By Jordan Gorjian
The retail industry and its real estate component are evolving more rapidly than ever. Today, the typical consumer is much better educated and price savvy about their merchandise choices than they had been in the past and often know in advance what specific item they want to purchase. To complicate matters, the competition from online shopping is significant and increasing.
A 2019 survey by Digital Commerce revealed that Millennials make up to 60% of their purchases online, representing a 10% increase over just the previous two years. The COVID-19 pandemic has accelerated the shift to online shopping and by the end of 2020, this percentage will be significantly higher for both Millennials and other demographic groups.
Both retailers and retail real estate owners need to adapt if they want to stay in business and continue to attract customers. The changes to their marketing strategies and to their merchandise displays will obviously impact their real estate needs in the years to come. How will retail landlords and brokers need to adjust their ways of thinking to accommodate the new reality?
Even with the drastic changes in the retail environment, two constants remain. Retailers need to establish and maintain relationships with their customers, and they need to provide a unique experience that will entice customers to return to their stores.
Maintaining the Customer Relationship
Retail stores can be divided into two basic categories. The mom-and-pop businesses, often individually or family owned, tend to occupy niche or essential markets in their communities. With small staffs, it is easier for them to establish personal relationships with their customers. Much of their business may be conducted through referrals, and they may feel that an online presence is not important. At the other extreme are large chain or box stores, with higher overhead costs, large staffs, and sizeable inventory. These stores have recognized the impact that effective media campaigns and changing customer preferences have in driving their sales. However, the customer does not expect to have a personal relationship with staff at these stores.
Omnichannel marketing offers an integrated platform across various communication channels to advertise products, identify customers, and personalize the retail experience with the goal of streamlining the purchasing experience and establishing a loyal consumer relationship. Building on the more traditional desktop advertising tools such as targeted emails and websites, a complete strategy would also incorporate mobile platforms such as Facebook, Instagram, and TikTok. These apps often feature streamlined methods to view products and purchase them online or reserve them in a store.
An effective omnichannel program spans across these platforms and will enable the retailer to customize advertising based on the consumer’s interests and to utilize their input to create detailed customer profiles. The profile can be viewed by a store employee, enabling them to direct the sale toward relevant merchandise and to create a more personal shopping experience for the customer.
Although omnichannel marketing may seem overwhelming to small businesses, they can still benefit from the use of technology. Effective social media marketing will keep customers informed and emotionally connected with the brand, and will draw them back into the store. However, there is still no substitute for a positive in-store experience.
Experiential Retail Provides Memorable Experiences
How can retailers continue to lure customers into their stores? The concept of experiential retail provides a focus on what the space has to offer rather than what specific goods are on display. 25% of our current tenants are experiential. We expect to see that percentage increase to 40% over the next five years.
Retailers have developed creative options to draw customers into their stores by offering relevant customer experiences. Bookstores are creating reading nooks with coffee, snacks and comfortable chairs. Lulumon offers yoga classes and meditation spaces next to the athletic and yoga wear displayed in their retail spaces. And perhaps as the epitome of a relaxing retail experience, Casper has started to install nap pods for customer use in some of their mattress stores. The focus is to create a positive experience that will make the customer want to come back.
The same concept applies when developing a roster of businesses that will ensure the success of a shopping center. Gorjian offers an example of a successful mix of experiential and traditional retailers from his portfolio. At The Shops at Pigeon Forge, TN, his firm conducted research to learn what mix would be most appealing to the local market. Pigeon Forge is a popular mountain resort city. We found that the local consumers wanted more than just a straight-forward retail center. They needed a place where, quite simply, things happen for both local residents and visitors. Recent additions to the tenant roster include a gym, an axe-throwing concept, and a gaming café, all experiential retailers.
Keeping up with current market trends and impacts
Historically, the most important long-term impact on retail sales has always been the rapid change in customer preferences. The latest examples are the trends toward more casual living that has affected clothing and furniture purchases and has also impacted dining options. The business casual trend continues to expand throughout the workplace. Retailers that quickly recognized this are succeeding. Others, such as the venerable men’s outfitter Brooks Brothers, who were slow to adapt their style offerings, are struggling due to their delayed attempt to accommodate the new office wear trends. As always, retailers must adapt quickly and constantly as their customer’s preferences change.
Aside from the online retailer competition and changing consumer lifestyles and preferences, the strongest impact on the industry in a decade came from the COVID-19 pandemic. A vast number of brick-and-mortar stores were closed for up to several months, resulting in a significant downturn in some retail businesses. Retailers that were able to quickly adapt, or who already had mechanisms in place to capture sales, successfully weathered this period. One of our salon tenants customized an automated platform that enabled customers to view themselves online utilizing potential hair color and cosmetics, which could them be purchasing online and picked up at curbside.
Retail Real Estate Impact and Future
How do these trends affect the retail real estate market and owners? The most significant change will be a reduction in the amount of floor area required for retail tenants. Retailers are learning to optimize their spaces by making their displays more appealing within a smaller square footage. Over the next five to ten years, we are going to see, for example, a 100,000-square foot retail center that used to have on average 15 tenant spaces increase the number to 20-30 spaces.
The type of tenants that will be thriving in the future are not necessarily defined by what specific type of product they sell. Instead, the success of their business will be determined by how well they are able to establish relationships with their customers and how specialized and fulfilling a specific niche their product is. Tenants that can satisfy the instant gratification needs of their customers, whether it be a streamlined shopping experience, rapid pickup options, or drive through windows, will find a larger market share.
Despite these evolving challenges and changes, the appetite among investors for retail real estate will return to pre-COVID levels. Landlords looking for reliable long-term tenants should seek businesses that have established loyal customer bases, while adapting to the use of omnichannel marketing strategies that will allow them to successfully sell to a modern customer. I project that rents will remain solid in the long-term as well.
The retail industry and its real estate component are constantly evolving. The old phrase of ”the retail will never be the same,” repeated during each challenging period, still holds true. However, the industry will recover as it always does and will definitely provide long-term financial returns for investors. The periods of rapid change are the periods of opportunity and now is the time to take a look at real estate properties again, keeping in mind the strategies and trends described above.
Jordan Gorjian is the director of leasing at Gorjian Acquisitions