Unfolding retail real estate’s inescapable transformation
In the first article of this retail series, “Not Dead Yet,” I explore how COVID-19 is shaping consumer behavior and how that will impact the retailers who come out on the other side. In this article, I explore what it means for a retailer to have staying power, including brand DNA and its role in omnichannel capabilities as well as the technologies that are required for shopping channels to work cohesively and new technologies for expansion. The final article in this series will discuss what’s left for brick and mortar, the technologies required on site to adapt to a post pandemic climate, and an overall outlook for the retail sector.
We are all well aware that the retail sector has not fared well the past few months. According to analysts’ predictions, the outlook is fairly grim during the recovery phase over the next couple of years for all retail formats. But mall anchors, full-priced apparel, and small businesses located in strip centers are particularly concerning to Vince Tibone, the senior analyst for retail at Green Street Advisors. He gave an update on the sector’s outlook within the U.S. in a recent webinar.
“There’s going to be a lot of investor focus in the near term on how much rent you’re collecting in the second quarter, but in the grand scheme of things, that’s not the most important driver of long term value.” Instead, Tibone recommends focusing on “how much occupancy you’re going to lose along the way and how many tenants will see their rent paying ability impaired for the long run as a result of COVID.” With the black cloud of bankruptcy looming over retailers like Neiman Marcus, J.C. Penney, and J. Crew, vacancies are growing, even as some malls begin to reopen in certain parts of the country. So for owners and landlords looking to fill vacancies long term, which tenants will have staying power and the ability to adapt to changing customer needs?
Not long ago, mall retailers like Victoria’s Secret and Express racked up massive debt in order to expand into nearly every mall, aiming for brand recognition and convenience. They relied on heavy foot traffic and oversaturation rather than understanding their demographic and building a loyal customer base, and when foot traffic started decreasing, well before COVID-19, they had no choice but to close stores. On the other hand, digitally native retailers are forced to build a loyal customer base before expanding into brick and mortar, and because they must be strategic about their locations, they tend to understand their customers’ demographics better, too. “The Abercrombies, they didn’t have a brand DNA. The Warby Parkers do. They have an emotional connection. You need to have a way to build that,” said Barry Sternlicht, the CEO of Starwood Capital.
Many retailers sought to build brand DNA by offering experiential retail, investing in expansive experiential concepts—that often eat up large chunks of square footage. They are now finding they may have bit off more than they can chew. Concepts like in-store eateries, bars, fitness classes, and workshops have been hugely successful in some cases, like Lululemon, by driving traffic, increasing trip length, and creating lifestyle branding. Brian Kilcourse, managing partner at Retail Systems Research, explained, “The longer that the customer stays inside the box, not only does the size of the basket increase but the dollars increase.” But experiential retail relies on people entering that “box,” and right now, people are learning how to get everything they need without ever stepping foot into a store, which could influence shopper behavior long term. Many shoppers who were begrudgingly “forced” into ordering groceries online because of the pandemic now realize they actually prefer its convenience.
Traditionally, physical stores build brand DNA by offering immersive sensory experiences for their customers—ones that are difficult to recreate online. A physical store done right should elicit specific feelings from its customers by curating every detail. There’s a reason you smell pumpkin pie baking when you walk past a Bath and Body Works in autumn. From the outside window display as you enter, to the cashier’s ability to leave a lasting impression when you check out, it all plays into a customer’s decision to buy (and to return), whether they know it or not. Is it possible to elicit those same feelings when customers shop online, or on a device, or through social media? If all shopping channels tell the same cohesive brand story, yes.
Omnichannel is to retail as property technology is to real estate. Omnichannel technologies bridge the gap between physical and digital spaces in the world of retail, allowing consumers to merge and customize available channels through which to shop. Similarly, property technology also bridges physical and digital spaces, changing the way people interact with the built world. An intuitive website would be the most basic channel requirement. Mobile websites, store apps, web based purchases with options to pick up in store, online product reservations, curb-side pick-up, and shopping through social media are some of the other major channels that should be considered requisites for almost any retailer now.
For shopping channels like buy online pick-up in-store, technology that provides “real time inventory visibility is the biggest enabler,” according to Shelley E Kohan, co-founder of Shelmark Consulting, a retail consulting firm. Online product reservations use a similar technology that alerts store employees to pick an item and hold it for the customer. These omnichannel technologies require a powerful network that provides communication between the store, websites, apps, and often distribution centers, which both fill in the store’s inventory as needed and act as an option for directly shipping to the customer. “A challenge for a lot of stores is the bandwidth problem itself,” said Kohan in a recent webinar. Having the technology to support network communication and real-time inventory visibility are some of the basic requirements for omnichannel to be successful. If it’s not easy, customers won’t bother.
For retailers with their basics covered, there are lesser explored shopping channels that have strong potential when it comes to replicating in-store experiences. While virtual tours have traditionally been used as a marketing tool for real estate properties, they have potential for retail application because of their storytelling capabilities. Both retail and real estate often rely on the ability to elicit feelings from a customer through the sensory experiences of physical space. Innovative virtual tours can be a close second when they incorporate multiple sensory experiences on top of audiovisual storytelling components, especially when the customer has control over the journey.
Ulta has been working with visual technology company, VirtualAPT, to provide customers with an interactive store tour filmed in 360 degree video technology, that recreates the in-person experience by allowing customers to browse and shop inside of a virtual store. Lidar technology measures data points throughout the space, giving the customer the ability to control how they digitally navigate the interior of a store, as well as interact with it through embedded content, clickable links to product, and gamification. Digitally native brands testing pop-up locations can also film them to make the space permanent virtually.
With widespread use on apps like Instagram, customers are more familiar with augmented reality (AR) technology and how to use it mobily. As mentioned in the first article in this series, this technology is often used in retail for virtual try-ons for clothing through AR-powered mirrors, but it also has use cases for mobile devices, allowing customers to visualize products like furniture and decor within their intended spaces or to see what kind of make-up looks best on their face. Mobile applications using AR can help generate digital traffic and engagement, but retailers have to determine if the investment makes sense for their customers.
For the brick and mortar stores that do reopen, there are some key difference-makers between those that stay open and those that will add to the growing list of vacancies. Owners and landlords looking to fill potential vacancies (and keep them filled over time) should look for tenants with staying power, which requires a strong brand identity, a loyal customer base, and strategically placed physical stores. These retailers will also have omnichannel capabilities, powered by the right technologies, that allow them to adapt to running leaner business operations by flexing between whichever shopping channels a customer prefers. Landlords may be eager to fill vacancies at all costs, but they should research tenants and consider providing concessions for those that will add the greatest value to their centers.