Retail: Evolution Vs. Extinction

IRVINE, CA—Contrary to the doomsday reports that retail is dead, the fact of the matter is that the retail industry continues to evolve to maintain customer demand as opposed to becoming extinct.  Department stores, says Donald MacLellan, senior managing partner at Faris Lee Investments, have been especially hard hit, but the rest of the sector should take note so as to not suffer the same consequences.  MacLellan looks at the true underlying factors that are negatively impacting retailers today and the significant presence the most successful retailers continue to enjoy in this exclusive commentary for

The views expressed are the author’s own.

MacLellan: “What does remain steadfast for the retail sector are brands that offer quality products, right-pricing for the demographic, and the utmost in customer service.”

MacLellan: “What does remain steadfast for the retail sector are brands that offer quality products, right-pricing for the demographic, and the utmost in customer service.”

In order for retailers to thrive and remain viable long term, they must continue to evolve to meet changing needs and consumer demands. If they don’t evolve they go extinct, as we have seen over the last 20 years. A current example is that of the department store concept. In their 1970s heyday, they were the only major shopping option for consumers, and as such, major retail hubs (regional malls) were anchored by various department store brands. Subsequently, the genesis of the big box “category killer” concepts began with the likes of Costco, Home Depot, Target, and other categories including office supply, books, electronics, housewares, etc.  This trend began to create competition with the department stores and took away market share and consumer demand. Also, the expansion and growth of value discount soft goods retailers such as Ross, TJ Maxx and Marshalls has taken consumer dollars from the departments stores as well as the vertically integrated off price-retailers like F21 Red and H&M.

The other major cause of the recent history of retailers’ failure, such as Sports Authority & Toys R Us, is the impact of leveraged buyouts which saddled significant debt loads on these companies and made it difficult for these retailers to weather economic downturns. In addition, there wasn’t enough capital available to reinvest in their stores and stay nimble to adapt to changing consumer needs.
We view e-commerce not as the cause of the demise of retail but as an augment for the bricks and mortar to increase their overall sales.  And we need to keep things in perspective … online sales represent only 10% of overall retail sales. Best Buy has three times the market share in electronics as Amazon, and Costco reportedly has close to 85 million members compared to an estimated 50 million Amazon prime members. Lastly, in relation to the grocery sector, Walmart and Kroger have nearly $330 billion in sales combined compared to the $20 billion of Amazon/Whole Foods.
Another negative impact is that in order for these retailers to grow stock value, Wall Street requires ever increasing sales which primarily is driven by store growth.  Because of this, retailers expanded too quickly, selected inferior locations, and cannibalized their own market share.
Faris Lee believes that the key to understanding retail is to look at each center in its totality – from the local macro drivers such as job growth, city economic development and employment stability, to the micro drivers of the asset such as submarket retail strength, tenant demand and historical sales/occupancy health ratios.
As a retail-specialized brokerage firm, we too have evolved in our asset advisement functions, addressing vacancy issues and other property-related deficiencies for our clients. Retail investors look to us to provide a clear understanding of how to maintain the value and quality of the center.
Our Faris Lee team recently closed on a large big box format community center which included several dark sub-anchors and a dysfunctional site layout. We collaborated with a strong boutique leasing group to come up with the most strategic business plan for the center in order to fully maximize consumer demand. One of the conclusions was that there was a void and demand for an entertainment component anchored by a state of the art theater complex which would draw synergistic demand from restaurant operators. The result of this in depth upfront redevelopment plan was tremendous investor interest.
Ultimately, what does remain steadfast for the retail sector are brands that offer quality products, right-pricing for the demographic, and the utmost in customer service. With an individualized property ownership strategy in place, well-located retail will always do well.
Visit Faris Lee Investments at ICSC Western at Booth #1103.


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