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echnology, shifting demographics and evolving consumer preferences are shaking up the retail industry. The global economic recession is hastening — and perhaps altering — which retail concepts will emerge and which ones will disappear. These same forces will transform retail real estate and will impact value creation opportunities in the next 10 years.
Eighteen months ago TNS Retail Forward and PricewaterhouseCoopers issued 15 predictions for what retail would look like in 2015. They pointed to fundamental changes in the way retail concepts will be conceived and presented to consumers and in the way products and services will be developed and delivered.
Recently they updated many of the predications in light of the depth and breadth of the economic downturn. Although the underlying trends are unchanged, they said, much of the fallout they predicted is happening more quickly because weaker retail business models are being exposed.
TNS Retail Forward Senior Vice President, Al Myers, told PLACES, "We are so over-stored in this country and you are seeing the shake-out now."
Retailer Realignment
The recent liquidation of Circuit City, Linens n' Things, and Mervyn's is one component of a wave of global big box retailer consolidation that is predicted by the report.
Many of the most successful U.S.-based big boxes, they argue, have reached their domestic maturation point and will seek further overseas expansion to satisfy their growth objectives. With global competitors already well-established in local markets, the report predicts that U.S. big boxes will grow through acquisition. Much of this consolidation has now been delayed by frozen credit markets.
Other retail chains, the report says, have reached the end of the runway and have little opportunities for growth. The natural end for these chains will further contribute to the retailer realignment.
The bigger drivers of the realignment though are the major demographic and cultural shifts occurring. Among the changes — the post-WWII Baby Boom Generation is retiring, Generation Y is rising in their place. The report argues that retiring baby boomers will require new products and services to meet their retirement needs, especially in light of their substantial financial resources and desire to remain "active."
The larger challenge for retailers will be meeting the evolving preferences of all consumers. "The evolving consumer in the near future will not be easy for retailers to understand or master," it said. "The value proposition guiding their product purchases is changing; consumers will put heightened emphasis on personalization, look for opportunities where their input matters, and value product and service solutions.
Consumers are increasingly proactive in their purchase decisions and selective about with whom they want to do business. Additionally, consumers will increase their focus on purchasing products from socially responsible and ‘green-friendly' manufacturers and retailers."
Technology is also driving these changes. The Internet is allowing consumers to have perfect access to product pricing and performance information. The ability of consumers to easily discover today's "hot" products will lead many to obsess over "the next big thing." Product life cycles will move more quickly with exclusives and limited editions becoming more dominant.
The retail realignment will have a significant impact on retail real estate, including which concepts will become the next generation of anchor tenants and what criteria will drive their site selection process.
Segment Killers
The 2015 retailers will be defined by the customers they serve, not the products they sell. Whereas the last twenty years were dominated by "category killers" that carved out product niches such as housewares, electronics or books, the next twenty years will be dominated by "segment killers" that carve out and serve customer niches such as active seniors, avid outdoorsmen, gadget gurus, urban trendsetters, or soccer moms. The report calls it "share of life" retailing.
"Share of life retailing will replace widget retailing," said Myers, "retailers will incorporate solutions to a lot of the needs of people's daily lives and serving a broader array of household spending categories."
Bass Pro Shops is an early pioneer of this type of retail. They have perfected serving their core "hook and bullet" crowd, providing products and services that meet all aspects of this niche customer segment's life. They offer travel support, fishing demonstrations, and golf lessons. They also have an on-demand inventory management system that allows them to customize local merchandising and replenish store shelves at the per-unit level with amazing efficiency.
Bass Pro is ahead of what the report calls "glocalization" — the ability of retailers to localize their brands and offerings to specific customers in specific markets.
Wal-Mart is also experimenting with the glocalization concept. Earlier this year they announced intentions to open Spanish-language-focused Supermercado de Walmarts in Phoenix and Houston. The company said the stores would feature a "new lay-out, signing and product assortment designed to make them even more relevant to local Hispanic customers."
Myers said, "We spent a lot of time on supply chains and IT and point of sale to get the back door set — now we're seeing a focus on the front of the store."
Although successful big boxes will be segment killers, the report says specialty retailers will "target finer niches with bigger portfolios of smaller footprint, smaller store count, more narrowly focused concepts." The Internet and hundreds of cable television stations are defining and reinforcing more narrowly interested consumers with distinct styles and preferences.
Lifestyle centers were originally conceived as a precursor to this trend. They targeted the 40+ Baby Boomer Generation with a mix of specialty apparel retailers, book stores, restaurants, and home goods that targeted styles that would appeal to that demographic. The lifestyle centers of tomorrow will target other niches, more narrowly defined with co-tenancies that differ from today's conception of a "lifestyle" tenant.
Niche Centers
Shopping centers of the future will follow the new retail model of defining themselves by the shoppers they serve, not by their footprint, tenant mix, or trade area.
Narrowly tailored centers, or niche centers, are likely to emerge in the 50,000–150,000 square foot range and feature highly complementary retail, restaurant, entertainment, and other share of life offerings.
Speaking from the consumer perspective, Myers said, "I want the niche concept that appeals to me so I don't have to trudge through a lot of stuff that doesn't appeal to me." By locating within close proximity of target customers, these niche centers have an opportunity to become convenient daily destinations akin to traditional grocer-anchored neighborhood centers.
In Hollywood, Urban Outfitters recently debuted Space 15 Twenty, a niche center with many of the elements highlighted by the 2015 report. The company describes it as "an opportunity for Urban Outfitters to collaborate with creative brands we find inspiring and interesting."
Space 15 Twenty is an open-air environment including a community stage and gallery for local musicians and artists. It also includes restaurants, an architectural book store, and other unique apparel and accessory retailers. There is also temporary space dedicated to limited edition merchandise. For instance, during the month of April, pop-up space was dedicated to unique designs from Annie Costello Brown, a popular jewelry designer "taking cues from the aesthetic talismans of ancient cultures and the inherent nostalgia of vintage costume jewelry." Niche indeed, and very Hollywood.
In Jacksonville, Florida, a local development team is creating a niche environment called a "Doctor's Village" where 50,000+ of medical office use and surgery center will be combined with 30,000 square feet of retail and restaurant use. For an aging senior population it is a compelling mix and another model for niche centers.
Adaptive Re-Use
The economic downturn has stalled much of the exurban growth and it is likely to be several years before the housing construction industry returns. The opportunities for value-added retail real estate investments, especially in the niche center category, will be adaptive re-use of existing urban in-fill locations. Many of these neighborhoods continue to grow and evolve into more economically powerful markets and retail offerings have not often kept pace.
Adaptive re-use of existing space fits well within the 2015 trends. Alan Pullman, a principal of Studio One Eleven, an architectural firm based in Los Angeles, said to PLACES that consumers are "tired of generic shopping centers." Adaptive re-use allows elements of the past to be preserved to give new spaces a distinctive feel and the authenticity craved by niche consumer groups. According to Pullman, it can also be a cost reduction strategy if implemented correctly. This aspect is particularly relevant as property prices fall and financing is scarce.
Pullman's firm was the original architect of "Malibu Lumber Yard," a niche center in the heart of Malibu that is an adaptive re-use of a former lumber yard. The center features local wood planks throughout and other nods to its former use. The project also fits squarely into the niche center category with 30,000 square feet of diverse retailers and restaurants catering to the eclectic and affluent Malibu community. J.Crew opened it's "At the Beach" concept store there and is offering a number of unique services, including beach delivery and welcome baskets filled with items suited for house guests.
Temporary Architecture
Pullman is also an advocate for "temporary architecture," another economically viable development option that addresses several of the trends in the 2015 report.
Temporary architectures include pop-up stores and semi-permanent structures to house farmer's markets and other temporary market concepts. According to the 2015 report, retailers will seek out these opportunities to push limited edition products and niche offerings.
Consumers also embrace the improvisation, activity, and authenticity of these temporary spaces. Existing centers are already adding farmer's markets to their community spaces and expect that trend to continue and extend to other product lines with established brands.
"What architects do is create more experiential places," said Pullman, who sees temporary architecture as a necessity in today's environment while also bringing much-needed personality to retail destinations.
The 2015 report highlights many trends that are already being witnessed in some form throughout retail and retail real estate. While challenging, the current economic climate is hastening the fallout in retail and is producing a significant inventor of distressed centers.
Viewed as an opportunity, many investors will see value added opportunities in leveraging the above trends to reposition and reintroduce these centers to the marketplace.
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