Recovery is a relative term when applied to retail real estate. It’s taken a couple of years of determined optimism, but most in the industry have now reconciled themselves to the realities of the new world order. A world where capital is cautiously invested and most retailers, even those that are opening new stores, have flattened growth rates. Gone are the days of expansive, unrestrained development — replaced instead by measured, deliberate decisions and a renewed focus on redevelopment, relocation and re-evaluation of portfolios. What we’ve come to realize is that these are progressive steps forward.
Positive indicators color the retail landscape: Bankruptcy filings have slowed significantly, store closings are down dramatically, and mergers and acquisitions are on the rise. Select sectors of retail are growing, most notably the dollar stores and discount brands across all categories, from food retailer Aldi to fashion plates like TJX.
Whether retailers are gradually adding new stores or holding steady, tenants and property owners alike appreciate that real estate portfolios need to be viewed as dynamic, not static, assets. Success in 2012 is measured not by how many new stores are built, but by how productive the retailer’s portfolio is — with productivity underscored by the difference in the number of stores performing at or above expectation, minus the stores with sub-par performance.
Strategic decisions fed by actionable information have become the trademark of the most successful players in retail real estate. Increasingly, these industry leaders are developing and executing plans around ambitious objectives to:
• Build customer-centric real estate models;
• Define the enterprise based on micro, as well as macro, characteristics; and
• Manage and monitor with a proactive mind-set.
Consumer-centric real estate models
Call it the Amazon Syndrome, but ironically the retailer that set the gold standard for building customer-centric real estate models has no brick-and-mortar real estate. Yet, the icon of online commerce taught the industry the importance of an ever-evolving consumer-relevant position.
“Constantly study and watch what your customer is doing so you can pick the right real estate location as it relates to your customer,” affirmed Charles Wetzel, president and CEO of Buxton, based in Fort Worth, Texas.
To accomplish this often requires a tectonic cultural shift within a retail enterprise. Traditional retail organizations built enterprises where real estate, operations, merchandising and marketing functioned autonomously and territorially independent of one another. That ‘silo’ approach proved increasingly detrimental to retail performance at every level, and was totally counterintuitive to the concept of creating a consumer-centric model.
“In successful retail operations, the silo mentality is no longer acceptable,” Wetzel explained. “Real estate decisions must be more holistic than just the brick-and-mortar location. It’s about more than market demographics: Know who your customers are, where they live, how they spend their money.”
That includes defining who and where online customers are as well so that enterprise decisions reflect the omni-channel preferences and lifestyles of today’s consumer.
“This is not a one-time study or single piece of analysis,” Wetzel cautioned. “Customer bases change and evolve over time so the retailer must continually evolve its real estate, marketing and merchandising strategies.”
What empowers retail enterprises to seamlessly connect and integrate various departments is technology that can effectively assemble, analyze and deliver actionable data across defined parameters.
“Cloud-based analytic tools enable end users to drill down and ask location-specific questions to more effectively evaluate sites and make the right decisions about real estate, marketing and merchandising,” Wetzel concluded.
Micro versus macro characteristics
Cloud-based solutions provide a number of benefits to enable strategic decisions that effectively consider influences at both the micro and macro level. The goal is to be able to evaluate individual store performance as well as the overarching productivity of the whole enterprise — and to do so by assessing every aspect of a real estate portfolio from a single-view vantage point. Essentially, portfolio optimization requires that retailers be able to distinguish high-performing stores from mediocre and poor-performing stores.
“The challenge is to focus on the good stores and identify what they are doing well, and at the same time focus on poor-performing stores and determine what can be done to mitigate those losses; in some cases that perhaps means eliminating the locations in as timely a manner as possible,” noted Jim Dooley, senior VP sales and marketing at Atlanta-based Virtual Premise. “The ability to look at all the relevant data at a glance and have it immediately available on a dashboard without having to dig through numerous [systems] gives the retailer a critical advantage.”
However, the strategic benefits of having visibility at a granular level into how each store is performing extend far beyond being able to classify the good, the bad and the anomalies. For a retailer that has a family of brands operating throughout its portfolio, the ability to make brand-specific evaluations based on micro- and macro-performance characteristics provides another opportunity to elevate strategic thinking.
“Having visibility into empirical data enables retailers to develop a strategy for every store and for every brand. A retailer could potentially swap store locations across different brands if the data indicates a low-performer with one brand would likely become a high-performer under a different brand,” Dooley continued.
Understanding micro versus macro metrics also positions a retailer to be more assertive in the marketplace, perhaps extending leases on high performers ahead of schedule to take advantage of favorable terms and conditions.
Now is certainly the time for retailers to be proactive, as the balance of negotiating power remains with the tenant in most cases.
“It’s not as dramatically skewed to the tenant as it was the last couple of years, but high-quality tenants still have some leverage,” stated Mark Dufton, CEO of DJM Realty, Melville, N.Y. “Especially the tenants that are stable and have good credit.”
“We’re working with quite a few clients to extend leases, and tenants have the leverage to cut a better deal in their lease because the landlords don’t want to take space back,” Dufton continued. “In the current market, retailers are working options [for lease renewals] pretty hard to get that option either back to the market level or even below market level.”
Whether a lease has come up for renewal or the retailer has initiated a preemptive discussion, effective negotiations require relevant information specific to the property under review. With geographically dispersed portfolios, technology powers the assimilation, analysis and communication of data that equips retailers to close the deal on the most favorable terms.
Since taking the helm at DJM Realty in February, Dufton has vowed to fortify the company’s culture to one that is even more technology-focused. “Our proprietary database aggregates all of the lease information we process on a national scale, with detailed insights into submarkets across the country.”
In addition to portfolio optimization through evaluation and renegotiation of existing locations, many retailers are looking at merger and acquisition opportunities to fuel growth. The same real estate technologies that enable retailers to study consumer behaviors and the micro/macro characteristics of stores in their portfolios can be used to evaluate each property in an M&A target, ultimately facilitating decisions for which locations should be retained. Joint venture partnerships essentially allow retailers to pick and choose locations within an acquired portfolio without assuming the liabilities of unwanted assets.
Capital that has been sitting on the sidelines is gradually making a move into retail real estate. Gradual is a good policy — preferable over the onslaught of investments that flooded the market with excessive development in the last decade. Now is not the time to make mistakes in real estate; now is the time to make educated, data-driven decisions.