Whether you are a retail analyst or a casual observer, it can be all too easy to get lost in the negativity of recent store closings and retail bankruptcies.
The OfficeMax and Office Depot merger has got me thinking more seriously about how the ongoing phenomenon of format downsizing, closures and consolidation may represent a kind of tipping point. At what point do we concede that what’s happening to big box retailers is not just the usual ebb and flow within the ecosystem, but represents a fundamental shift in the big box and power center dynamic? Like all ecosystems that are undergoing a rapid change, many inhabitants will need to evolve or risk reducing their numbers — perhaps even going extinct.
From my vantage point, both the stores and the landlords must take a more proactive approach to survive and thrive over the long-haul.
What is going to happen to the power center if the Office Depot-Office Max consolidation is followed at some point by a Best Buy bankruptcy or repositioning? There are plenty of analysts who think that Barnes & Noble might be another candidate in the next few years — that the bookseller’s recently announced plans to close approximately one third of all Barnes & Noble locations in the next decade might just be the beginning, and a more rapid restructuring of its existing portfolio is unavoidable. Keep in mind that this is coming on the heels of loss of national brands like Borders, Linens N’ Things and Circuit City over the last ten years. That’s a lot of square footage to account for.
Let’s tackle the immediate future first. With more and more traditionally large-format brands all looking for and competing for smaller spaces, the downsizing dynamics will be interesting to track. Because many of these existing boxes cannot be divided into two individual retail spaces, options are somewhat limited. In lieu of simply closing locations that have become outdated, oversized and unwieldy, developers and landlords can relocate these retailers into smaller spaces or can sign off on “virtual downsizing”: the retailer using a smaller amount of space within the existing box, leaving the remaining area unleased.
It’s important to remember that none of this is happening in a vacuum; times are changing. In fact, the trend toward smaller formats is largely the result of those changes. Online competition from aggressive e-tailers and the gradual shift away from brick-and-mortar and toward web-based shopping, along with smaller products and more efficient inventory in the wake of the recession, has created what amounts to a perfect storm of pressure to “go small”. This downsizing news has happened quickly.
To make matters worse, there are also very few new bigger box retailers on the horizon. Aside from a few select brands such as Sprouts (which is both expanding, and also able to adapt their layout to various sizes) and Total Wine, there just isn’t much movement. Some potential backfill candidates like TJ Maxx and Marshalls expanded during the downturn, but have slowed their growth more recently. There is some hope that bigger retailers moving into smaller and mid-sized concepts (such as Wal-Mart’s Neighborhood market concept) might be able to fill some space.
The upshot is that developers are going to have to be very nimble with regard to their larger box tenants going forward. Proactive developers will need to make quick decisions and get ahead of this curve. The typical posture is to wait for events to unfold and then to assess the landscape strategically, but in this case, the failure to prepare might leave them in a disadvantageous position. In other words, don’t wait for the Best Buy or the Barnes & Noble to close, ask them to move them to a smaller space in the center and make way for an up and coming retailer. By facilitating change for oversized tenants, landlords and developers might be able to avoid boxing themselves in.
How do you see the power center market evolving over the next ten years? Will the gaps be filled with existing stores, or chains we haven’t yet heard of? Comment below to join the conversation, or email me directly at email@example.com.
Click here for past columns by Jeff Green.