CREJ - Retail Properties Quarterly - August 2017
Despite what you’ve been led to believe, the internet actually is not the leading cause of death for brick-and-mortar retail. While the internet certainly cannot be discounted in the discussion of why retail seems to be failing, its impact often is massively inflated as the primary source of retail’s recent woes. While many look to the internet to analyze the issue at hand, an in-depth analysis of the problem elucidates more nuanced reasons. The first is the frequent failure of stores to reinvest capital into their brands. Many companies sold to private equity firms incurred large amounts of debt and were left without the proper capital to continuously improve their stores, products and consumer experience. Another key reason is the decline of the regional shopping mall as a center of commerce and social interaction. While historically the mall was a place for people to shop and congregate, the mall experience has come to lack a unique or fresh feeling, leaving malls stagnant and uninteresting to the modern consumer. In addition to this, the millennial generation trends toward living near or within urban infill, whereas typically most malls are products of the suburbs. Lastly, the abundance of retail space has saturated the market to the extent that there are simply more stores than there are people to shop. In 2007, Apollo Global Management acquired Claire’s in a leveraged buyout for $3.1 billion. While Apollo’s intention may have been to work on the brand in order to do an initial public offering a few years later, the recession unfortunately changed these plans. Now it’s 2017, and Claire’s is operating at a massive loss and collapsing under $2.35 billion of long-term debt and colossal interest expenses, according to business and finance website Wolf Street. Claire’s was an iconic brand that dominated the highly profitable accessory market for teenage girls. Leading up to its buyout in 2007, it always had been a fun and whimsical shopping experience that historically drove business into retail centers. Now saddled with so much debt, it is questionable, at best, if Claire’s will be able to survive the coming years. Without the proper capital, Claire’s essentially has been unable to merchandise its stores to attract new customers, drive sales and continuously improve its business model. The decay of malls as the classic American hub for interaction and commerce derives largely from their inability or refusal to incorporate new, experiential-based retail to draw in customers. The consumer in the 21st century has consistently demonstrated a tendency to be more willing to spend money on experiences, such as movies and restaurants, rather than on materialistic commodities. Most shopping malls have experienced great difficulties in transitioning from primarily soft-good apparel sales to food and entertainment venues. Locally, Littleton’s Southwest Plaza recently underwent a $75 million renovation, but it remains to be seen how effective this remodeling will be on impacting sales and customer traffic. While the owner did a wonderful job updating the property, it is unclear whether the capital investment will pay off. Today’s shoppers are looking for an increasingly authentic feeling, gravitating toward places like River North or the Highlands, where they can discover chef-driven restaurants, craft breweries, boutique shops and a general sense of local presence. If customers do decide to shop or eat at a mall, they have shown strong partiality only to those that are certifiably best in class, such as Cherry Creek Shopping Center or Park Meadows. In the retail market, malls have yet to prove not only an acute awareness of the new consumer preferences, but also a willingness to adapt and conform to it. Looking forward, there is hope for the future of America’s malls. Malls aren’t dead, they’re simply being left behind. To catch up to the future of retail, it’s of paramount importance that they focus on bringing in specific concepts such as Apple, Tesla or Sephora, concepts through which the product’s value is intrinsically tied to the experience of venturing into the store. Furthermore, stores that maintain a certain degree of inelasticity are essential, as they require customers to show up for their services. These are the types of businesses that expand the trade area, drive more traffic and help increase overall sales. When customers are in search of a commodity such as a coffee pot or a pair of socks, inevitably the internet can prove to be more efficient and cost effective. However, retail shopping is a form of entertainment, one meant to imbue customers with a sense of fun and satisfaction, thereby evoking imagination that can lead to further impulse purchases. As a result of this, brick-and-mortar operations must look beautiful, incorporating the best lighting and nicest buildouts to entice consumers into making purchases. In 2016, the United States reported six times more retail square feet per capita than the United Kingdom, according to Seeking Alpha. Since 1995, the number of shopping centers has increased by 23 percent, while the population has increased by only 14 percent, according to Forbes. The U.S has up to 50 sf per capita of retail space, which contrasts starkly with Europe’s 2.5 sf per capita. These statistics are only a few facts that are emblematic of a much larger, systematic problem: saturation. There are far more stores and shopping centers than there are people, and the effects of this tremendous volume are finally catching up with the retailers themselves. Due to the overabundance of stores, each is seizing sales from another, to the extent that very few businesses are making enough money to justify keeping their doors open. While the situation appears dire, in fact, a type of natural selection is taking place. Retailers are closing their doors, developers are embarking on fewer projects and, eventually, what will remain is the proper number of stores. However, this is not to say that developers need to wait out the retail crisis twiddling their thumbs; instead, they need to adjust their mindsets. The traditional mall or basic shopping centers are no longer models for success. Developers need to focus on transit-oriented developments and mixed-use projects that include housing, offices and hotels. Developments such as these will provide built-in consumers, allowing retailers to grow a stronger, more consistent customer base. The future appears bleak with many businesses shutting their doors, but this is not the end of retail, it is merely a harsh restructuring. Yes, many malls, shopping centers and companies will go under in the coming years, but what will that leave behind? Healthy survivors and optimistic developers who will emerge from the ashes of retail’s past and characterize the future of the retail economy with fresh ideas and new concepts.