonobos, Athleta, Casper, Boll & Branch and Wayfair. Having a physical presence lends credibility to their brands.
The success of Amazon has led to the proliferation of distribution centers. Accordingly, the number and size of retail stores is shrinking. While demand for large distribution centers will continue as more customers are wanting same-day delivery, there will be an increased demand for smaller urban infill fulfillment centers — perhaps converting former big-box retail stores.
Big-box retailers are rightsizing and reinventing themselves. Inspired by Walmart's experimentation, Target, Kohl's, IKEA and Nordstrom are examples of retailers creating smaller footprints, especially in urban areas. Target is opening its first small format store (approximately 54,000 square feet) in Dallas’ Preston Center. Kohl’s has been subleasing up to half of its average 87,000-square-foot space in select locations to grocery stores, convenience stores and the like. Office Depot is opening co-working space inside its stores. Discount retailers such as TJ Maxx turn their inventory more frequently and offer special in-store-only opportunities — i.e. “treasure hunt” retailers.
Some obsolete properties are being adaptively repurposed. For example, some older Walmart locations and other big boxes are being converted into industrial, self-storage, gyms and office space. The obsolete Big Town Mall in Mesquite, Texas, was converted into a FedEx Distribution Center.
Meanwhile, some stores are becoming more convenient with automated systems. Fast food restaurants like McDonald’s are modernizing and using digital self-serve kiosks. Companies like Starbucks Coffee and Chick-fil-A have mobile apps that allow you to order online so that your order is ready when you arrive. Cashier-less stores such as Amazon Go in Seattle provide invisible payments through an app-linked payment method — no lines, no checkout.
Customer Service is King
The key to success in retail is high quality customer service. Think of a spectrum of retailers. On one end, you have poor quality customer service — over-priced items, a poor website, no deliveries, poorly located real estate and weak salespeople. They are obsolete. On the other end, you have high quality customer service — competitively priced, omnichannel retailers with well placed physical stores, a robust online presence and convenient deliveries to and from home. Those companies will thrive.
Disruption is the Future
In order to survive, retailers must avoid being a victim of disruption and, better yet, be a disruptor. They must identify and stay true to their company’s purpose, even if it means discarding traditional but obsolete ways of doing business. Take Blockbuster, for example. It was recently reported that the very last Blockbuster is located in Bend, Oregon. Blockbuster passed on the opportunity to buy Netflix, now worth over $152 billion. Somewhere along the way, Blockbuster lost sight of its true purpose of providing movies.
Apple is probably the most disruptive company of all time. While Apple is a products-oriented company, they’re also a very successful retail store operator. They occupy very good locations and have high quality customer service. Customers are greeted by helpful staff members, which ask probing questions to find the right solution. They provide meaningful information. It’s a gathering place offering a unique experience that is only available in their stores.
There are plenty of Internet-resistant retail uses to fill brick-and-mortar space. Entertainment, fitness, food and beverage and even open gathering space have become the new anchor tenants. The disruption in retail is a good thing for consumers who now enjoy real-time competitive prices, more convenience and unique experiential physical retail stores.