The Transforming Retail Industry
/by Alyssa DeJonge
The retail industry has gone through a substantial transformation over the past decade, and it continues to evolve. Brick and mortar stores still dominate retail sales transactions. However, they are under siege from online competition, causing them to adopt strategies that involve creating unique customer experiences and making customer purchases easier. At the same time, the online threat is evolving; online stores are also working to increase market share, improve the customer experience, and increase profitability. Online retailers are looking for ways to offer more personalized assistance to shoppers, as a way to increase sales, and also decrease the amount of returns.
Some other interesting trends transforming the retail industry include:
Brands as Culture: Increasingly, consumers are prioritizing corporate responsibility and social consciousness, and brands are responding by thinking about their companies as a culture and way of life more than just a series of products to be sold. Marketing efforts are designed to reveal the internal culture of the company rather than just trying to sell its products.
Faster Shipping: Most major brands have an online presence, in addition to brick and mortar stores. With the onset of Amazon Prime, two-day free shipping is a standard offering, and people expect low-priced or free shipping for many items. Reducing shipping time is essential for any e-commerce business to stay competitive. However, companies do not necessarily have to turn to Amazon or Walmart as the hub for online shopping; for the right shipping option consumers are willing to purchase their items directly from their traditional retailers.
Growing Subscriptions: Consumers are interested in purchasing items that are based on their preferences and delivered directly to them. Businesses in the subscription market curate products and ship them to consumers on a recurring basis. Subscriptions are popular: according to a McKinsey & Company report, 15% of consumers who shop online also signed up for at least one subscription service in 2017. Indeed, new brands such as Harry’s razors have been created with a business model based on subscription purchases. The trend is expected to continue to gain increasing popularity in the marketplace. Examples of this trend include Stitch Fix for clothing and KiwiCo for children’s STEM projects.
Integration of Channels: Even though the closure rate of brick and mortar stores is higher than ever, these stores can still play an important role in the sales process. Instead of being the primary sales point for many products, the store can be one of a variety of touchpoints for consumers that, when used together, help the consumers feel comfortable enough to make their purchases. Consumers use websites, marketplaces, social media and brick and mortar stores when determining purchases, and it is this integration across all of these channels that makes a compelling case for companies’ sustainability. Furniture stores, for example, increasingly center their sales pitches around online searches followed by “touch and feel” advantages.
There is no doubt that technology and the growth of online commerce have significantly shifted the way real estate is used for retail, in a number of ways. Initially, online sales led to the closure of a number of brick-and-mortar stores and a decrease in the demand for space as stores used space more efficiently. However, trends in the demand for retail real estate continue to shift as companies adapt, and businesses learn how to meet new consumer expectations. We note a number of related trends.
One major trend is the growth in experiential retail. Consumers do not want to spend a lot of time at a store shopping for basic goods, which can be done online more quickly and easily. However, they will pay for entertainment, and retail locations that include an experiential component (dining out, activities such as movies or other entertainment, or which are designed with place-making in mind like “paint and sip” galleries) are performing well. Millennials and the younger generation may be contributing to this shift, as many exhibit a preference for spending money on entertainment and experiences, while the minimalist trend advocates consuming fewer traditional goods and living with less. In response to these trends, retailers are now growing more savvy and retooling their existing stores to align with consumer demand. Examples include Jordan’s Furniture with indoor ropes experiences; and grocery stores with children’s care clubs contained inside.
Another growth market arising from the shift to online retail is the growth of more flexible commercial space. The internet has allowed many start-up businesses to gain a foothold with minimal overhead, so real estate space is being adapted to accommodate the growth of these businesses as they evolve; for example, when someone is ready to move out of their home office, garage, or basement into their first commercial space. Uses such as business incubators, maker-spaces, coworking space, shared offices, and leases with more flexible terms have all grown in the last few years, to try to provide support for the expansion of these businesses.
Another area in which retail-related real estate growth has been strong is in logistics and warehousing. Online sales have increased demand for these services, and warehouse technology has allowed for faster processing and delivery of orders. In recent years, consumer expectations regarding delivery times has narrowed; while in years past, orders could take a week or two for delivery, consumers now expect to receive their items within two days, so demand for “last mile” warehousing and logistics is expected to continue to grow. Retailers such as Amazon even promise same-day or next-day delivery in certain areas, and many stores use their retail locations to double as fulfillment centers or offer next-day pickup in-store, when home delivery may take a bit longer.
Another current trend in retail real estate involves dark stores, or vacant big box stores. The “dark store valuation method” argues that comparables for assessing the value of operational big box stores should be the sale prices of similar buildings, including vacant big box retailers, rather than the price paid for the building plus renovations minus depreciation, which is how big box store valuations have traditionally been calculated. Since demand is so much lower for dark stores, the vacant stores stay empty longer and often sell for lower prices than the sellers paid for the properties. This market mechanism drives down the assessment values and thus the property tax revenues for operational stores. As owners of properties for operational big box stores contest each assessment using the dark stores, the value of operational stores tends to go down as assessors try to compromise with property owners; one big box store in a community winning a lower revaluation using dark stores can also set the precedent for other operational big box stores contesting their valuations, thus compounding the effect.
How consumers shop has changed drastically over the past decade, with implications for real estate, logistics and warehousing, and marketing. Retailers and related property owners that stay competitive are embracing the changes and adapting accordingly.
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Alissa DeJonge is Vice President of Research at the Connecticut Economic Resource Center, Inc., a nonprofit corporation and public-private partnership that drives economic development in Connecticut by providing research based data, planning and implementation strategies to foster business formation, recruitment and growth. This article first appeared in the Spring issue of Connecticut Planning, a publication of the Connecticut chapter of the American Planning Association.
