Doing More With Less
Even as the economy continues on a path of slow improvement, brick-and-mortar retailers still find themselves in a real estate market with few vacancies and even fewer new malls under construction. In addition, corporate management remains reluctant to expend any more capital than it feels is absolutely necessary to meet immediate needs.
Despite this potentially grim scenario, smart retailers are still having success in optimizing and even growing their real estate portfolios. Careful assessment of lease values, fully understanding the dynamics of store locations, and investing in technologies that increase the breadth and depth of data analytics are all steps retailers can take to succeed in the current real estate environment. Several noted retail real estate advisers and technology experts make the following recommendations.
No Development Means Developing a Plan
In an era of scarce new development, it is imperative for retailers to understand the value of each individual store, as well as the value of their customers.
“Retailers are trying to understand where they need to consolidate,” said Andy Graiser, co-president and co-CEO of Melville, N.Y.-based commercial real estate advisory and investment group A&G Realty Partners. “They may have too many stores in light of the growth of omnichannel commerce and other factors. Retailers really have to start rethinking where they need — and don’t need — new stores.”
Graiser advises retailers to begin with an internal portfolio review, on a store-by-store basis.
“See where leases are coming up in the next couple of years and where there is a risk of increased rent or capital expenditures required to renew the lease,” said Graiser.
He also advised retailers to conduct a comprehensive psychographic review of their customers. “Look at your customer profiles and demographics,” he said, “and see what’s changed with your customers and your portfolio.”
In addition, retailers must be aware of locations that hold more real estate value than operational value.
“In Manhattan, leases have tremendous value because of their location,” said Graiser. “The store may not be operating well but it represents a real estate opportunity.”
Graiser said A&G Realty helps retailers define their real estate strategies.
“We challenge retailers regarding their portfolio growth strategies,” he concluded. “Through our questions, they begin to understand what it is they don’t know and to develop a strategy around the big questions; we then execute the strategy on a landlord-by-landlord basis, relative to where they should grow.”
One Size Does Not Fit All
When it comes to evaluating retail real estate portfolios, one size does not fit all. Corey Bialow, CEO of Needham, Mass.-based retail real estate consulting firm Bialow Real Estate L.L.C., says retailers’ size priorities have changed in recent years.
“There is a clear trend among many national retail chains to ‘rightsize’ their concepts,” said Bialow. “The ‘bigger is better’ expansion strategy that we saw a decade ago is a trend that has clearly reversed itself. Many prominent retail chains are reducing SKUs and merchandising more effectively out of a smaller footprint in order to lower operating costs as margins across the board are getting hurt by online shopping.”
According to Bialow, part of rightsiz-ing is knowing when to accept a deal and when to turn one down.
“The best advice I can give to any retailer who has initiated an expansion strategy is that in order to negotiate the best possible deal for their company, they need to be able to walk away from any one given site,” said Bialow. “The best deals are sometimes the ones you don’t make. The other important piece of advice I give to clients is to be decisive when evaluating a new location. If the site doesn’t meet your criteria, don’t try and fit a square peg in a round hole — just move on. On the flip side, when everything does fit your model and the deal is yours to make, don’t overanalyze; make a commitment or someone else will, as time kills deals.”
Bialow concluded by stressing the importance of real estate to retailers’ business strategies.
“Real estate is a business unto itself and is probably the single biggest contributing factor to a chain’s ultimate success or failure,” said Bialow. “My motto at Bialow Real Estate has always been ‘retailers should focus on retail,’ while we focus on what we know best — and that’s real estate!”
Location, Location, Location
Despite changes that have occurred in retail real estate during recent years, the universal real estate rule of “location, location, location” has not changed. But determining a good location for a new store, or assessing performance versus location characteristics of an existing store, is not a simple task. Fort Worth, Texas-based Buxton addresses the complexities of location assessment with its SCOUT touch platform custom predictive solution.
“Retailers are focused on growth in the right markets and trade areas,” said Stephen Polanski, senior VP of Buxton. “SCOUT helps them make decisions more quickly in the field and on tablets and smartphones — answering questions like ‘how many units can you have’ and ‘where would you be located in a perfect world.’”
Retailers can also use SCOUT to score sites with forecasts that show quantifiable opportunity based on customers, co-tenant mix and competition, gaining advantages with speed to market.
“Retailers can assess the ‘who’ and ‘where’ value of their best customers, using consumer data and sales performance data combined with Buxton’s household-level database to define what an opportunity looks like,” said Polanski. “They can quantify data elements into an answer, while evaluating the drive-time trade area and the impact of competition in their market.”
Polanski said retailers can also measure how new online customer interaction channels relate to their real estate footprint.
“New channels are the talk of the town,” said Polanski. “Retailers are tracking more data elements across all areas of the business. We make sure the entire organization is on the same page in terms of who their valuable customers are. Analysis could be driven by channel, geography or store by store. You can take the seasonality out of components and regionality out of the decision-making process. You can assess the operational efficiency of same-store performance and the potential of a given market trade area with data-driven points.”
Lease Is the Word
Understanding the value of leases, especially as they come up for renewal, is a crucial foundation of any retailer’s real estate strategy. Woodbury, N.Y.- and Boston-based real estate services provider DJM Real Estate works with retailers to take a holistic look at their portfolios, on a store-by-store basis.
“In some cases, a store may have real estate value, but not be performing well,” said Mark Dufton, CEO of DJM Real Estate, a Gordon Brothers Group company. “It may make sense to exit the location and take the real estate value off the table. Or a renewal might be coming up and the retailer could continue to leverage a store’s market standing where they can get leverage on restoration of the lease.”
To truly understand and maximize the value of their lease portfolios, Dufton advises retailers to follow several specific steps.
“First, retailers need to understand the market value of where they stand in their portfolio of leases,” Dufton said. “Their lease portfolio may be above, below or at market value. What they can do to get control back is a holistic portfolio analysis, so they can understand where they are in the real estate spectrum. They need to look at their portfolio on a store-by-store basis. There are always hidden gems you can leverage.”
Dufton said DJM offers a lease audit product that audits triple net charges as a category-based service.
“I can’t understand why anyone wouldn’t conduct such an audit,” said Dufton. “It’s a no-brainer to look at the biggest real estate problem, which is paying more than you should, and eliminating that. We do a deep dive into each business and examine where the problems lie. Since the beginning of this year, a lot of retailers have been trying to prune the bottom parts of their portfolios, but don’t know what that kind of reduction entails. You need to know the exit costs and develop a strategy.”
Spend Now or Pay Later
A continuing slow economic recovery is leading many retailers to make real estate spending decisions that are penny wise and pound foolish. According to Andy Thomas, president of Atlanta-based Virtual Premise, a wholly owned subsidiary of the Co-Star Group that provides cloud services-based real estate management software, too many retailers are continuing to make poor choices with their real estate technology budgets.
“Relative to 2013, it’s more of the same,” said Thomas. “It’s similar to last year in that the economy remains slow to recover. In some respects, that’s not all bad if you have a job, but companies continue to be tight with their purse strings, while the requirements they put on existing employees continue to increase.”
In this environment of doing “more with less,” Thomas said investing in real estate management technology that automates previously manual processes and generally improves operational efficiency is more important than ever. But many retailers don’t see it that way.
“Retailers are also getting stingy in capital spending at corporate level,” Thomas said. “They are not investing in technology the way they should at this point in the cycle. They need more technology.”
For 2014, Thomas said the retail industry’s real estate focus is finding great locations in a saturated market, as well as optimizing existing real estate portfolios as renewals approach.
“Not many new malls are opening, so they are expensive to occupy,” commented Thomas. “Retailers’ real estate technology priorities are the availability of appropriate data and a high-level reporting capability that allows them to utilize that information to drive efficiencies and better decisions.”
According to Thomas, retailers particularly need better accessibility and reportability in light of the upcoming changes to the International Financial Reporting Standards (IFRS) for real estate.
“No solution can currently provide everything retailers need for the IFRS changes, but we are helping them get the right data,” said Thomas.
Toward the end of 2008, it became painstakingly obvious to retailers that impulse spending was out and frugal saving was in. Faced with an imminent recession, staggering job loss and quickly depleting discretionary and savings accounts, consumers began to shift their focus to value. The impact of such a large-scale economic event and an abrupt consumer focus shift would appear to alter the fundamental realities of retail.
As the recession slowly becomes a fading memory, consumers have grown accustomed to getting good deals, and, fundamentally, customer expectations and priorities have shifted. Any stigma associated with discount retail in the past has evaporated. Today, it is the opposite: Looking for a bargain has become cool. Even the meaning of the word discount is changing. Discount has become value. Everyone and everything is shifting in favor of value, looking for ways to get value into new spaces and in front of more customers.
Not surprisingly, no category of retail has been as profoundly transformed by this shift as discounters. What was once an afterthought in the retail segment, discount retail has rapidly gained acceptance and validity in the industry, becoming a sought-after entity by landlords and shopping centers and finding co-tenancy alongside prominent retailers.
A shift in perception
Over the past few years, many major changes in retail have occurred — big brand names went out of business, and there was a tremendous amount of consolidation seen throughout the industry as downsizing or rightsizing became a common theme. As the recession continued and the importance of value increased among consumers, discount value brands made up the majority of retailers that were expanding. To compete, everyone from luxury and upscale names like Neiman Marcus and Polo, to established discount brands like Kmart, began looking to capitalize on these changes by promoting their own new and existing discount concepts.
The influence that the perception shift in value shopping has had on the industry is perhaps most evident from the shopping center tenant mix we’re seeing today — the retailers that were previously discouraged from occupying certain spaces through the use of covenants and leasing restrictions are now fully accepted into the mix. At Easton Gateway in Columbus, Ohio, for example, Dick’s Sporting Goods, Whole Foods and REI coexist happily with Saks Fifth Avenue’s discount spin-off Saks OFF Fifth. The change has been so dramatic that it has gone from some developers and landlords actively avoiding discount retailers to now actively seeking them out.
The omnichannel significance
The increasingly complex and demanding nature of retail today is also a very important, but not as obvious, aspect within the story of discount retail’s reinvention. Retailers that are finding success today are deploying cohesive, strategic execution across multiple shopping channels, such as mobile, digital, brick-and-mortar, direct mail and TV to drive value to the customer.
While it’s difficult to determine the results of some of these channels, it is obvious that there is a lot of money to be made in the discount segment of retail, and high-end retailers have taken notice. Polo, Nordstrom and Saks Fifth have always had discount spin-offs, but these retailers are no longer simply using their outlet stores as a way to dispose of unsalable goods — they are actually hiring buyers for those stores as well. Nordstrom Rack is one prominent example of a store that was once little more than a “clearance store,” but today is really just another retail channel.
Ultimately, observing and experiencing the visible and positive effects that an omnichannel approach can bring, developers, investors and retailers have discovered that discount retail is actually just another important channel to consider in appealing to a broader range of consumers.
The new face of discount retailers
What discount retailers look like today — and where they can be found — is strikingly different than just a few short years ago. While it would be a mistake to make sweeping generalizations about this diverse segment (Nordstrom Rack is quite different from Goodwill, for example), one thing that retail analysts and observers can say with confidence is that 2014 will likely see new and exciting chapters written in the continuing story of retail’s reinvention.
However, with so many preconceptions swept away, and retailers and consumers alike coming up with their own definition of value, there is a compelling case to be made that it’s hard to truly differentiate who is a discounter anymore — it has become just one more value-add retail channel in order to compete in a complete market.
Jason Baker is a principal at Houston-based retail brokerage firm, Baker Katz. Dave Cheatham is the president at Phoenix-based Velocity Retail Group. Baker and Cheatham are partners of X Team International, an alliance of retail real estate specialist with locations in the United States, Canada and Europe.
Weather or Not
Record-breaking frigid temperatures and snowfall from the recent polar vortex incursion have made unprecedented demands on the nation’s power supply. As some owners of shopping malls and retail centers have discovered, this has left large retail destinations more vulnerable than ever to blackouts, has damaged operational continuity and impacted the bottom line for businesses across the country. The impact has been particularly punishing in places like the Deep South that are not accustomed to, or prepared for, such harsh winter weather conditions.
While it is easy to treat this stress on existing infrastructure as a fluke, the reality is quite different. From the great Northeast Blackout of 2003 to Superstorm Sandy in 2012, millions of businesses have learned the hard way just how disruptive and costly a large-scale power interruption can be. And the headline-making disasters are only part of the danger — the Christiana Shopping Mall in Delaware experienced two significant blackouts in the 2013 holiday shopping season affecting sales at more than 100 stores during the busiest time of the year.
Landlords and tenants alike need to understand what steps they should be taking to prevent and prepare for power outages and emergencies and protect their properties, businesses and bottom lines.
Emergency generators are a logical and essential foundation of any emergency preparedness planning. But selecting the right generator(s) for your center is important, and understanding where to place those generators is vital. Installing generators in a basement or other area that might be prone to flooding is a common and easily avoidable mistake. Many generators require an uninterrupted power supply (UPS) to ensure that there is no gap between power interruption and generator startup. It is a good idea to seek the advice of a trained professional to determine which UPS solutions are right for your system and your property.
While the presence of a generator can provide some peace of mind, it is really only the beginning of preparing for a blackout or other power emergency. For landlords, big questions remain: How are you going to communicate with tenants? Where are you going to get the fuel to keep those generators running? Shipping disruptions are also possible as power outages often disable gas stations, thus preventing delivery drivers from filling their tanks. Developing a detailed emergency preparedness and response plan that answers those questions and addresses those uncertainties is critical.
Secure your fuel supply
Because a generator is only as good as its fuel supply, preparing ahead of time for an uninterrupted source of fuel (even in the most dire emergencies) is essential. In a true emergency, lines of supply can be disrupted, and local and regional shortages are common — gas stations close, refineries are shuttered. It is wise to participate in a guaranteed fuel supply program with a provider that has the regional and national resources and relationships to stand by its fuel delivery promises. Also remember to plan for enough fuel and resources to operate not only generators, but also any vehicles you and your property require to continue functioning normally.
Establish lines of communication
For landlords and tenants alike, designing an effective means of communicating with employees, customers and professional partners during an emergency or power outage is important. Social media networks are an increasingly popular resource to disseminate information, and emergency notification services can be an effective way to get in touch with large numbers of tenants or employees.
Train and test regularly
The last thing a mall or retail center needs in an emergency is an unwelcome surprise. Minimize those chances by maximizing preparedness: Establish a maintenance program and test equipment regularly, and provide regular training to ensure that all personnel are familiar with existing emergency equipment and procedures. Review that equipment and those procedures regularly to ensure that they can meet the needs of the property and its tenants.
Read the fine print
The issue of extreme weather or other unexpected events does present a problem for fixed CAM (common area maintenance). A big storm or even an extended period of challenging weather is likely to exceed any kind of maintenance budget a landlord or shopping center owner sets, potentially leaving the tenants to do things themselves and pick up the extra costs. For this reason, retailers should ensure they are covered for these unexpected events during lease negotiations by asking questions like whether there is a back-up generator available, who will pay for the additional cost of gas for the generator and what happens if the landlord fails to provide these essential services. It is also important that every tenant checks with their insurance company before signing a lease — making sure that all potential liabilities are covered in the case of extreme weather or other unexpected events (and understanding who is responsible for handling them).
At a time when landlords and retailers are increasingly dependent on a fragile and extremely complex array of technologies and communication networks, any damage or interruption to that infrastructure can be extremely damaging — and extremely costly. In that context, understanding the basics of emergency preparedness (and putting those safeguards in place) to ensure that your mall or your business is able to keep the lights on is a comparatively small investment with a potentially dramatic and difference-making ROI.
Bob Kenyon is executive VP sales and business development at Taylor, Mich.-based Atlas Oil Company. Jim Bieri is principal of Detroit-based Stokas Bieri Real Estate, and a partner of the international retail real estate alliance, X Team International.