A few weeks ago I was cleaning out some files and came across a two-year-old article in The Atlantic predicting the death of the American mall and many traditional brick and mortar retailers along with it. Written at the tail end of the downturn, the article took the still popular position that online retail is supplanting—or will supplant—traditional retail outlets as time passes. It used a series of examples like vacancy rates, failing brands, and the number of online start-ups to make this case. There is little debate over the increasing market share of online retailers (even if it is wildly overblown), but in making its argument, the article left me wondering if it was less about online versus brick-and mortar and more about the disruptive nature of markets and the painful beauty of creative destruction.
Online Retail Will Be Apocalyptic for CRE, But Specifically Malls …They Say
Many of the malls that struggled and subsequently closed were constructed in the 1960’s-1970’s in locations that were prime or soon would become prime based on the surrounding population, easy access, and a slew of other factors (see timreamer.com/keysite). Over the decades, new housing, roads, interstate interchanges, and employment centers were constructed—all leading to a shift in where consumers traveled, how they got there, and what they saw along the way. During this same period of time, the leases of national retailers expired and when the opportunity to renew the lease presented itself, these retailers decided to occupy new space in a better location to meet the needs of their customers.
Two malls in the Shenandoah Valley offer a fairly clear illustration of the impact of the path of progress and all that comes with it. The Valley Mall in Harrisonburg continues to maintain a location on prime real estate on the primary thoroughfare and near new residential development which has permitted the attraction of new retailers like Popeye’s, Dick’s Sporting Goods, and more. Imagine, however, if the Valley Mall was built on Route 11 thirty-five years ago. Population growth, commercial activity, and primary traffic patterns would have all shifted away from its location yielding a very different story. In essence, this is what happened to the Staunton Mall. It is relatively easy to locate a store from one area in a particular market to another within the same market, but not so easy to move an entire mall from Greenville Avenue to Richmond Road.
Certainly, consumer preferences also change in regard to shopping experience—from indoor to outdoor and “get what I want and get out” to a lifestyle center that provides an experience, but it seems more logical that the natural evolution of the market is more the culprit than anything else.
8% is Enough To Garner Some Attention
Part of this evolution includes consumer recognition that e-commerce has some real advantages over brick-and-mortar locations as they are traditionally configured. Online is absolutely destroying office suppliers, music/movie vendors and bookstores and has forced many other categories to adapt quickly. Amazon, the party most responsible for the decline of the aforementioned and the standard bearer for online retail first opened in 1994. After 20 years of e-commerce, the online market has grown to $289 billion in retail sales in the U.S. alone. Online shopping has come a long way in a short period of time, and there is little evidence to suggest that this trend will slow anytime soon.
Now, with all of the advantages of shopping online and the explosion of mobile—it’s easy to see why market share for traditional retail has eroded—and without question, it has; just not as much as might be believed. In fact, only 8% of retail shopping is happening online (including mobile) and the king, Amazon, is not in the top 10 largest retailers in America; they’re 11th, with annual sales equaling approximately what Wal-Mart does in one month, The rest is still happening in physical stores. More importantly, when the retail analytics firm Synqera polled American consumers, 67% of them said that they still preferred shopping in stores to shopping online.
So, Who Wins & Who Loses?
Without question, online retailers have the momentum, but brick-and-mortar still has the sales. Creative destruction doesn’t require this to be an either/or choice between the two options. Rather, it is a mutation that revolutionizes the economic structure from within, destroying the old one, and creating a new one. It’s not a zero sum game and it seems to be the natural path that is already well worn at this point under the name of Omni-channel retailing.
There is an extremely strong trend toward merging online and physical stores in which customers can test, order and pick up product at a convenient location allowing brick-and-mortar locations to become part of the supply chain. You are already witnessing it. Many brick-and-mortar locations allow the consumer to check inventory from their phone; purchasing online permits customer support at a physical location; and order online with in-store fulfillment. Amazon plans to establish a small brick-and-mortar store in New York in the fourth quarter for this purpose. Very few believe it will be their last. This isn’t even the exciting stuff. The promise of Omni-channel is a more knowledgeable consumer, a seamless shopping environment, and a personalized shopping experience. Regarding who wins, we do.
Tim Reamer provides commercial real estate brokerage and consulting services with Cottonwood Commercial and specializes in retail representation, investment property (multifamily | commercial | NNN), and development projects. Learn more at www.timreamer.com.