Many of us grew up during what I like to call the gilded age of the shopping mall: where all of the usual suspects in the world of retail held a space, where food courts were lined with (Americanized) cuisine from every hemisphere, where parents and teens alike killed time, where consumerism flourished and materialism ruled. Malls became prevalent around the world but nowhere as much as the US. We are literally a society built around retail. There are 8.5 billion square feet of retail space in the United States, which equates to 24.5 square feet for every American. This is five times that of Europe. Europe has its squares and plazas as the center of their urban life. In many American cities, that center was the local mall.
But then the center of our cities started slowly shifting. The internet came to American households and with it left the need to every leave it. We witnessed a slow shift in consumer behavior towards the convenience of online shopping, and, slowly, malls went from being the centers of our retail lives, our social lives, to relics of a different era. In 2017, analysts were predicting that 25 percent of American malls would be gone in the next five years.
To some extent, the future of retail should come as no surprise. The end result is really not that different from what industry experts have been projecting all along. The acceleration of e-commerce leads to a decline in sales for brick and mortar, causing the physical retail footprint to grow smaller over time. But there are some inconsistencies with this projection. One is the time frame in which these changes were predicted to occur—it has since accelerated. The other inconsistency lies in the fact that growth in e-commerce does not necessarily equate to a diminished need for physical retail space, as long as you include both storefronts and warehouses.
Growth in e-commerce does not necessarily equate to a diminished need for physical retail space, as long as you include both storefronts and warehouses.
The death blow for many retail locations is, of course, public health enemy number one: COVID-19. Now, over a year after the pandemic hit the U.S., we are still dealing with its vast repercussions. Even with multiple vaccines being deployed, certain learned behavioral patterns, including shopping for even groceries and food online, are likely to stay. We are finding new ways to navigate daily life, and in a society still largely driven by consumerism, these adaptations have created an intense ripple effect, spreading throughout the very fibers that make up retail and retail real estate.
One of the biggest shifts in consumer behavior since the pandemic began has been the growth of e-commerce, which many have incorrectly assumed will be the demise of brick and mortar. In 2020, e-commerce in the U.S. grew by 44 percent, nearly tripling the growth it had in 2019. Still, e-commerce accounted for 21.3 percent of total retail sales, and while this number is up significantly from 2019’s 15.8 percent, that still leaves the majority of retail sales happening in brick and mortar. This means that even when the country is under lockdown orders, forced to stay home for all but the most “essential” of activities, more than three-quarters of the shopping STILL took place in a store.
Even more interesting is how brick and mortar is facilitating the growth of e-commerce through new shopping channels. The traditional e-commerce model is changing to incorporate retail networks. Where the only option for online retailers used to be to ship directly from warehouse to customer, now that is no longer always the case. Today, e-commerce encompasses a range of selling channels, including curbside pickup, buy online pick up in-store (BOPUS), online fulfillment from in-store, and so on. In the third quarter of 2020, Ulta Beauty reported a 90 percent increase in e-commerce sales over last year, and 16 percent of those sales were generated from buy online pick up in store, which doubled in comparison to last year. This indicates that brick and mortar will continue to play a larger role in e-commerce sales through omnichannel shopping. As many retailers expand their e-commerce offerings to include things like curbside pickup, this creates an interdependence with convenient physical locations, not just in major cities but in suburbs across the country.
For some time now, consumers have clearly been transitioning to shopping online, but for sectors like grocery, this transition had been much slower—until COVID-19 hit. The pandemic spurred people who had not previously utilized online ordering and curbside pickup to download an app and give it a try, especially within the grocery sector. This shift in consumer behavior has changed the way retailers are thinking about product distribution.
John Furner is the President and CEO of Walmart, the largest private employer in the world with over 2.2 million employees, and one of the big box retailers that quickly adapted to meet these changing needs during the pandemic. In a recent Walker Dunlop webinar, Furner said, “What’s really changed is commerce in general. I don’t think it will stop changing.” In fact, one of Furner’s favorite quotes from Sam Walton, Walmart’s founder, has always been, “The only constant at Walmart is change.” Furner believes that Walmart’s investment in the technological infrastructures that support services like curbside pickup enables the retailer to be poised to preemptively meet customer needs. After all, “Customers are finding new ways to be served all the time,” Furner said.
Having a large network of physical stores allows retailers to respond more quickly and adapt to a surge in online orders. Stores like Nordstrom, Academy Sports and Outdoors, Nike, and Macy’s are all leveraging their physical assets to provide online fulfillment for online sales. Many of the aforementioned retailers have had to close stores—to free up cash, reduce debt, or simply unburden themselves with underperforming assets. While closures are still undoubtedly a part of the current retail landscape, the condensed remaining physical locations are often now acting as double duty storefronts and mini-warehouses to ensure speedy delivery and same-day pick-up is available by keeping product on hand. Leveraging a physical asset to make their e-commerce efforts more efficient helps retailers stay present in more markets.
In some cases, retailers like Gap and Abercrombie & Fitch may be closing locations in enclosed malls, particularly B and C class properties, but they are pivoting to open new, smaller locations away from malls. Again, this supports the idea that while consumer shopping behavior may be evolving, it does not eliminate the need for physical stores. Clothing retailers in particular will always have a need to support customers who wish to touch, feel, and try on before purchasing. But some new technologies are making enormous strides by working in conjunction with physical assets to enhance the in-store experience.
Companies like Nordstrom and Ulta have consistently invested in developing technologies that enhance the in-store experience, rather than simply “replacing” it. Technology that assists in making e-commerce transactions more seamless is valuable (see: Stripe). But, the technology that enhances the in-store experience is just as important for a retailer’s success in the current climate.
For example, Ulta’s Virtual Try-On mirrors use AR to allow customers to try on make-up and other products without the physical application. Ulta has also been a pioneer when it comes to reimagining the digital storefront using virtual tours to allow customers to “walk” around their stores using 360-degree video. This is actually a technology borrowed from the PropTech world as the company that created Ulta’s tours, VirtualAPT, is most known for their 3D virtual property tours. This kind of technology can help retailers expand their virtual personal shopping offerings by making the experience more immersive within the physical space.
Less glamorous but equally important are technologies that enable curbside pickup, BOPUS, and other types of online order fulfillment. Fulfilling online orders with in-store product may seem like a no-brainer for retailers looking to boost efficiency, but it requires advanced inventory software that ensures accuracy in real time. Similarly, BOPUS orders require the same kind of inventory software, often coupled with wayfinding technology to ensure that product can be easily located and ready for immediate pickup. According to Walmarts’s Furner, “It seems like a transactional experience, but there are a lot of things going on in the background.” Retailers like Nordstrom and Ulta have committed to investing in the infrastructure that creates a seamless omnichannel shopping experience for their customers, but they also understand the crucial role that brick and mortar plays within their business models.
Most retailers understand that the development of an efficient omnichannel strategy is an ongoing process—one that may never reach perfection. At the same time, these retailers also understand that their key to survival combines e-commerce, strategic physical locations and use of that space, and the technology to facilitate all of these things. But with the overwhelming plethora of technologies and the laborious research that goes into determining the best locations, some retailers, especially those that are digitally native, are left wondering where brick and mortar fits into their business model.
One startup helping retailers figure out what their needs are is FlagshipRTL. According to Justin Abrams, FlagshipRTL’s CEO and co-founder, their company helps retailers perform A/B testing for physical retail space through flexible lease structures and strategic site selection. Based on what Abrams has found in his extensive partnerships with the world’s top retailers, he believes that brick and mortar is becoming seasonal and hyper local, similar to e-commerce. He is seeing retailers who “might have their full year flagship stores in New York, Los Angeles, or any of the major big cities. And then they might also want a seasonal presence in markets like the Hamptons, Austin, or Seattle.”
Foot traffic is still seen as the most important metric for retailers. But now the way that it is understood is changing thanks to that invasive little device hitching a ride in our pockets and purses. One of the companies using cell phone data to understand the changes in human mobility is Unacast. They can help retailers understand not only how many people are walking past a store but where they came from and where they went afterward. “Foot traffic was originally the only metric that mattered,” said Adam Slackman, Unacast’s VP of Sales. “They would look at how many customers came through the doors then use transaction data to get a quasi-conversion rate.” Now data providers can layer daily mobility data along with demographic information to help companies create psychographic analyses of not only their converted customers, but the ones that were left unconverted as well.
As retailers become more sophisticated in how they understand their space needs, the real estate world will have to follow suit. Retail property valuations are still largely based on what other properties in a certain radius are worth. To bring the property industry up to speed with the needs of retailers the property industry will need to consider using data that was not previously considered in real estate analysis. “I would be looking into granular demographic data at a hyper-local level and how it is changing over time,” said L.D. Salmanson, co-founder of Cherre, a data platform for real estate investors. “Who is moving in and who is moving out? I would also want to see what other kinds of businesses are around a location, both retail and office, and how that is changing.” Some of this data is being created by social media, our new gathering places. Mentions, check-ins, tags, these have yet to be aggregated in a way that makes them easily consumable by a logic engine, even if it is a human one.
Understanding the future value of a retail space means not only looking at data, but understanding the cultural aspect underpinning our retail spending. “I spent more time than I would like to admit in a mall as a teenager,” said Salmanson. “They were a scene, it was the thing to do. But now that ‘thing to do’ has changed. Figuring that out is key to finding real estate value in the future.”
Slackman also thinks that the cultural trends will play a large role in how retail space is best activated. “This generation is very communal,” he said. “I could see many stores getting replaced by places where people can congregate and recreate.” He also sees value in the ability for stores to curate products. In a sea of products, a trusty compass is invaluable. Amazon has even played around with this concept with their “4-star” stores that consist of many of the online giant’s top-rated products.
While the gilded age of the American shopping mall may have come to end, the gilded age of retail has not. People will continue to shop, and they will continue to do so in physical stores the majority of the time. E-commerce is expanding and changing at a rapid pace, growing new arms as people discover more convenient ways to acquire the things they need and want. Many of these “new arms” rely on the existence of a physical retail footprint, whether a hyperlocal flagship store or a vast network with thousands of locations. Retail is evolving to adapt to consumer needs and to make the most of new advancements in technology. The shopping mall may not represent the amalgamation of consumerism within American culture anymore, but the next big thing may actually be just around the corner.