Retail Apocalypse or Healthy Response to a Changing World?

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The term Retail Apocalypse is quite a workout in the media these days. It refers to the fallout from recent changes in the buying behavior of retail consumers. But, apocalypse might not be a fair way to describe current retail trends. In this post, we take a closer look at what’s going on in the retail sector and what it could mean to consumer behavior here in Orange County.

The retail industry’s well-known tendency to remake itself is no secret. If you are an Orange County retail property owner or just a retail customer, the list of major disruptions to the way we buy goods and services at the retail level is readily apparent. Those of us who are middle-aged or older remember the days of the small local hardware and five & dime stores that populated rural downtowns and suburban neighborhoods across the country. Now we have 100,000-square-foot Home Depot, Target and Walmart stores where we can buy pretty much anything we could think of in one place.

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The Amazon Effect Looms Large

Though the rise of these big-box retailers has caused a huge shift in consumer spending habits, the so-called ‘Amazon Effect’ has been the biggest game-changer. 49% of US consumers looking for new products start by looking at Amazon. 36% start by searching on a search engine. Just an online bookseller back in the 1990s, Amazon now sells millions of items online from watch batteries to groceries. If you are so inclined, you can even buy a small house on Amazon…assembly required, of course.

Regional malls, once the darling of institutional owners and diehard shoppers, have been under serious threat from e-commerce competitors for years. Many in secondary suburban markets have lost anchor tenants like JC Penny, Sears and even Macy’s, all household names that go back a century or more. The loss of an anchor puts any regional mall at risk, as the foot traffic they generate is the primary reason smaller tenants will pay a premium to be nearby.

Then there are the big chain retailers who sell everything from shoes to clothing to electronics. Many of them financed their way into thousands of locations to grow revenues only to lose out to online competitors who can deliver many of the items we purchase on the same day. Some chains were acquired through leveraged buy-outs and couldn’t grow fast enough to cover debt service and deliver a return to private equity investors.

Brick and Mortar Stores In Peril

Reports state that more than 8,200 brick-and-mortar stores are expected to close in 2019. Some will close because they were ill-conceived in the first place, others due to deteriorating performance. That sounds awful, but all the news isn’t all bad. Adjusting scale in response to market conditions is something all business sectors must engage in as times change.

So, are we in the midst of the Retail Apocalypse we hear so much about these days? For those who didn’t figure out how to adjust, maybe so. Shuttering an entire chain and liquidating inventory is about as apocalyptic as it gets. But for those who make the right adjustments, maybe not. A lot of the change in retail is due to advances in communications technology and another chunk of it is generational. Over one-third of retail purchases in 2018 were made on a mobile device. Twenty years ago there were no such devices, so that fact alone makes it easy to see how the retail landscape would be impacted.

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Shopping for the Experience

Even though we hear more bad news than good about retail, total retail sales are still on the rise. So the folks are still reaching for their wallets. It’s just that they are either looking more online for ‘stuff’ or shopping in stores that offer an ‘experience’ they can’t get online or in a traditional department store at the mall. This is especially true for the millennial generation. They are much more into purchasing experiences than just getting a good price on a particular item. They value the experience of drinking a craft beer on tap they have never heard of before then getting a discount on a six-pack of Budweiser longnecks. Is that oversimplified? Probably, but the point is made. Younger people will pay a premium to get what they want in terms of experience. It’s the baby boomers who still like to snag a good deal on that six-pack and take it home.

Internet Proofing Your Property

So, what does all this mean to you if you own retail real estate in Southern California? Tenant mix has been the key to operating a successful shopping center and it still is. What’s changed is the mix itself. Savvy retail investors are focusing more on attracting tenants who offer personal services over those who sell merchandise that can be purchased online. Some refer to as internet-proofing. Consumers can’t buy a haircut or manicure online. Amazon can’t draw a tasty pint of craft beer into a chilled glass or deliver live music do consumer doorsteps. By being selective in terms of who they accept as tenants, shopping center owners can, to a degree, protect themselves from the Amazon Effect. However, it probably means they will have to rely more on local credit tenants to do it, as service retailers tend to be independently owned and operated.

This may be a good time to review your rent roll and re-think your tenanting strategy for the future. Retail real estate has always been a hands-on affair, and that fact has never been truer than it is today. Give us a call. We are here to assist you in optimizing your property’s performance.