“The outlook for physical retailers is grim, the sector roiled by store closings, layoffs and bankruptcies.” San Francisco Chronicle 5 May 2017Some genius has said last rites over retail’s empty storefront every day this year, causing even its faithful to wonder if they are fiddling in the Titanic’s quartet. Is retail really dead? Will we all be mainlining nothing but Amazon by 2022? Having been in retail development for thirty-five years, I can tell you 2017 has yet to be pretty. Almost weekly, one of our tenants has gone bankrupt or announced store closures or insisted upon a survival rent break. Or–worse–some kind-hearted friend has openly fretted about the internet turning our shopping centers into the whaling ships of the 21st century.
But will my partners and I be sitting on a curb one day holding a sign, “Will Develop for Food”? Not too likely. Retail isn’t dead, but it is on the operating table. It is hemorrhaging, not so much from the internet’s nicks, more on that in a moment, but from an enormous over-supply of retail footage and perhaps a fatal complacency among aging retailers themselves. According to Forbes, we have roughly 50 square feet of retail space per capita in the USA while Europe, by comparison, has just 2.5 square feet. Like an ancient live oak hit by a hurricane, massive branches of retail are falling away, some snapping off, others splintering and slowly rotting out. More than 3,000 stores have shuttered so far this year, with predictions ranging up to 8,000 closures for the entire year.
Back to that complacency. Could it be that the bankruptcies of once thriving retailers (e.g. Payless Shoes, Radio Shack and The Limited) have more to do with their poor merchandising, lack of execution and vision than the internet’s depredations? If this were not the case, how does one explain the runaway successes of such value retailers like Ross, TJ Maxx and Marshalls? If everyone drowns, it’s a biblical deluge; if only some do, they can’t swim.
Looked at another way, is it possible that retail’s walking dead, those that haven’t had a pulse since the Reagan administration (Sears, Kmart and JC Penney) would survive if we had no e-commerce? No, not a chance. And could it be that the traditional department store is a time capsule relic and that, rather than its assassin, e-commerce is merely the scapegoat that the department stores’ out-of-touch management has blamed to mask its own incompetence?
Is the net having a serious effect on bricks & mortar retailers? Of course. But rather than a MOAB, it is a wolf pack picking off retail’s weak, foolish and elderly while making its great herd trot harder. And the great herd is nearing a gallop, evolving almost daily, incorporating the best internet practices into its bricks & mortar stores, meeting the net in the middle.
The most interesting question might be: How long will the net vs. bricks retailing battle last? Put somewhat puckishly, how long will it take Amazon to complete its 180 degree pivot and become the country’s biggest bricks & mortar retailer? Amazon isn’t opening bookstores and supermarkets on every other street corner because it’s killing it on-line. The company has yet to make a profit from e-commerce and, if you put your faith in what it does rather than what it says, it would seem that Amazon realizes there’s no light at the end of that coaxial cable. And if Amazon can’t make it on-line, who can? In an homage to Amazon entitled “E-Commerce is a Bear,” Andy Dunn, the founder and CEO of Bonobos, points out that no other retail company has a chance on-line: “E-commerce is great. Only three problems: no IPOs, no M&A, no EBITDA”. (EBITDA means profit in accountant-speak). Putting aside FedEx and UPS, no one is making money in on-line retail.
The Russians outlasted the Germans in the siege of Leningrad, but only by suffering casualties six times greater than that of the invaders. The casualties in the Great War of Retail may be closer to even, but are venture capitalists fond of pyrrhic victories? How long will they allow their e-commerce darlings to burn money in their already twenty year siege of the shopping center?
I don’t know.
But I do know there are casualties yet to come. The term “power center” is now an oxymoron and the herd’s wounded antelope are the second tier centers in second tier cities. At the same time, large swaths of retail will remain unscathed by e-commerce. The gods atop retail’s Mt. Olympus are in no danger from the internet or new competition or even the vagaries of retailing itself because the very best locations will always attract the next great retailer when the infirmed one stumbles. The centers in the number-one location in a metropolitan region’s number-one city–South Coast Plaza in Newport Beach, Highland Park Village in Dallas, the Time Warner Center in Manhattan–will continue to perform brilliantly. And it need not rise to the level of a Stanford Shopping Center to be Kevlar-coated; the best-located, best-tenanted centers in all but our country’s dying cities have nothing to fear from the net.
And despite the plethora of sad little e-companies that deliver tacos or blinis at 2 am, quick-serve and fast-casual restaurants–the whole world is a now food court–are also highly unlikely to be netted. Whether they are impervious to changing tastes and increases in the minimum wage is another story.
Finally, if you’re worried about the death of retail, consider small, supermarket-anchored shopping centers in urbanized, competition-constrained locations. Where the co-tenants are pizza, nails, a bank, a dry-cleaners and a local restaurant and the near-by population is both reasonably dense and unreasonably affluent, you have nothing to keep you awake at night.
John E. McNellis is a Principal at McNellis Partners in Palo Alto, Calif.
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To read more from McNellis, please consider his book Making It in Real Estate: Starting Out as a Developer.