The Great Reset has finally begun in earnest, with Federal Reserve Chairman Jerome Powell instituting a series of rapidly rising interest rates since March 2022, leaving many wondering if we are in for a Cat 5 storm, or more gentle trade winds sailing us toward a soft landing. The whisper of recession became louder in June, as the markets fell to bear territory, and several economists now predict a 50% chance that the U.S. will slip into recession in 2024, if not sooner. Despite these prognostications, many in the retail industry do not view this as a hinderance to getting deals done. In fact, there is a general consensus, that although the current inflationary environment may in all likelihood extend through the end of 2022, it is a welcome return to normal market conditions that rise and fall, despite any current consumer pain.

Many now understand how inflation is affecting their daily lives and lightening their wallets. Everything from fuel to food and energy has surged during the first half of 2022, forcing consumers to make increasingly hard choices to maintain their lifestyles and remain economically viable. U.S. Bureau of Labor Statistics, May Consumer Price Index reports that the all-items index has risen 8.6% year-over-year, with the food index increasing 10.1% for the 12-months ending May 2022. This is the first increase of 10%, or more since the period ending March 1981. Protein essentials like meat, poultry, fish and eggs have risen 14.2%, sending an increasing number of consumers to the local food bank to supplement decreasing trips to the grocery store. The cost of transporting food has been impacted by fuel costs, rising 50% this past year.

The Fed is tinkering with economic tools available, to remove some excess liquidity from the markets, and rebalance the sensitive levers of supply and demand. Most Americans remain anxious as to what can be expected in the second half of 2022 into 2023, and beyond. Consumer demand remains strong, but shows initial signs of softening, and unemployment remains historically low, impacted by a lower labor market participation level. Recently, some companies are beginning to analyze their headcount and adjust employee levels in anticipation of a coming recession. Yet, despite all, most retail experts don’t forecast doom and gloom. 2022 ICSC Las Vegas attendees were notably upbeat, and for many this was the first face-to-face event in three years. Although still down in attendance from pre-pandemic levels, the event enjoyed a bounce and many conference exhibitors and attendees were back and ready to do business. Those brokers interviewed by the media did acknowledge ongoing business challenges, but most were encouraged by opportunities in the sector and activity level. Klaus Schwab, the Executive Chairman of the World Economic Forum stated in his book, Covid 19: The Great Reset that “When devastating things happen, creativity and ingenuity often thrive.” Schwab rightly saw a great reset underway that has been changing the landscape of retail. Let’s dig deeper.

The Ebbs and Flows of Market Cycles

We sat down with two leading industry experts to delve into why a number of retail professionals remain confident. Secretary of the Treasury  Janet Yellen expects inflation to remain high through the end of the year, with the hope that it will eventually head downward. So how do thought leaders in retail view the current situation, and what will it take for the industry to succeed post COVID-19?

Rick Chichester has four decades industry executive-level leadership experience that lends an informed and comprehensive view of retail from all sides. He currently serves as a Managing Member and Board Advisor at MTN Retail Advisors and is an Executive Director of X Team Retail Advisors. John Cumbelich of John Cumbelich & Associates leads his San Francisco Bay Area firm providing commercial real estate services to Fortune 500 retailers and select owners and developers of retail commercial properties.

Cumbelich describes himself as a “glass half full” optimist. He offers, “We’ve seen zero slow down with no dip in end-user demand or activity. I believe that the industry has expected the ramp-up of rate increases for quite some time, so this news is most likely not catching anyone flat footed. Whether the markets are expanding or contracting, there’s still plenty of opportunity in the brokerage space. I will take this market condition any day over our pandemic-mandated shutdown. That was a serious problem, this however, is the normal rise and fall of the markets.” Retail brokers are working with business owners to “right size” their space and many are opting for a smaller footprint. Cumbelich confirms, “There are business opportunities out there for the retailer, dining brand—or the owner and investor, and the broker. Movement is a good thing for the industry, we like movement.” Cumbelich believes that the fundamentals underpinning the economy remain solid and although rates have risen, they are still historically low.

Chichester agreed with his colleague, for the most part. “I agree with John, especially in terms of consumer demand. However, I do feel that retail is going to moderate and change. There is a buying trend migrating from goods to services.” Chichester believes that more expensive purchases like autos and large home appliances will experience a slowdown. However, he believes services are going to continue to expand, perhaps at a slightly slower pace.” Americans can start to chart their futures as the pandemic moves to the endemic phase. Late April, Dr. Anthony Fauci, chief medical adviser to President Biden, said during an interview with PBS NewsHour, that the U.S. is no longer in the COVID-19 pandemic phase, despite the global threat the virus still poses. This new endemic phase will continue to see changes to shopping behaviors that COVID-19 begun, and retailers will need to pay close attention.

McKinsey’s 2022 Consumer Pulse survey findings indicated that Americans are changing their shopping behaviors—and are expected to continue this shift. They report that consumer confidence has decreased with many consumers moving away from branded merchandise to lower priced private labels or channels. Grocery stores continue to do well, while retail apparel sales have declined.

The refocus of buying habits from consumer goods towards services may negatively impact large retailer sales volumes, but it can be argued that this shift may not impact the larger economy. Disputing this assumption, Q2 retail earnings disappointed investors, with Walmart and Target missing the mark. Ongoing inventory problems contributed to an oversupply of pandemic-level stock. Early June, Target announced that it plans to markdown excess inventory on some merchandise to correct the gaffe. Bucking the trend, one large retailer made notable gains in their third financial quarter. Costco announced a 16.9% increase in May comparable sales year-over-year, driven largely by their sale of fuel and increased gasoline prices.

The Global Supply Chain and The Unexpected Consequence of Extreme Efficiency

During a recent press conference at the Port of Los Angeles, President Biden expressed his frustration and anger that only nine ocean carriers, and three main shipping alliances, control key trade lanes. Each enjoy immunity from U.S. antitrust laws, and have increased their shipping fees upwards of 1,000% during the pandemic, without recourse. This news may have come as a surprise to most Americans, unaware of the shipping cartel controlling the flow of internationally manufactured goods to North America. Logistical hiccups resulting from continued lockdowns in key Chinese manufacturing hubs, along with spiraling cost-per-container have cast a harsh glare on the downside of globalization.

Cumbelich offers, “I think that one of the underreported dynamics affecting retail and dining businesses is the nation’s reliance on a global supply chain. U.S. manufacturers, and businesses are beginning to insure themselves from disruption by increasing domestic supplies and resources to mitigate globalization’s control over business, and this is a healthy process. Businesses will have to learn to moderate their reliance on the global supply chain as we continue to deal with the fallout from the pandemic.” McKinsey’s Taking the Pulse of the US Consumer report finds that companies are starting to create more local redundancy in the supply chain and focusing on the products that consumer’s want. They cite analytics as crucial for retailers to maintain a handle on product mix and inventory.

Chichester adds, “I had an interesting conversation recently with a large grocer about the global supply chain’s adoption of Just-In-Time (JIT) inventory management. Just-in-Time inventory management is a system to align raw material suppliers with manufacturers to deliver materials as production is scheduled to begin. Chichester continues, “Efficiency was so fine-tuned that any disruption caused geometric ripples across the entire system, magnifying supply chain issues. The grocer plans to keep globalization components, but will create some redundancies by regionalizing portions of their operations to protect against future disruptions.”

Geopolitics is likely to be a continuous factor that world leaders will need to manage. Chichester illustrates China’s zero-tolerance mandated shutdowns, the Ukrainian war’s impact on wheat commodities, and Europe’s dependance on Russian oil and gas as examples of global disruptors that will necessitate contingencies to manage a more volatile world.

Inflationary Psychology and Appetite For Risk

Despite these threats, Chichester believes that the underlying fundamentals of the U.S. economy are strong, and cites retail as a lead indicator of its strength. Chichester explains, “The most comprehensive and available data resources available are generated by consumer behavior at the time of purchase. Three-quarters of our economy is based on the consumer Chichester explains, “All eyes are upon how much they spend, and what they are buying. Are they purchasing needs or wants?” The acceleration in the consumer spending habits of Americans can be explained in part by the phenomenon of inflationary psychology. Inflationary psychology is a mindset that leads consumers to spend more quickly in the belief that prices are rising. This internalized pressure will drive a consumer to spend money immediately to buy a product, if they believe that the price will increase soon.

Another factor influencing the consumer is their appetite for risk versus tolerance. There is evidence that inflation is dulling consumer’s appetite for risk, leading them to pull back on expenditures and manage budgets more tightly.

The Calm After The Storm

Still, Cumbelich and Chichester suggest that there is a silver lining surrounding the storm clouds ahead. Cumbelich maintains that this is a cyclical cooling off and not a recession resulting from structural issues in the economy. “The market has to lower demand so that supply can catch up, that's the issue. I think the sooner we can get there, the better.” Chichester suggests “The long and short of it is that we are going to go through some difficult challenges, but if these are handled correctly, the economy will be okay and the nation will be wiser for the experience.” He maintains that the economy needed to go through this cleansing process, after decades of monetary manipulation, which was unhealthy. He explains, “The government must allow the capital markets to rebalance themselves. We must also reexamine the science of supply chain management. If we do those things as we should, we will sail into the calm, after the storm.”

An Epoch of Incredulity

The U.S. markets are a tale of two economies. May’s recent jobs report was glowing, adding 390,000 jobs almost universally across the board, in many sectors of the economy. In this season of light, spring delivered hope with continued historic low unemployment at 3.6% for the third month running, and increasing job participation—notably among women—as a reason to be optimistic and feel good about the economy. Consumer sales continue to flow full tap, with an appetite to purchase seemingly untouched by stratospheric inflation.

The May report indicated solid job growth in food services and drinking establishments, logistics, transportation, warehousing and storage. Manufacturing and wholesale trade made gains, along with all aspects of the construction sector adding 40,000 new jobs above February 2020 levels.

There was one notable exception. The retail industry was an outlier to this otherwise buoyant account with employment declining 61,000 jobs in May, although maintaining 159,000 jobs above pre-pandemic levels. Job losses were notable in general merchandise retailers, apparel, grocery stores and garden supply and home improvement stores. This precipitous dip in the last month, countered the good news delivered by other sectors, and it is worth exploring the causes of the drop through the lens of national retail experts.

Dave Cheatham, X Team Retail Advisors’ President, an authority on retail real estate with over three decades experience in the industry, addresses that question. We sat down to discuss trends and economic factors that he considers top of mind affecting the industry. Cheatham points to a troubled set of issues that he calls “worrying,” as we move toward a murky horizon and what many economists and business leaders predict will include a recession.

Retail has been under pressure for some time now, facing thinning profit margins, more complicated and costly e-commerce supply chains, raw-material cost inflation and increased labor costs in the face of worker shortages. Additional distortions coming out of the pandemic lead Cheatham to believe that the industry is experiencing a “perfect storm” dealing with a series of confounding factors that continue to disrupt business models and hobble any strategy for expansion.

The great pandemic created both positive outcomes and negative effects in the workforce, Cheatham explains. “On the one hand, many people realized that the daily grind was no longer desired or sustainable. They redefined their lifestyle and how and where they work. Many chose to work from home, valuing additional time with family, not having to deal with a long commute to the office. Others have requested that their employers be flexible and embrace a hybrid schedule. So, the pandemic fundamentally changed the way we view work and impacted the economy.” Cheatham continues, “On the flip side, the pandemic removed a lot of employees out of the workforce, whether by choice or necessity. We are still managing a scarcity of workers in the retail industry. It is a real problem. We’re challenged to attract workers, and there are simply not enough people available to hire. In fact, some retail establishments had to cut their hours of operation, and many restaurants cannot find servers.”

Cheatham asserts, “Right now retailers find themselves in a reactive state. They are responding to what is being done to them, by outside forces, with limited recourse to be proactive, and get ahead of the economic factors influencing the business.” Supply chain problems are what keep retailers awake at night. Cheatham speaks with top industry executives regularly, who express their concerns with inventory shortages and delivery delays. Most major big box retailers manufacture their goods in factories around the globe, with one country eclipsing others, China. Recent Covid lockdowns in Shanghai and Beijing, once again, have disrupted the manufacturing and transportation sector. “We outsourced much of our key manufacturing,” Cheatham states, “and it left us vulnerable.” He suggests that it is long overdue for American companies to home shore their manufacturing facilities, at least partially, if not fully. If that is not feasible because of costs and other factors, he suggests that retailers manufacture closer to home, in Mexico or Canada, our neighbors to the South and North. Cheatham realizes that this cannot happen overnight, but believes a smarter strategy is needed to guard against future disruptions and protect our national interests. “You can't get any semiconductor chips. A large portion of semiconductor chips are manufactured in China, so that has impacted the availability of new cars in the U.S. A large part of that supply chain and the global economy is being affected,” he says.

An Inflationary Tale

U.S. Treasury Secretary Janet Yellin has recently admitted that she was mistaken when she stated in 2021 that inflation was transitory, calling the risk of inflation “small” and “manageable.” Inflation has reached 40-year highs at 8.6 percent for the twelve months ending in May 2022, according to the latest Consumer Price Index report. We are witness to the reality that it is in fact steep, historic and may be here to stay for some time. Rick Chichester, a retail capital markets veteran, is an Executive Director of X Team and provides a few insights. Chichester agrees that inflation is a present danger and the Federal Reserve’s Jerome Powell must follow data and facts, not models to successfully manage monetary policy. Chichester sees one benefit to retail is necessity-based purchases, such as private label food products and discount grocery stores. He feels that retail has gone through an inflection point and following the pandemic many have reassessed their need for physical space versus the importance of e-commerce. Chichester believes that retail can remain strong with the shoring up of online sales to extend the physical store, despite facing some inflationary and supply chain headwinds.

Cheatham agrees with his colleague, stating, “Retailers have learned in a year or two (about e-commerce) what would have taken them a decade to integrate.” Omnichannel retail strategies are the norm in 2022 and not the exception. Cheatham offers, “Target is a good example of a retailer that enhanced their e-commerce platform to dramatically improve their delivery service to compete with Amazon. Which before the pandemic was not the case.” Retailers have learned to manage online buying, delivery and in-store pickup, and it is this comfort with technology that has advanced in-store automation, already in motion prior to the pandemic.

Almost a full year before Covid emerged, McKinsey’s May 2019 report, Automation in retail: An executive overview for getting ready, anticipated the dramatic changes that automation would bring to the retail sector. They indicated that data analytics would help create a more informed workforce, and cautioned that those retailers who quickly grasped the implications automation would bring, will emerge at the top. Many retailers are adopting technologies, such as flat panel screens, to save labor costs and compensate for a lack of workers. Automation is increasingly playing a role in the reduction of the number of customer service positions within the retail sector, and this trend is expected to continue. Self-serve check-out kiosks, touch screens, phone apps and other interactive technologies are replacing hourly paid workers in many of our largest fast-food establishments, grocery stores and big box retailers.

All this technology is coming at a time when state minimum wages have continued to rise during these last few years. While the federal minimum wage has remained at $7.25 since 2009, the President has signed The Minimum Wage Executive Order, raising the wage for federal workers and contractors to $15.00 per hour. Raising the federal minimum wage for all workers is a centerpiece of the Biden Administration’s jobs agenda, but ultimately this will require an act of Congress. However, states such as California, New York, Washington, Massachusetts, New Jersey, Oregon, and The District of Columbia have followed suit, raising their own state’s minimum wage above $13.00 an hour. Many employers find themselves in a situation where they must pay more for salaries and compete in a limited talent pool.

Another twist in the “perfect storm” are construction costs. Cheatham states, “Construction costs and prices are going through the roof—retailers are asking themselves; how can I expand?” The answer is complex. Cheatham explains why. “Steel, lumber, concrete, equipment—everything continues to rise, and much of it is shipped from overseas. The cost of construction drives up retail rents, and retailers are unable to afford these dramatically elevated levels. This in turn impacts expansion and opening new stores. It is changing expansion plans and most likely will continue to weigh on the retail sector for the foreseeable, until this volatility subsides. Retailers are trying to figure out what they can, and cannot do.”

The Future is Now

Researchers have found that almost half of retail activities can be automated, using existing technology. This may seem to be an alarming statistic, but it is certain that retailers will continue to adopt technology to support and bolster margins and preserve cost competition. Experts have suggested that the reskilling of retail workers and the evolution of retail jobs, will balance initial front-line job losses. Automation is expected to lead to job creation as companies invest in growth. As ancillary sectors of the economy continue to recover, there is a unique opportunity emerging from a “perfect storm” for a reset to embrace innovation, evaluate priorities, reimagine the workforce and move the sector toward growth, profitability and stability.

Retail Sector Continues to Evolve Post Pandemic, New Concepts Redefine Thriving Consumer-Oriented Real Estate Model That’s Emerging

Disruption to retail caused by the pandemic, upended the way in which merchants sell to customers. The need to pivot, almost instantaneously to e-commerce took customers off the selling floor and riveted them to their touchscreens, completely redefining the buyer’s journey. As we emerge in fits and starts from pandemic isolation and confinement these last three years, omnichannel and experiential retail concepts have become increasingly sophisticated to meet a new society’s changing needs.

Retail experts predict the redefinition retail will prove the sector hasn’t died and in fact is simply undergoing a transformation, albeit a rather massive one. The retail industry is being reinvented as consumer-oriented real estate that incorporates all of the elements of retail but eschews some traditional tenets of retail. Tenant mixes are changing and the over-retailing that’s occurred over the last decade is being corrected via a thinning of the herd. The market is seeing smaller concepts emerge as retailers balance and right-size their oversized footprints, even as others continue to pivot to online and hybrid models. It all adds up to exciting times ahead for the retail sector.

As retail grapples with ways to stay profitable and reach the Americans consumer, big questions around retail space and land use are being asked and little is assumed. The last decade saw the acceleration of the un-malling of America. In a decades-long run up to the Great Recession, the market was overbuilt and oversupplied with big boxes centers and shopping malls. David Larson, X Team affiliate and Owner and Partner at Legend Partners, LLP, a retail brokerage firm based in Denver, Colorado, represents an extensive variety of national retailers with a focus on large box tenants. Larson believes that the retail sector is ripe for a redefinition of itself. He explains, “What is true, in my belief and experience, is that retail is certainly not dead, nor is the American consumer. Retail is changing and evolving. I would suggest that instead of referring to “retail” we need to rephrase it as “consumer real estate”- because in essence that is where the sector has evolved. Explaining this nuance Larson offers, “Many retail sites are currently occupied by a service—whether that is a fitness center, office suites or medical clinic. These tenants have the same market dynamics as a traditional retail tenant. They are consumer-oriented, must be conveniently accessible, possess branding and identity needs. In short, they present all of the elements of retail, but they aren’t retail in the traditional sense.”

Changing Tenant Mixes

The change in tenant mix can be traced back over a decade, leading up to the 2008/09 economic downturn. Larson explains, “Around eight to ten years ago, vacancies were hitting the market due to the Great Recession. At that time, everyone in the business was trying to figure out how to backfill all the empty boxes. Shopping centers and other retail developments had restrictions in place to prevent certain types of businesses from leasing. It is a greatly different story today. If you want to discover who is doing the biggest deals now, you need to examine those old lease restrictions. It is precisely those excluded tenants who are the drivers of retail leasing today."

Covenants, Conditions, and Restrictions (CC&Rs) in commercial real estate leases, spell out exclusives and radius clauses determining the types of businesses who can operate in a particular development within a certain location. CCRs are implemented to protect the interests of tenants and the development. These lease clauses are one of the more contentious issues between commercial property owners and tenants. Certain types of businesses that affect parking requirements were undesired, such as theaters, fitness centers, entertainment venues, as well as other non-retail uses, such as educational or medical. Achieving the correct retail mix often meant outlining a series of restrictive lease covenants to prohibit undesirable uses of the development. Ironically, it is these same fitness centers, entertainment arcades, bowling alleys and even marijuana dispensaries that are leasing large footprints, revitalizing an old anchor or vacant big box hardware store.

One of the more significant changes Larson has witnessed over the last ten years, has been the move toward consumer-oriented, interactive use for retail space. He states, “Although the end use may have changed, retailers have not gone away.”

According to Statista, the United States had the highest square footage of retail space per capita worldwide at 23.5 square feet per person in 2018. Canada and Australia followed behind with 16.8 and 11.2 square feet, respectively. COVID-19 has accelerated a trend of consolidation and closures that had already been underway. As Larson points out, there simply was too much retail space built in the last decade. “There needed to be some fallout. It was inevitable because in many cases there were three or four competitors occupying the same retail category within a given market. That level of saturation wasn't sustainable. There were just too many malls and centers that were underperforming—we were over-retailed.”

Today, prime retail space is commanding record rents, and assets within the top tier are not in distress. Along with rising rents, a record number of properties traded hands. CoStar Analytics reports that more than $105 billion of retail assets were bought and sold across the nation in 2021. Activity was 65% higher on a year-over-year basis. Today, Larson sees the biggest challenge facing retailers who want to grow is the lack of affordable space.

“In Denver, Colorado, where I am based, you'd be hard pressed to find a decent 20,000-square foot box that's available. And a 40,000-square-foot space can’t be divided and make good fiscal sense anymore. The expense incurred to install an additional loading dock, and rework utilities and so on, is prohibitive,” Larson explains. “So, I see this as an ongoing challenge to retailers over the next five years, or so.”

Small But Mighty

On the other end of the spectrum, there is hot demand for smaller retail spaces, particularly in the urban core and in other densely populated areas. Traditional large retailers and nascent digital brands are looking for smaller footprints to re-invigorate the shopping experience or move their online brand into the real world. Downtown store fronts are popular choices, offering street level visibility, pedestrian engagement and easy access.

Smaller concepts may also play a key role in enticing pandemic-weary customer back into what they perceive to be a safe and controlled environment. Last year, IKEA opened its first urban store in the hip Tokyo, Harajuku neighborhood. The 27,000-square-foot store sells curated merchandise for small spaces and urban living, offering novel interior design ideas to customers. The new concept store is far smaller than a standard IKEA 300,000-square-foot expanse and may pave the way for future expansion to other urban centers.

Online retailers Warby Parker, Allbirds, Everlane, Casper, Bonobos and Million Dollar Shave Club have expanded to bricks-and-mortar in the last few years, enjoying great success. The flow of pixels to places and spaces is expected to continue. Research suggests that by 2025, a physical location will fulfill 30.5% of all digital transactions. Larson confirms that most digital brands lease within the 1,200-square-foot to 5,000-square-foot range, with the majority of new retail space consisting of freestanding single-tenant properties.

Technology Lends A Hand

As larger retailers look to strike a balance and right-size their oversized footprints, many are relocating to smaller retail spaces to downsize their stores. Merchants are devising more engaging ways to leverage technology to extend beyond their four walls and bolster sales. Larson explains, “Retailers are trying to figure out how to generate the same sales volume from a smaller footprint. Technology is often a way to accomplish this, which is where omnichannel retailing comes into play. The integration of online sales makes perfect sense to reach sales goals without having to carry the expense and overhead of a large physical retail space.”

The pivot to online and hybrid continues with many of the largest public grocery chains investing heavily in their online infrastructure. Other retailers have partnered with popular social media apps to create a frictionless and interactive retail experience. WhatsApp has joined with several major retailers as part of an ecommerce strategy called, Shops in WhatsApp, rolled out at the end of 2021. The Meta-owned platform will introduce new technologies like Instagram visual search and AR Dynamic Ads to create an engaging intelligence-driven experience. China’s App-Powered stores are linked with WeChat to blend livestreaming and instore shopping. Viewers on the app can comment and interact with each other during retail events, bringing the shopping experience out of the physical box and onto the screen. Increasingly AR and VR is being used to virtually “try on” apparel or project a piece of furniture into your living room.

Today’s retail sector is rebounding from the disruption experienced during the pandemic and new concepts and models are earning a place on consumers shopping lists. The blending of retail, e-commerce and technology is creating a world in which omnichannel and experiential retail concepts are working hand-in-hand to deliver products and services consumers want – and that’s music to any retailers ears.

Pre-COVID, ask any investor what kind of retail they were looking for and the answer would be experiential retail with elevated service offerings. Operators were undergoing aggressive leasing campaigns to attract direct to consumer tenants into bricks and mortar spaces and the key conversations were around activating spaces in order to maintain foot traffic throughout the day and night. Class A mall operators completed these renovations and activation programs and were positioned to lead the way into the new wave of retail. Since March of 2020, what we consider to be the best retail investment has changed dramatically, and it has left owners and investors in a conundrum that has come to a head in the past weeks.

What’s Happened?

A catalyst can be found underlying a mega-deal involving one of the largest Class A mall owners in the United States. Unibail-Rodamco-Westfield (URW) announced in their Investor Day presentation on March 30^th that they would be disposing of their U.S. assets by the end of 2023. It appears that the primary motive here, beyond switching to pure-play European, is deleveraging their overall portfolio; exiting the U.S. market will bring LTV to below 40%, assuming the portfolio can be disposed of at a 30% discount on 2021 valuations. Last month, URW Westfield sold the former Promenade mall in Woodland Hills for $150 million, a 60% premium on its appraisal, and CEO Jean-Marie Tritant, cited that example and the overall quality of the U.S. portfolio as factors in their confidence of getting good returns, good being a relative term. X Team Retail Advisors’ Jim Bieri, of Detroit based affiliate Stokas Bieri, is skeptical of URW’s statement and timeline, citing a similar statement that was retracted last year.

Long Term Challenges & Shifting Mall Trends

Prior to the sale to Unibail-Rodamco, Westfield was owned by the Lowy family, an Australian developer with pension fund capital. The family sold to Unibail-Rodamco at a good value prior to the pandemic, but there were long term challenges brewing before COVID graced our lips. Bieri noted that super regional centers were redeveloped and made too large, an example of that being Garden State Plaza in New Jersey, which added a second level and two further additions that created more retail losers than winners. Neiman Marcus was added, and capital was expended in an ill-fated attempt to attract luxury retailers. Another example is Annapolis Mall, which was expanded to five anchors and too much GLA. The market could not support the space, and today the center has two anchors and significant vacancy. Similar stories occurred at Topanga, Roseville, San Diego’s UTC, and Santa Clara’s Valley Fair, with the biggest challenges occurring at the World Trade Center. Hindsight is of course 20/20, but upon reflection, the expectation for re-tenanting and growth through redevelopment was miscalculated. COVID acted as an accelerant for all things related to retail and commercial real estate as a whole, shifting how people work, where and how they spend their time and impacted the “third place,” something that URW was banking on as they planned the expansion and asset growth.

Newport Beach based X Team board member Rick Chichester sees the macro-retail impact on URW’s decision. Chichester says, “Customer demand has changed significantly and as such malls need to reposition themselves to align with these changing expectations and demands. For the best located malls, this repositioning entails redesigning spaces into more of a mixed used (Live, Work, Play) densified development, and in most cases includes reducing the existing “retail” footprint. Redevelopment is expensive and time consuming, and as such, many owners and investors are looking to balance their risk adjusted costs and returns, as well as capital allocations in an effort to strategically determine which assets they will invest in, and which they will dispose of.” Ultimately URW has already engaged in the redevelopment of assets and hasn’t been able to see the returns expected. Bieri further points out URW’s strategy during the pandemic, as centers were closed and URW was initially aggressive to chase rent payments, served to alienate key relationships at a time when flexibility and mutual understanding was key.

URW’s Disposal and The Bigger Challenge

Unibail acquired Westfield in 2018 and took on considerable debt in order to make the acquisition and began selling off properties. URW allowed lenders to take back five underperforming malls in the United States last year. Tritant took the helm as CEO in January 2021 and made it clear “Our investment should be in Europe.” Chichester sees some strategic merit to the disposition strategy. He says, “The U.S. market hosts the largest retail footprint per capita, thus the associated property repositioning costs probably do not provide Unibail with the returns they can achieve in markets outside of the U.S. Finally, the market demand for good real estate is compelling and, as such, this could be an opportune time for URW to monetize its U.S. portfolio.” The upcoming disposition of the U.S. assets, and the proclamation made, however, may provide potential buyers with an opportunity to capitalize on even lower prices.

X Team’s Tim Miller of Chicago-based affiliate Great Street Realty sees the long-term challenges of sustainable rents in Class A malls. Citing URW’s Old Orchard Mall in Chicago’s North Shore, “tenants are paying double the price per square foot to be in 4,000 square feet in the mall. They can pay up to half that rate to be in the best outlot of the best power center across the street. It doesn’t add up. Mall rents need to come down, and the value of the malls needs to be reset.”

URW isn’t the only owner seeing a massive reset in their Class A mall portfolio. Brookfield announced April 5^th that Chicago mall Water Tower Place was being handed back to the lender. Brookfield Properties spokesperson Lindsay Kahn said Water Tower Place “will no longer be part of Brookfield’s portfolio.”

“After many discussions to carefully assess and identify all available options to move forward, we’ve determined that it is best to focus Brookfield’s resources on other opportunities within our portfolio,” Kahn said. Ownership will be transferred to lender MetLife Investment Management, a unit of MetLife Inc.

Establishment owners like URW and Brookfield disposing of U.S. based assets is not emblematic of larger retail challenges as quick service retail, grocery anchored centers and community retail thrive. It does however signal a massive reset in the Class A mall space as owners have to adjust to new strategies, rents, values, and approaches in a post-COVID existence. Bieri sees positivity in the market for those who are willing to be patient. “Mall traffic is generally back to 2019 levels. Department stores remain a key component to any mall retaining fashion and luxury stores. Simon and Brookfield have adjusted their portfolios by focusing capital and resources on their best properties. They also propped up their malls by purchasing J.C. Penney and several other retailers. Rising construction cost and supply chain issues make new construction difficult. Key centers will continue to attract new concepts. Failing centers will become mixed use and or be torn down for warehousing, medical, civic, or educational uses.” Once again, we will see a reset of the best use in Class A mall space for years to come, black swan interruptions aside.

The grocery industry, one of the most competitive and market reactive in the retail sector, faces a critical moment. Pandemic shopping habits changed dramatically by force, and operators had to pivot and adapt quickly as customers curtailed trips to the grocery store in favor of online shopping and delivery.

Revenues rose as much as 35% from the previous year as home-cooked meals, stress baking and panic buying ensued during 2020. The coronavirus elevated fiscal sales by $4.6 billion. As events unfolded, e-commerce platforms, store operations and supply chain logistics were figured out in real-time. Profit margins in the grocery industry have always been thin because of intense competition, and operators often sought promotions to entice customers into their stores. Industry analysts are wondering if consumer habits, developed out of necessity, will carry forward as we move past the pandemic era. Will we stay glued to our phone apps and Instacart? Or will the visceral experience, and possibility to pick our own fruits and veggies, entice us back into the grocery aisle?

Doug Munson is the founding Principal at MTN Retail Advisors, a national primary grocery retail research and data collection firm that works with major grocers to help retailers, developers and investors determine the best locations for grocery stores.

Munson says, “I do see a demarcation between publicly-traded and privately-owned grocery companies and their business focus. The large publicly-traded grocers are investing heavily in e-commerce and online fulfilment to support that segment, which averages 8-10% of total store sales. To that point, the physical store is not going away. There are approximately 8,000 exclusively-online retailers looking to establish brick and mortar locations.”

High land and construction costs and a heavy-handed entitlement process is slowing down development. Darren Pitts, Executive Vice President of Velocity Retail Group in Phoenix, Arizona foresees an environment that favors a large amount of built-to-suit and small development, along with value-add opportunities that redevelop existing shopping centers.

Moving toward a period of normalcy, leading chains will need to reinvent themselves in order to preserve and sustain additional sales they achieved from the pandemic. Other headwinds include the inflationary environment, supply chain hiccups and a constricted labor market exacerbated by the “Great Resignation.”  Munson sees the latter as a pain point that is not going away any time soon.

“Grocery is essential to the economy, as we quickly realized during the pandemic. While supply chain disruptions have eased somewhat as we move away from the crisis, we still face considerable challenges in hiring. The labor market is very tight, and grocers are having a tough time finding employees. I feel this will continue to be an issue for retailers for some time to come.”

Emerging Trends and Technology

Store-within-a-store concepts will continue to emerge as large grocers strike deals with retailers in alternative categories to create new segments of merchandise under their roof. Consumer brands in popular categories such as clothes and household goods will create interest, differentiation, and expand margins.

Kansas City-based Ball’s Food Store has introduced a CBD store-within-a-store in its Price Chopper supermarket through a partnership with American Shaman, a provider of high quality CBD tinctures and beverages. The store environment features botanical prints, a small seating area to test products and consult with brand representatives, and wood-toned finishes to reflect the brand’s focus on natural ingredients.

Darren Wood, Principal of The Providence Group of Charlotte, North Carolina, spoke at the recent X Team annual meeting about the integration of grocery store technology, both in and out of the store. Wood is a U.S. tenant representative for Aldi Foods, the German family-owned discount supermarket chain with 200 stores in 15 states domestically. They are currently testing frictionless checkout technology in Utrecht, the Netherlands as a pilot to implement on a wider basis. That parent division, Aldi Nord operates 500 stores throughout the country. The technology was developed by Trigio, an Israel-based computer vision startup.

Wood cites Nourish + Bloom, as an independent grocery retail innovator, based in the States. The organic market and bistro integrate cutting-edge technology and maintains a fleet of friendly mobile robots for grocery delivery. The company’s first store is located in Fayetteville, Georgia, an underserved community 22 miles south of Atlanta.

The 1,500-square-foot store is the brainchild of married entrepreneurs Jamie and Jilea Hemmings whose autistic son and his food-related issues, sent them on a mission to provide fresh, healthy food for the black community—often lacking in poorer neighborhoods. They plan to expand their concept further into Georgia and Florida. Partnering with Microsoft, who helps offset the cost of technology investment, the store promotes itself as the first African American-owned autonomous grocery store, with robotic delivery in the world. The shopping journey is frictionless and minimizes contact. Shoppers download the store app, input their payment information, and scan a QR code to enter through an automated gate.

“Smart shelves” subtract the weight of each item picked and records its purchase in a digital cart. Thirty ceiling cameras track shopper’s physical movement throughout the sales floor. One caution—if the customer fails to return any rejected item to its original shelf, it stays charged to their account as a purchase.

Store guides are on hand to help customers, and a quick phone scan checks them out. The app tabulates the order and pays electronically. The receipt is emailed. There are no lines to wait on, just a seamless experience which ends with an exit through an automated gate.

Amazon Fresh, who currently has 19 stores across six states and Washington, D.C., according to their website, was one of the first small-format grocers to introduce this technology to consumers. The grocery chain’s deep-pocketed parent absorbed the considerable R & D technology costs as a loss leader.  Wood notes, “It will be interesting to see how many companies can buy this technology in the future.”

Advances in the fulfilment center are improving efficiencies, managing inventory, costs and reducing waste and energy-use. The need for large warehouses and smaller, localized-sites to create micro-fulfillment centers, has transformed the industrial sector into the reddest hot and most active in commercial real estate.  Ocado Group, a U.K-based online grocer, builds automated customer fulfilment centers (CFCs) using sophisticated AI-powered, demand-forecasting engines, high-speed picking bots and a 3D grid of crates packed with items. The company has partnered with Kroger, the largest U.S. grocery chain, to build several automated giant CFCs to meet the demand for online grocery. Ocado’s solution, the Ocado Smart Platform (OSP), offers grocers an end-to-end e-commerce, fulfilment and logistics platform.

Kroger’s e-Commerce online delivery earnings outperformed during the pandemic. The company will dedicate significant resources to accelerate e-Commerce under its strategic growth plan. Currently Kroger operates 45 warehouses. They have partnered with Ocado to build 20 super warehouses. The first of these debuted mid-April 2021 in Monroe, Ohio. The $55 million, 375,000-square-foot facility contains over 1,000 robots alongside 400 human employees to pick, sort and move items controlled by a proprietary air-traffic control system to fulfil customer’s orders. Algorithms regulate the pick-and-sort process and robots pack groceries intelligently, balancing bag weight to reduce plastic use and waste. The center is forecast to process as much as $700 million in sales annually, equivalent to 20 brick-and-mortar stores.

Omnichannel Retail Strategies

Omnichannel retailing enables consumers to interact with brands through both online and offline channels, enjoying a unified experience. Grocers are incorporating this strategy to allow shoppers to order online and pick up at the store, providing choice and flexibility. Shopping habits may be permanently changed, considering the popularity of OGP (Online Grocery Pickup) and BOPIS (Buy Online Pickup In Store). During the pandemic almost half of the top 500 retailers with brick-and-mortar operations were offering BOPIS, a rise from less than 7% pre-pandemic, according to a Digital Commerce 360 survey taken August 2020. Amazon at Whole Foods, Walmart and Kroger offers a BOPIS option to customers.

Pandemic-driven services like curbside pickup and same-day delivery are expensive for retailers to operate and eat into profitability. The BOPIS model helps offset delivery expenses and benefits grocers as it gets consumers into the store—reducing online cart abandonment and capturing brand loyalty.

Major markets have begun to roll out omnichannel grocery store prototypes that function as both a physical store and online fulfilment center. Workers quickly pick items with hand-held inventory guns identified by wayfaring signage. Inventory is restocked speedily by moving merchandise from the back-end fulfilment area to the sales floor, allowing consumers to get their essentials faster.

Community Partnerships

Grocers are partnering with nonprofit and government entities to meet the needs of “food deserts.” A food desert, or healthy food priority area, has limited access to affordable and nutritious food. The USDA’s Economic Research Service previously identified more than 6,500 food census tracts in the United States that equates to approximately 13.5 million people with low access to sources of healthful food. In early 2021, H. R. 1313 (Healthy Food Access for All Americans Act) was introduced to stimulate investment and healthy nutrition options in these communities.

However, the most viable and agile solutions seem to be emerging from grass-roots organizers, civic leaders and business partnerships. For example, when Buy For Less, suddenly shut its doors in northeast Oklahoma City in 2019, its primarily black community lost its only full grocery option. Working closely with community nonprofit, RestoreOKC, Homeland Stores was able to open a 6,800-square-foot grocery store in April 2021. It is about one-third of the size of an average store, and will sell a seasonal supply of fruits and vegetables grown at the nearby RestoreOKC urban farm by local middle and high school student interns. Corporate suppliers with food assistance programs can sell grocery items with deep discounts to the store. This particular Homeland Store will provide an invaluable resource to the community, and include nutrition, cooking and shopping classes.

Consumers and competition will continue to modify the grocery industry environment, as we move into what’s next. Technology will continue to play a major role in shaping every aspect of the industry, however the demise of physical stores is largely overblown. The U.S. Department of Commerce census bureau news reports that while 2021 e-commerce sales did increase 14.2 percent year-over-year, it still accounts for 13.2 percent of total retail sales. There is a sense that consumers like the convenience of their phone apps, but also are beginning to welcome the communal experience of shopping after a long and isolating pandemic. Chains and independents will have to willingly embrace innovation, as different choices, challenges and opportunities present themselves.

Shopping Malls proliferated out of the suburban expansion during the mid-1950s, which brought efficient transit to prosperous neighborhoods spread across postwar America. Rising automobile ownership made these retail centers accessible and convenient, offering a bounty of merchandise and services.

Today, those same centers that lifted up suburbia and opened up the world through mercantilism are facing a host of challenges leading to mall re-development across America.

The first enclosed shopping mall opened in Edina, MN in 1956, designed by Victor Gruen, an Austrian-Jewish architect who emigrated to the United States in 1938. The Southdale Centre offered a spacious, climate-controlled environment with shops and public art. Gruen envisioned a core community space that could offer shopping, medical facilities, schools and residences. Gruen’s idea took off and over the next three decades developers offered retailers generous incentives to build department stores in mall settings. Brands expanded into standalone stores and chain stores proliferated. By 1985, 2,500 malls were developed in the United States. Anchored by major department stores, malls provided a safe haven to meet up, hang out and shop.

X-Team affiliate Jim Bieri, Principal with Stokas Bieri Real Estate, a Detroit based commercial real estate firm specializing in retail transactions, has been involved in the mall business since 1972. His firm provides strategic consulting to a wide variety of retailers and property owners. He has witnessed the sector’s growth, apex and current struggles.

Bieri sees a combination of factors, including over-development, demise of Department stores and saturation of the market hurting the sector. He explains, “The population of towns and cities had not changed significantly, and developers just built too many malls.” According to Cowen Research, oversupply of malls outpaced demand with development eclipsing twice the population growth between 1970 and 2015. In the 1980’s the explosion of outlet stores, and “big-box” power centers further siphoned mall business. From 1988 to 2016 department stores market share dropped from 45 % to 15%. Conversely value stores rose from 58% to 80% and is expected to provide continued growth and share gains.

In many cities, consolidation of owners proved a detriment as they cannibalized their own properties. Tenants would opt to lease in the highest producing center in the portfolio, leaving others to die. Financing structure changed and developers began accepting public investment. This placed pressure to produce short-term results, and decisions were made that were not in the best interest of the development.

“A mall is like a sports car; it needs constant attention and capital investment. It is already a fast machine, but must be maintained,” Bieri asserts. “In the past, a $10-15 million upgrade was considered a big deal. Now, it is not even worthy of putting out a press release.”

So, what does the future hold for the mall sector? Cowan’s consumer tracking and studies show that three quarters of customers still prefer to shop in physical stores. Brands, a social experience, current styles and immediate gratification are key preferences for bricks over clicks. Analysts predict that A class malls will thrive with intensified investment to stay fresh and competitive. However, C and D class malls, which account for about 30% of properties are at most risk.

Bieri echoes the sentiment that malls in great markets will rebound. He believes that millennials will embrace them for their conveniences, and many will have private entrepreneurial ownership. South Coast Plaza, Aventura and Bellevue Square are examples of privately owned centers that continue to flourish. Located near affluent communities accessible by freeways, they offer curated luxury boutiques and anchors offering amenities that match their customer’s tastes and pocketbooks. According to its company statement, South Coast Plaza, attracts over 22 million visitors per year, with annual sales (prior to the pandemic), approaching $2 billion and a sales volume of over $800 a square foot. To cater to their sizeable Chinese tourist trade, the center provides Mandarin speaking concierge services and accepts China UnionPay as a payment method. Luxury will continue to lead, concentrating shoppers at the top-tier.

As the gap widens between Class A malls and the rest of the sector, there will continue to be an ongoing retraction in the number of malls throughout the country. By 2030, it is estimated that there will be 300 to 750 malls operating. Bieri states, “In most markets you’re going to end up with one or two malls. I don’t see many of these (redevelopments) taking less then perhaps 10 years. That said, those redeveloped sooner are those retained by the property developer. The demise of the department store hurts everybody. If the developer can repurpose the space to include other uses, this is the best approach- even though the volume (of business) may not be replaced. Repurposing a mall can work if you have a good location, connection to transit, with a demand for entertainment, food and hospitality. If a developer can deliver those amenities and keep to the same price point, in theory, you will provide the customer with what he or she wants.”

The Shops at Westshore, formerly Westshore Mall in Holland, Michigan is such a case. In 2009, the mall was over 30% vacant, and losing its anchor stores to bankruptcy or consolidation. The mall was originally built in 1988 by Bramalea Limited, a Canadian development company. Bieri recalls, “The local developer purchased a dying mall from the lender and began the process of “de-malling” it. He was able to cut about 50% of the GLA (gross leasable area) by demolishing part of the structure. He then had the ability to create additional GLA, by constructing freestanding buildings and reinventing the development as an outdoor mall.” Today, The Shops at Westshore feature a farmer’s market, dining, a studio gym, physical therapy practice, investment advisors and in 2019 signed a new tenant, Grand Rapids Community College. The college has purchased the center’s former JCPenney store to establish a central campus that consolidates four leased locations. This is an example of how smart, community-centric redevelopment can mitigate the loss of property and sales tax base that support basic services.

Bieri sees a growing trend in rezoning lower tier mall developments to industrial use. Empty anchor department stores are being snapped up by online retailers and logistics firms, who convert them into fulfillment centers. Driving this trend, many retailers have implemented a BOPIS/BORIS model, which allows a customer to buy online, pickup or return in-person. And with the shift to the web, omnichannel shopping continues to grow in popularity. Surf the net at midnight, click, purchase and pick up the next day at the store. Other uses for abandoned malls include self-storage and distribution centers. In December 2018, U-Haul acquired 13 K-Mart and Sears stores and converted them into storage facilities. A year later, Amazon bought Randall Park Mall and converted it into an 855,000-square-foot fulfillment center that can process up to 100,000 orders a day, operated by an assembly chain of workers and robots.

And, what of Victor Gruen’s hopes and dreams for the great American mall?

Tempe Marketplace, a 1.3-million-square-foot outdoor mall in Tempe, Arizona may answer that question. The property sits at the intersection of two main freeways, a stone’s throw from the main Arizona State University campus. The mall was built on land once designated as a Superfund site by the EPA. In 2004, Vestar Development partnered with the City of Tempe and agreed to fund the majority of environmental remediation with an additional $7 million loan from U.S. Housing and Urban Development. It became the largest brownfield land cleanup in the history of Arizona. The shopping center opened in 2007 with big-box stores, dining and an interesting mix of regional and national retail and promoted “the District” its lively entertainment core. The success of the mall ignited development of the surrounding area. Multifamily mushroomed along with corporate headquarters bringing employment for thousands. Tempe Marketplace sits adjacent to Arizona State University’s new Novus Innovation Corridor, a 10 million square foot public/private partnership with Catellus Development Corporation being constructed in phases through 2024. Novus will bring an estimated 34,000 jobs, multifamily housing, office, retail, entertainment, hotel, and a research and technology hub.

Toward the end of his life Gruen was asked if he was proud to be considered the “Father” of the mall. He regrettably felt that his ideas were lost from his original vision. The architect might feel differently today as the future of mall development is expected to be mixed use- to shop, work, play, learn and live, as he imagined sixty-five years ago.

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Savvy and proactive retailers that adopted aggressive national roll-out strategies during the global health pandemic grew market share and are in better positions now compared to competitors who hunkered down or tapped the brakes to see how the Covid threat played out. Retailers who made bold moves and incorporated innovative initiatives were rewarded with more opportunities and they faced less competition for sites.

The uncertainty that arrived with the onset of the COVID-19 pandemic hung over the economy and retail sector for more than a year. Those clouds darkened optimism and caused many retailers to take a ‘wait-and-see’ approach at the onset of the pandemic. But some retailers elected not to take refuge in a bunker or place everything on pause.

X Team Retail Advisors’ President Dave Cheatham of Velocity Retail Group in Phoenix said, “One of the first words out of everyone’s mouth when the COVID pandemic hit was ‘we should get great pricing.’ Ultimately, that never happened. People just didn’t lower their price due to the uncertainty and that didn’t lead to lower prices.” Cheatham notes some retailers pushed the pause button, but he didn’t experience many that got out of deals. “Very few canceled, though many paused and stalled plans,” he said.

Companies that went out there earlier on were rewarded. The environment many proactive retailers found was one in which they could secure opportunities with less competition at time. There were more sites and few competitors since many took cover in a bunker.

Darren Wood, principal of The Providence Group in Charlotte, and a member of the X Team, said, “There are challenges obviously that still need to be addressed, but I think for most part, retailers are back in full acquisition mode, regardless of the brand.”

The key for a retailer seeking to expand its footprint nationally is keeping its pipeline full. The aggressive retailers retained their existing pipelines and even expanded them. As a result, they are today’s leaders. But there are those who didn’t remain active and consequently are now behind. Some larger companies took a cautious approach, restricted travel, and waited. That put them in a position of needing to play catch up. Many are now sorting through the rush or pipeline from 2020 and 2021 with moderate pipelines pushed into 2022.

Cheatham said, “There’s a push to expand now, and the competition for sites is fierce, as retailers now wake up and try to aggressively catch up in an effort to make up for lost time and ground.”

Wood reports demand is robust for any retailers that have essential businesses, such as grocery or drive thrus, banks  or fast food. They are armed with capital and are pursing deals, which is creating a competitive environment in the outparcel area.

There are a number of consolidations on the junior anchor side that Wood has observed, but retailers seeking to expand are running into a supply issue, especially for spaces under 30,000 square feet. There is significant tightness in the 10,000-square-foot to 20,000-square-foot user category, mainly because there’s been little new supply coming online. Institutional investors remain largely on the sidelines when it comes to pursuing retail deals unless the site has grocery. Wood believes retailers expansions now must incorporate more flexibility in the size of the space, due to the shortage of decent space.

The lack of supply is an issue facing retailers, as are rising construction costs and labor, though Wood notes it has become harder to staff restaurants or stores now. These are issues that are hampering new construction now and is leading to increased rents at existing retail real estate since there is more demand than supply.

Wood adds, the view that retail is dying is actually disconnected from what consumer spending and shopping patterns reveal. The perception that the retail industry is being swallowed up by online shopping isn’t a true reflection of what retail experts are seeing in the marketplace. There are many examples of retailers that are expanding, such as TJ Maxx. Due to the lack of supply, they are focusing on smaller markets, where they can secure sites under favorable pricing and that have consumer drawing power, making them viable expansion strategies.

“Online shopping is not crushing retail,” said Wood. “It has grown, but retailers are seeking more space options now in which to expand, so comparable sales in existing stores must look good to support that strategy.”

Backed with better research, retailers are now accelerating what was inevitable in a number of areas, points out Wood. For example, the center store, or goods in the middle of a store, has shrunk. Grocers have reduced the number of items in the center store area, such as produce or fresh meat. That shift is being driven largely by the emergence and increasing pressure created by online shopping, says Wood, who notes there’s “always a place for those goods on the outside area, but grocers are carrying less in the middle of the store.”

The strategies of Walmart and Kroger to stock fewer SKUs and shrink their store footprints has also been driven by the fact that shoppers can pick-up orders themselves or are bagging groceries themselves.

A crucial consideration in the evolving retail environment is understanding what a shopper wants. Not only is the shopping experience inside a story changing as people come armed with smart phones to comparison shop, retailers now face replenishment issues, mainly because there’s less on store shelves. That presents challenges for a retailers supply chain.

“Retailers are becoming more careful about supply chains, as they learned early-on in the pandemic when demand surges led to outage of some products. The just-in-time models that retailers have grown accustomed to allow them to reduce inventory on-hand, but the pandemic showed they need a better balance so if there is a run on sales they won’t run out of basic items,” said Wood, who advises retailers to be mindful that the online ordering and pick-up in store programs should not be a detriment to those who actually wish to visit a physical store.

Online shopping has been accelerated by the pandemic especially in the grocery sector and has impacted the experiential elements of retail. Wood cites eyewear retailer Warby Parker as an example of how online and in-store work together. Consumers want to visit a physical location to see, touch and feel the Warby Parker products but they may not actually purchase at the store, preferring to order online.

The strategies now being executed by big retailers reveals how those trends are driving the sector. Cheatham notes, “One of trends that is coming out of COVID-19 is an absolute focus on being good at online delivery. A number of big retailers rapidly advanced their processes to adapt and capture or expand new revenue streams. They accomplished in one year what may have taken them 5 to 7 years in a normal market, largely because they had to do it out of necessity.”

Change has always been components of the dynamic retail industry, and the process of selling products is constantly evolving. Gone are the days of roving door-to-door salesmen, and each subsequent sales model that followed, whether that be mercantile stores, downtown hubs, or power centers, reflected the sectors’ ability to adapt and try new things. The past 18 months continued in that tradition, but the core focus of getting a product into a consumers’ hands when, where and how they desire at the right price and value point remain intact in a retailer’s playbook. Incorporating technology into the equation has helped some retailers achieve competitive advantages from a pricing and product delivery perspective, too.

Cheatham adds, “Some retailers, like Target, have done an amazing job during the pandemic to catch up through the adoption of technologies. They caught up sooner than expected and are firing on all cylinders like a smooth-running engine. Target is a great example of what retail is all about.”

During the pandemic, grocery stores learned how to implement pick-up strategies or the buy online and pick-up in a store (BOPIS). “Amazon taught all retailers how to use online ordering and delivery to a consumers doorstep,” said Cheatham. “COVID taught us BOPIS, especially in the food sector, but all categories including big box retailers, are catching on to BOPIS. Walmart has created a BOPIS selling machine, and retailers have discovered BOPIS can be a profitable area.”

Another shining example of a restaurant chain that successfully pivoted during COVID was Chipotle, which made it easy to open a smart phone or device to order and then go pick up in the store. As a result, online now makes up 40% of Chipotle’s sales. Part of the reason they grew online sales so rapidly is the fact that this BOPIS model is in line with the buying habits and preferences of Millennials.

The beauty of BOPIS is consumers tell retailers what they want so it removes much of the guess work of what to offer and can help reduce unsold inventory while producing fewer chances to miss the mark on what to stock. That strategy is reflected in Starbucks’ morning crush during which the store, knows exactly what they will need to fill orders. The guess work of what to ship from a store is removed. And when there is a sound logistics and supply chain backing the retailer, products arrive at customers doorsteps quicker, even when an order is fulfilled from a warehouse, or they come to a store to pick it up. BOPIS is a strategy that contributes positively to a retailers bottom-line, too.

The convenience of BOPIS makes it a viable sales channel going forward. Visiting a store to pick-up a product provides another touch point for retailers to capitalize on. Research shows that retailers who have adopted BOPIS also realize additional in-store sales. Roughly 70% of online buyers who come to pick up at a store purchase other items.

That is one reason the return centers opened by Kohls to handle Amazon returns have proven to be beneficial for the retailer. And it is no surprise that the areas where those returns take place are at the back of stores, either. When someone returns a product, they can get a credit or an immediate coupon to use in the store. Returns are an issue retailers must deal with for online buyers, and it is taking on more significance since sellers on the Amazon channel are facing increasing delivery fees.

The retail sector continues to evolve and while the weaker retailers going into the Covid pandemic era struggled or didn’t survive, there were other stronger retailers that thrived. They got stronger because they had built a strong immunity to challenges and now are ready to compete in the next round. In many cases they reinvented themselves and redesigned their store or strategy in order to compete at whole new level.

Cheatham predicts the three future growth areas in the retail sector will be 1-improving the drive thru process, 2-BOPIS and 3-using online food deliver services. An example of a strategy that was met with success during COVID was the introduction or expansion of drive thrus. Some restaurants doubled or even tripled capacity of their drive thrus. Others created pick-up areas and expanded BOPIS options. Now food delivery systems, which brings food right to a consumer’s door, have become mainstream and those advancements are expected to be part of the future retail landscape. That is reflected in the fact that restaurants also incorporated more online ordering services like DoorDash, UberEATS or Grubhub into the mix during COVID, which has resulted in greater adoption of those platforms.

The advice Wood offers retailers considering national expansion plans is to spend the time on research and strategy up front. That best practice allows those executing the plan a clear direction that’s based on what local market and broker experts recommend will work to grow a retailer’s footprint. “By slowing down and incorporating this expertise at the front end, we can collaboratively work with a retailer to develop the concept based on our knowledge of a market and what will work with that consumer base,” said Wood.

The big takeaway in what is considered a landlord or seller’s market is that having local representatives on the expansion team is more important than ever now. A retailer is then able to leverage the skills and relationships a broker brings to secure the best real estate sites, which ultimately serves as the foundation underpinning a national roll-out plan for retailers.

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Addition of Affiliates ADMI and Hoffman Boost X Team Platform

"X Team Retail Advisors recently added two new affiliates including ADMI Inc. and Hoffman Strategy Group which bring retail brand, hospitality, mixed-use and themed entertainment expertise. The additions boost the number of companies now part of X Team’s platform to 37." Read More at ConnectCRE...

X Team adds two new affiliates; brings total to 37

"X Team’s nationwide network of boutique brokers and retail advisors has added two new affiliates: ADMI, Inc., and Hoffman Strategy Group." Read More at Chain Store Age...

 

X Team's Evan Albert is featured in the University of Maryland's 30 under thirty!

"Evan Albert started working in retail leasing immediately after graduating from the University of Maryland in 2015. Evan has grown tremendously in the commercial real estate industry since he began including opening his company's Washington DC office in 2019 and leading the young broker's division, X Now, of international retail broker network, X Team Retail Advisors. Evan continues to have UMD spirit, attending basketball games and continuing to network with fellow Terp alumni."

Evan is at X Team member MFI Realty where you can reach him or check out the full listing at the Terrapin Club!