Why The Future Of Retail Is Omnichannel
Over 8,400 retail stores across the United States closed in 2020. It was certainly a bad year for brick-and-mortar retail, but it wasn't the start of a new trend. The huge number of retail store closures in recent years has captured countless headlines in the news.
But it isn't as if retail is dead and buried. The "retail apocalypse" narrative is a powerful one, and accurate in some respects, but it also can be misleading. The key area in which it misleads investors is in the idea that online shopping completely replaces — or will replace — in-person shopping at retail stores.
In some cases, that's true. But in many cases, it's not. To quote a recent CNBC article on how COVID-19 accelerated trends in retail real estate:
“There’s a sort of misconception that e-commerce growth means the end of the store, that e-commerce essentially eliminates the need for the store, both for retailers and for customers. And the reality is, it doesn’t.”
Retailers are not helpless before the onslaught of e-commerce. No one has a patent on online shopping or the use of technology such as smartphone apps. Retail has ways to fight back against the mighty Amazon (AMZN). And the truth is, more often than not, it is more profitable for the retailer to operate its business through the hub of a physical store than to perform sales entirely online and delivery entirely through warehouse-to-home distribution.
But customer preferences are evolving, and COVID-19 sped up that process. If retailers want to survive in the world of tomorrow, they will need to embrace the innovations of an omnichannel strategy. Let's explore what that looks like.
Omnichannel Real Estate
It's perhaps easiest to explain omnichannel retail through what it's not: Traditional brick-and-mortar shopping, where customers walk into the store, pick things up off the shelves, pay for them at a cash register, then take the items back to their car.
Of course, omnichannel includes traditional in-store shopping as a foundational element, but it offers much more. In an omnichannel strategy, the retailer seeks to make the sale through any means necessary, whether that be in store, online, in an app, or at a kiosk in the store.
What's more, omnichannel provides multiple means of delivering products to shoppers:
off the shelves,
in-store pickup from an online or app purchase,
parking lot pickup,
direct home delivery from a warehouse,
direct home delivery from a store,
and lots of other options.
Big retail landlords like Brookfield Property Partners (BPY), Macerich (MAC), and Simon Property Group (SPG) believe that this strategy is more beneficial to customers and retailers alike than pure e-commerce (online order / home delivery).
There are multiple reasons for this.
First, having a physical store presence is a form of advertising that increases brand awareness. People walking through the mall or driving down a main thoroughfare see the sign and the store and become aware (or are reminded) of the retailer's presence. Moreover, having a store where customers can examine the product themselves increases shoppers' comfort and knowledge of the products, leading to more sales in-store or online.
A second reason that omnichannel is beneficial is that regional and national retailers already have dozens, hundreds, or thousands of physical stores spread around the nation that can double as last-mile distribution hubs. This prevents the need for a large number of small distribution facilities in high-cost areas to fulfill customer orders.
A third reason is that customers have an easily accessible location for product returns, which saves on shipping costs and often results in increased frequency of sales.
As the nation's strongest retailers build out their omnichannel capabilities, they have not seen their physical store sales shrink or become cannibalized by these more innovative purchase and delivery options. Rather, as Brookfield points out, from 2016 to 2019, both physical and e-commerce sales increased, though e-commerce definitely grew faster.
Going back further to 2007, notice how annual e-commerce sales growth has consistently far outpaced in-store sales growth, coming to a crescendo during the pandemic.
However, the beauty of omnichannel is that it matters less to the retailer where exactly the sale comes from. An online or app sale that occurred because the customer discovered a product in the store may count as an e-commerce sale, but it occurred because of a physical store presence. These expanded sales opportunities that do not strictly occur in-store but are facilitated by a store presence are called the "halo effect."
Another reason retailers tend to prefer omnichannel to pure e-commerce is simple economics. The margins for sales completed in some way involving a store are much higher than online purchases directly delivered to the customer's home.
Of course, customer preference matters. If customers simply stopped going into physical stores to shop, then retailers would be forced to adapt. But foot traffic in physical stores has not been decreasing, on the whole. It's just been redistributed from some retailers like department stores to others, like TJ Maxx and Target.
Two Models of Omnichannel Retail Stores
There are currently two predominant models or visions of future retail stores in an omnichannel world:
The Utilitarian Commerce Hub, in which typically freestanding stores are molded to customer convenience and preferences, becoming hybrid retail and last-mile fulfillment centers. Controlling the property from "curb-to-curb" gives retailers the flexibility, ease of access, and visibility to quickly deliver products to customers however they want it. This is the model envisioned by Agree Realty (ADC), which we will return to later.
The Town Center Model, in which retail stores cluster together in well-located malls and shopping centers as social gathering places where customers shop, eat, drink, relax, and enjoy various recreation and entertainment. This is the model envisioned by Brookfield, Macerich (MAC), and Simon Property Group for their upscale malls.
In the Town Center Model, the retail store of the future will exhibit four distinct characteristics, according to an article in Food Navigator. It will be:
(1) Curation-focused (via customer data collection)
(2) Experimental (via touch screen kiosks, virtual "try-on" mirrors, interactive displays, store product maps, etc.)
(3) Social (areas where shoppers can relax or socialize in the store)
(4) Frictionless (ease of shopping and checkout)
While upscale malls are the typical example of where one can find the first three characteristics, Amazon Go stores provide the quintessential example of a frictionless shopping experience. There are no checkout aisles at all. Shoppers simply use their smartphones to complete purchases, then walk right out of the store with their items.
I would add a fifth point to the above list: Discount pricing. In today's world, it has never been easier to compare prices online. Retailers will need to give shoppers — or at least make shoppers feel like they are getting — a low or special price on products. This will benefit the largest retailers with the most built-out supply chains and the greatest scale.
The few stores that continue to utilize premium pricing will need to create scarcity for their products by limiting the ability to purchase those products to stores and the company website.
But, again, why not just skip the store and go straight to the website? If ordering online is more convenient and (often) cheaper, why wouldn't everyone just do that?
I can't top the answer given by Doug Stephens in a blog post on Retail Prophet:
You see, if I believed that humans shopped for no other reason than to acquire goods, I might be more aligned with (the retail apocalypse view) but in fact, we don’t shop just to get stuff – any more than we go to restaurants purely for nutrition. In fact, we often shop to fulfill other deeper needs as well – the need to disconnect, to socialize and to commune – and at times to simply be out in public....
The physical, human experience of shopping is in some ways of far greater value than the goods that come along for the ride. So, while shopping is a means of acquiring the things we want and need, it’s also a meaningful social activity that appeals to our deepest, human tendency to gather in tribes.
Though the "treasure hunt" style of shopping can be replicated with websites and apps, the experience is subtly but meaningfully different in person at stores. My wife does plenty of online "treasure hunt" shopping, but her preference is still to shop at physical stores. Online shopping is often a way to fill downtime. In-person shopping is a stimulating experience.
Now, I would hasten to add that there is a wide divergence between retail catered to higher-income individuals and retail catering to the average person. The fancy, state-of-the-art technologies we hear about being rolled out in high-end mall stores like Gucci and Prada are not going to be implemented in a Walmart (WMT) or TJ Maxx anytime soon. Nor will the "treasure hunt" style discounts be offered in those high-end mall retailers anytime soon.
There are different strategies for appealing to customers, and retailers will do what works best for them and their customer base.
In my view, the higher-end discretionary product retailers in Class A malls and shopping centers will concentrate on creating a specific, data-fueled experience for each customer, while discount stores will continue to hone the "treasure hunt" experience. The shops in upscale malls will turn their spaces into immersive showrooms for brand awareness, product demonstration, and personalized experiences. Meanwhile, big-box and discount stores will continue to integrate personalized data on apps and in-store kiosks so that shoppers can spend less time sifting and find more items they like.
In other words, the upscale malls and shopping centers owned by the likes of Simon Property Group, Macerich and Federal Realty Trust (FRT) will gradually embrace the Town Center Model, while big box stores, discount stores, restaurants, apparel retailers, and even department stores like Macy's, will continue to veer toward the freestanding Utilitarian Commerce Model.
This is the model Agree Realty (ADC) sees becoming ever more popular in a world of e-commerce. Freestanding stores, after all, have far more flexibility to mold their stores into hybrid retail and last-mile fulfillment centers.
Flexibility is paramount in a dynamically changing world whether a retailer is adding a second drive-through, pickup only spaces, or an additional truck dock for micro-fulfillment. As such, the free-standing format provides the greatest level of efficiency and effectiveness for retailers to transform to meet the changing demands of consumers.
In freestanding properties, the retailer has a greater ability to deliver products to the customer without ever even needing to walk into the store. This can be accomplished by curbside pickup or drive-thru lanes. This is why Starbucks, for instance, increasingly wants to be located in freestanding buildings. The same is true for Walmart, Target, T.J. Maxx, CVS, Walgreens, Home Depot, Lowe's, Best Buy, and even many retailers that can typically be found in malls.
A recent Bloomberg article highlights the trend of retailers like Macy's, The Gap, and Kay Jewelers pulling back from malls and opening new freestanding locations instead.
“The foot traffic for off-mall locations is better than what we’re seeing in the mall, certainly in this time. It’s really important, and we see that shift continuing.”
The Bloomberg article cites a recent survey showing that almost a third of retailers are planning to scale back their presence in malls. Many of these retailers would now rather be in close proximity to a Walmart or Ross Dress For Less rather than "stuck in the middle" of a mall. Gap would like 80% of its stores to be outside of enclosed centers by 2023.
Mall retailers aren't the only ones looking to expand into freestanding properties. Many digitally native brands like Amazon are also opening flexible, freestanding stores, offering the full range of omnichannel services to customers.
In the case of Amazon Fresh, the primary product delivery methods to customers are pickup and delivery, though in-store shopping is offered in the new store formats as well.
At the same time, the flow of retailer traffic isn't solely from malls to freestanding buildings. Lots of retailers are shifting to innovative mixed-use centers as well.
“A lot of these mixed-use centers now are trying to recapture that town hall feel. That’s where people want to go again, instead of just these rectangular indoor boxes, where everything is the same.”
Of course, the best located and most dynamic enclosed malls will be able to survive and thrive in an omnichannel world, as long as their landlords invest in transforming them into the "live-work-play" Town Center Model. The days of shoppers going to malls simply to browse racks and shelves are dwindling. The integration of technology and experiences into mall shopping has to happen in order to continue attracting foot traffic.
In short, in a world of e-commerce, malls will need to become a lot more than mere shopping destinations. Many of them won't be able to do that and will die out. But the ones that do make the transformation will become thriving gathering places.
