Memphis Retail: Evolution Not Extinction — A Look at Disruption, Trends, and Innovation in Retail
By Shawn Massey, CCIM, CRX, CLS, ALC*
Much has been written about the “Retail Apocalypse” and the demise of bricks and mortar that is simply not justified by the actual numbers. How this negative view of retail has evolved can be traced back to a few sources that have twisted the news and have focused on the retail of the past and not on the future of retail development and the evolution taking place within the industry.
The retail industry as a whole is quite healthy, benefiting from strong consumer confidence and positive economic fundamentals. The question, of course, has been one of new channels of distribution and the emergence of newCommerce (the total integration of online and bricks and mortar). Retail sales are expected to grow by 3.8% this year, compared to 3.0% growth in 2016. - Garrick Brown
Retail as we know it has been changing for several years. Retail real estate has been transitioning into consumer real estate with the growth of internet-resistant uses, such as fitness and recreation, medical, restaurants, and other entertainment venues, taking a substantial amount of existing square footage that has been vacated by big-box closings. But, how we got this negative view of retail real estate needs to be examined.
Five key factors led to this negative view:
- The media’s preoccupation with the idea that bad news sells and/or “if it bleeds it leads”;
- Lack of other retail news to counter the negative;
- The idea that retail stores do not close every year;
- First Year Fung Global Data going negative on store closings; and
- Amazon becoming the proxy villain of the bricks and mortar decline.
We are all in agreement that e-commerce is growing steadily (16.2% in 2017) but still only accounts for slightly less than 10.0 percent of all retail sales, which grew only 4.1 percent during the same period. Bricks and mortar will remain the predominant way people buy retail goods and services, but the perception of what a retail center will look like is changing rapidly. Retail has always changed over time. We went from the general store to main street, to small shopping centers, to malls, to large power centers, to lifestyle centers, and then today to mixed-use projects that apparently try to mimic a main street or town square of the past.
This view stems from several real or perceived disrupters in the market:
- The view of the “Retail Apocalypse” that has been written about;
- How we got this negative view of retail;
- Demographic Disruption: The Influence on Retail Sales;
- Amazon’s purchase of Whole Foods;
- The current structure of retail leases;
- Retail’s drop to the bottom of main property types for both investors and lenders;
- The slowdown in new traditional retail development;
- Millennials wanting and seeking authentic environments;
- Showrooming in retail stores;
- The mobile consumer ; and
- The “I want it now” mentality.
Both demographic and macro-economic factors are creating unique pressures and opportunities for retail:
- In 2000, baby boomers accounted for 29.0 percent of the population. In 2015, they accounted for only 25.0 percent of the population, which means approximately 21 million retail consumers were lost.
- Millennials’ peak spending occurs later in life than does that for baby boomers and has delayed their major purchases by 8-10 years over those of the baby boomers.
- Millennials are entering their prime spending years, and their projected spending will grow from approximately $600.0 billion to $1.4 trillion as the largest transfer of wealth takes place.
Consumer spending per person per year by age group:
Retail is healthy, and retail sales are up $121.5 billion. But, several categories that are not as internet-resistant, such as sporting goods, department stores, electronics, clothing, and shoes, were hit hard. Although pure-play e-commerce represents 29.0 percent of total retail growth, it still accounts for less than 10.0 percent of overall sales.
We cannot fully understand what is happening without looking at some of the trends taking place in the retail marketplace:
- Internet-Resistant/Service-Oriented/Necessity Tenants are becoming the norm in retail developments.
- Health and Wellness tenants are starting to take retail spaces (80.0% of 18-34-year-olds spend 25.0% of income here).
- Medical Service Groups are recognizing that retail spaces provide better convenience and experience for their customers.
- Millennials love physical stores with experiences and actually prefer to shop in person.
- E-Commerce brands are opening bricks and mortar stores at an alarming rate.
- Micro-Retail is here to stay and incubating local retailers throughout the country. Look at the existing development of Edge Alley and the proposed Shab Chic development, as well as The Works in Jackson, Tennessee.
- There is a rise of Mixed-Use Developments by building neighborhoods such as Crosstown Concourse, South Main, and Cooper Young, as well as proposed developments such as Parkside at Shelby Farms and The Lake District.
- Local Chef-Driven Restaurants are being looked at as retail anchors.
- Entertainment uses marry well with traditional retail.
The numbers do not lie. Retail is growing, not declining as we expect +/- 4,080 net new store openings in 2017. For every store closing, 2.7 stores are opening. Many of the store closings are concentrated in a few legacy retailers. Sixteen retail chains accounted for 48.5 percent of all store closings, and five chains accounted for 28.1 percent of all store closings. Many of these openings are coming from e-commerce players who are moving into bricks and mortar from uses that we do not traditionally associate with retail, like entertainment, medical, and health users.
So, what is really happening in the retail world? The look of retail is changing. More retail is being integrated into mixed-use projects. Retail centers or retail components are integral to the social fabric of communities but providing a “third place.” They are community centers or town squares providing a place to be with friends or family when not at work or home. They can be the cultural center for a community bringing people of all ages and interests together to shop, dine, and work out. Retail’s move toward mixed-use centers is creating a cultural shift where “signature” dining and experiences encourage foot traffic that stays longer, spends more, and keeps it local. We are back to building neighborhoods!
The growth of entertainment retail is of paramount importance to both existing and proposed developments that have a retail component. It is actually the next step in the retail evolution. Why is simple:
- Tremendous pressure is being exerted from on-line/e-commerce to transform the design and experience of bricks and mortar shopping for consumers.
- There has been a shift in the service economy where consumers are expecting more demand for unmatched in-person experiences.
- There is an opportunity to monetize retail centers with entertainment users who pay more than traditional big-box retailers.
Those retailers that focus on customer experience in retail will succeed, and those that refuse to change will have trouble going forward. Shopping centers are a vital resource for local communities, generating billions of tax dollars that fund critical city infrastructure, from fire departments and schools to playgrounds and parks. Retail real estate isn’t just about collecting rent; it helps nearly 13 million Americans pay their rent. From folding tee shirts to developing tomorrow’s urban megaplexes, the industry creates jobs. Bricks and clicks are not an “either/ or,” they are a relationship. When done right, Omni-channel is a sales driver, improving service and convenience and delivering experiences that make brands relevant to consumers.
Retail today is not dying, but it is challenging. Without question we are at an inflection point— retail in the U.S. is right sizing in a number of different ways. Retailers and Property Landlords need to invest in the customer experience
Retail real estate is a catalyst of the global economy. As a bellwether connecting Main Street and Wall Street, the industry’s impact stretches from the wallet to the global exchange.
The value of retail real estate stretches far beyond retail sales alone; in fact, the current value of shopping center real estate in the U.S. is $1.3 trillion (ICSC Economic Impact Infographic, 2016).
The business of retail influences the entire economy, with a substantial impact on the communities where shopping centers are located. Shopping center sales in 2015 totaled $2.6 trillion (ICSC U.S. Fact Sheet). Shopping center sales make up approximately 15.0 percent of U.S. GDP (ICSC U.S. Fact Sheet).
LOCAL RETAIL PREDICTIONS
Absorption – Up
New Development – Up
New Tenants – Up
New Store Openings – Up
Vacancies – Down
Cool Factor – Up
Shawn is a partner with The Shopping Center Group where he specializes in retail landlord and tenant representation and retail development advisory services in the Memphis area.