By Moritz Lück
The success of retail real estate fundamentally depends on how strong brick-and-mortar retail is. The protagonists of digital transformation would add “As long as brick-and-mortar retail still exists”. In the USA, the discussion regarding the seemingly unstoppable decline is being conducted under the bold “retail apocalypse” catchphrase. It is powerfully metaphoric to describe the closures of some retailers with a dramatic collective term in order to be able to claim with irrefutable verve that the development is inevitable – that the end of all days of brick-and-mortar retailing (and, thus, of all malls as well) is near.
However, is that true? Is the apocalyptic mood that has been repeatedly published in the German media with regard to the retail trade appropriate? In the German media, the development of the US retail trade is seen as a compelling trendsetter for Europe and Germany. Transferability is always challenging, but it is worth asking the key question: Is online retailing really the decisive factor driving the changes in US retailing?
The USA: The brick-and-mortar retail trade is growing and polarizing
In the USA, too, brick-and-mortar retailing is not doomed to failure. In 2017, 91% of retail sales came from brick-and-mortar stores, while 9% came from e-commerce. Only 3.7% of this 9% went to Online Pure Player, and Amazon’s share of sales was less than 1%. Certainly, there have also been insolvencies and large retail chain closures, but, according to Forbes, last year on balance, more than 4,000 stores opened than closed. The main drivers of this development are discount concepts and the premium segment.
Consequently, both ends of the retail trade are growing, and the middle is shrinking. The sales development of various retail concepts over the last five years serves as proof of this. The premium segment grew by 81% in this period, and discounters grew by 37%. Retail concepts from the gray middle only grew by 2%. There are good reasons for this development, which can be derived from economic fundamental data.
According to a study by Deloitte in 2018, 80% of US consumers have experienced a dramatic deterioration in their financial situations over the last 10 years. The lower 40% of incomes have stagnated, while the middle 40% have fallen. At the same time, both income groups have had to cope with a sometimes dramatic increase in living expenses: health +62%, education +41%, food +17%, and housing +12%. Significantly rising living expenses combined with stagnating or declining incomes have forced such households to make price-oriented purchases. In the same 10-year period, the incomes of the top 20% have risen significantly. This has led to the massive growth of retail concepts in the premium segment.
Clearly positioned concepts have become much more attractive to consumers in recent years, while the more or less undefined concepts from the middle have clearly lost out. The latter group includes many of the retail companies that have been struggling with branch closures and, in some cases, insolvencies for years. The US brick-and-mortar retail sector is, therefore, healthy as a whole, but it has become polarizing at both ends. This development is the manifest expression of changing consumer habits.
Online Shopping is Not a Generational Issue
In 2016, Amazon bought the Whole Foods grocery store chain and has owned more than 450 brick-and-mortar stores since then. Other exclusively online retailers such as Warby Parker, Indochino, Untuckit, Everlane, Fabletics, and many others are also expanding into the brick-and-mortar arena, partly due to the fact that brick-and-mortar stores are important with regard to taking the next step in growth and, not least, to becoming profitable. This development can be observed globally, e.g., in China as well. Alibaba has initiated its brick-and-mortar store expansion with its Hema supermarket concept and, as part of its “New Retail Strategy”, is also investing in other brick-and-mortar concepts, such as Beijing Easyhome, which operates 229 decorative and DIY stores nationwide. Technology companies have recognized that they lack retail competence just as much as dealers lack technological competence.
In its study, Deloitte shows that, in the USA, the affinity for online trading strongly correlates with income, not with age or generation. Members from the lower income group have a 44% higher affinity for brick-and-mortar shopping at discounters, supermarkets, and department stores than those from the higher income class. Conversely, 52% of those with high incomes are more likely to shop online than those with low incomes. This also applies to all generations.
It is not one’s affiliation with a generation that makes the difference regarding whether purchases are made online or at brick-and-mortar stores, but rather income and purchasing power. Millennials, who are generally attributed a high affinity for Internet shopping, are not a coherent group that primarily shops online. This is due to the fact that millennials from the lower and middle income brackets in the USA shop at brick-and-mortar stores just as often as the rest of the income group, e.g., members of Generation X and baby boomers.
In summary: In the USA, brick-and-mortar retailing is also lively and growing. Not even in the USA is online retailing the driving force behind the change: It is the development of income as well as the rising cost of living over the past 10 years. The alleged demise of retailers is, in fact, a market shakeout in the middle section of retail concepts. Retail growth is taking place at the extremes, in discounter and premium formats, and the share of online trade is also growing. Online retailers are also under high evolutionary pressure to integrate brick-and-mortar stores. Basically, the integration of offline and online shopping is the key to success for retailers. Naturally, there are also retail formats that are only successful either offline or online.
Brick-and-mortar retailers are particularly vulnerable if they offer over-distributed products with more or less interchangeable sales and marketing concepts. A clearly recognizable value proposition for consumers is an important factor for brick-and-mortar retail success. Deep knowledge of the target customers is absolutely essential as that is the only way appropriate value propositions can be developed. Retailers must focus on in-depth psychographic knowledge of their customer base rather than on digitization. If they fail to do this, they will carry the mistakes made in brick-and-mortar trade into their online business. Hypercompetition has completely shifted market power to consumers. They alone represent the beginning and the end of all retailing.
Owners and operators of retail real estate have to examine retailers with regard to the aforementioned aspects in order to assess the sustainability of their tenants. There will continue to be enough agile, customer- and competition-oriented retailers in the future to turn shopping centers into good investments.
Finally, one more figure should be noted: In 2017, the average occupancy rate at US shopping centers was 93%. Apocalyptic?