OpEd: Fewer Good Tidings at the Mall for Holiday 2015
I hate to be the bearer of bad tidings, especially during the season to be jolly, but I’m a realist. And though I wish happy holidays for all, I must tell mall retailers to steel themselves for another disappointing holiday season. Deloitte is expecting seasonal sales growth of 3.5% to 4% this year, ahead of inflation but below the 5.2% growth of last year — but don’t expect malls and department stores to see that growth. A disproportionate share of holiday sales will go to the humble discount stores, far away from the fancier shopping centers.
But the bigger story will be shoppers’ continuing collective flight to online shopping. One of the myths retailers — and especially the shopping center industry — try to convince themselves is true is that the shift to e-commerce is slowing. Even casual observation of shopping trends suggests otherwise. Just ask your teenager … or your grandmother. They’re holiday shopping on their phones and tablets, from the comfort of their living rooms while watching TV.
It’s true that year-over-year sales growth in e-commerce is slower now than it was a decade ago, when online shopping was still in its infancy. In the middle of the last decade, e-commerce was growing almost 25% annually. That average growth rate has slowed to about 15% per year. Lower inflation accounts for some of the difference, but real growth rate is lower now than it was before the recession.
Physical retailers should take little comfort in this trend — because in-store growth has slowed even more, relatively. The annual in-store sales growth rate is down 53% from before the recession, compared to 38 percent for online sales. So, online sales are growing even faster compared to in-store sales than they were previously — growing 5.4 times faster now compared to 4.2 times faster before. Of course, e-commerce cannot sustain even this growth rate indefinitely — at these rates, e-commerce will surpass total retail sales in 25 years, which is logically impossible.
The more important metric is how quickly online shopping is capturing market share from physical stores. And here the picture is much more of a challenge to traditional retailing. Online sales now account for 7.9% of total retail sales excluding autos, as shown in the left chart below, rising by an average of just under 50 basis points (bps) a year since the Census Bureau began tracking e-commerce sales in the fourth quarter of 1999.
Though the ascent appears relatively steady, in fact the online market share, while volatile, has been gaining momentum since the recession, especially recently, as shown in the right graph. In the three years prior to the recession (2005-07), the online market share rose an average of 45 bps per year, meaning the online market share was about 0.5 percentage points higher each year. This growth has surged by two-thirds during the last three years to an average of 76 bps — an annualized rate of 111 bps in 2015.
The reasons should be obvious: Online shopping is more compelling, and shoppers are increasingly comfortable doing it. One telling statistic: slightly more people shopped online on Black Friday than went to stores, according to the National Retail Federation — a rather startling accomplishment for an event that started only 10 years ago. All told, in-store spending on Black Friday fell to $10.4 billion this year, from $11.6 billion in 2014, while e-commerce saw a 14.3% increase over last year’s total.
Definitive market share figures for online vs. in-store for the full holiday season are not available, but we can get a sense by removing the seasonality smoothing from the quarterly sales figures, as shown by the red line in the left graph below. The annual spikes represent market share during the fourth quarter every year. The spikes are getting larger, as the right graph clearly shows. Last year, for example, the e-commerce market share averaged 6.7% during the first three quarters but jumped to 8.3% in the fourth quarter — a spike of more than 160 bps.
Thus, not only is the overall online market share still rising at an escalating rate, but the shift to online holiday shopping is growing even more. Again, there’s no mystery. Excluding autos, e-commerce has the greatest market penetration in discretionary shopping (e.g., apparel and hobbies), and the lowest share in convenience goods (groceries and personal care items). As the share of discretionary shopping surges in the fourth quarter, so too does the online market share. Malls are especially vulnerable to this sales erosion because they specialize in the kinds of goods most frequently sold online.
All of which means that malls and retailers without a winning omnichannel strategy are hemorrhaging sales during the all-important holiday season that are make or break for retailing. In the last few weeks we’ve seen all the department stores and many mall-based specialty chains report falling sales and downgraded forecasts.
And there’s no reason to suspect retailing is near an inflection point of declining online sales growth — e-commerce still accounts for less than 10% of all sales (though far greater in some categories such as electronics and books), and mobile shopping has the potential for even greater growth given the near ubiquity of smartphones.
In fact, retail sales are at new peak levels — and not because there are more stores. Unfortunately, the size of the retail stock has barely budged since the recession, with less new construction and less occupancy recovery of any property sector. The cause, instead, is sales leakage to online shopping. And it’s certainly a trend to watch this holiday season and beyond.
Andrew Nelson is chief economist/USA for Colliers International. Nelson develops economic and market perspectives for Colliers, drives the research agenda, and provides insight, thought-leadership and guidance about commercial real estate, capital markets and financial investment, and related sectors. He can be reached at [email protected].
No comments found
Winning with retail real estate in 2016
Occupancy costs are among the largest expenses for any retailer. Total lease obligations can exceed long term debt in many companies, reducing profitability and hindering growth. It doesn’t have to be that way though if operators follow four simple rules of retail real estate.
Properly managing a store portfolio of any size is filled with nuance and minefields are abundant, especially in today as stores play an increasingly important role in many retailers e-commerce fulfillment strategies.. Taking the wrong steps in the form of bad or restrictive leases or poor locations can have negative consequences for retailers that are every bit as significant offering a product assortment or marketing creative that doesn’t resonate with shoppers. To make sure retailers win with stores, there are four core areas that every operator should make a priority for the New Year and beyond. They include:
1. Conduct annual portfolio reviews
While it may sound like common sense advice, it’s surprising how many CEOs don’t review their portfolio annually. For most mature concepts, leases are constantly coming up for renewal, requiring retailers to ask hard questions about how particular locations fit within the company’s long-term view of serving the market. This makes a yearly strategic review of the lease portfolio essential with each location placed in “bucket” that defines how a particular store fits in the portfolio. At a minimum, this essential exercise should involve grouping stores into the three buckets of locations that are winners, those that need a change and those that should be closed.
The definition of winner can vary from retailer to retailer, but generally speaking winner is pretty easily defined as a location that has a 4-wall contribution, positive cash flow, a strong history of stable or growing revenues and a relatively low occupancy burden rate. This desirable combination will in almost all instances indicate that a store location doesn’t need an intervention.
Falling into the buck of locations that need a change are those where losses are less than occupancy costs or locations with less than 12 months to go before an option renewal. Stores may also need a lease adjustment if the location is profitable, but there are less than ten years of “control” remaining. Such leases may require a conversation with the landlord for a lease renewal or restructuring to avoid closure. It might also make sense to negotiate a contribution from the landlord for locations where remodels are planned. Initiating conversations with landlords well before lease expirations or an anticipated project provides time to prepare for any outcome.
Decision about locations to be closed center on whether a store produces negative earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR) and requires operators make judgment calls about likelihood of future improvement. If a site is generating negative EBITDAR, the firm’s earnings would improve simply by closing and continuing to pay rent. Finding a subtenant can minimize the reduction to shareholder value.
2. Make the right ‘ask’ of landlords
Once the review has identified locations that could benefit from renegotiating the lease, it’s critical the right “ask” is made to landlords. In most cases, landlords will only choose to restructure a lease if they believe it’s in their best interest. Sending a generic request asking for a blanket reduction in rent for the remainder of the lease term is the wrong approach. Build a case tailored to the specific location by creating a fact-based explanation about why the lease should be restructured including details about the location’s financial performance, recent trends and whether the location is at risk of closing without a restructure. Landlords may want added term or percentage rent to share in a potential turnaround, or they may need the tenant’s approval on something that helps the landlord within the development or mall.
3. Conduct thorough due diligence when acquiring a company or property
As with the first point, this may sound like common sense, but when acquiring a multi-site business with significant operating lease liabilities, it’s imperative that all leases are thoroughly reviewed. When assessing the portfolio the key issue is to determine whether it contains enough “winners” with favorable terms and whether the remaining liability on the “losers” is minimal. Knowing if loser leases can be terminated in a cost effective manner and understanding lease run-off schedules play an important role in negotiations, post-acquisition plans and ultimately whether the deal is successful.
4. Establish a lease administration program
A lease administration program is the foundation that supports strategic real estate planning and portfolio management. This is especially critical when a portfolio is large and spread across several markets. Lease administration programs help retailers efficiently control many activities, including tracking lease guarantees and security deposits, letters of credit, rent escalations and lease abstracts; complying with regulatory items; following tenant improvement work and construction cost; and making decisions on key trigger dates, such as option renewal and kick-out dates.
Winning with retail real estate will matter even more in the future than it has in the past given rapid changes in the market place. Following these four basic strategies won’t guarantee any companies’ success, but they will ensure that operators have an essential foundation in place on which to build their value proposition with customers.
Gary Graves is a principal at Huntley, Mullaney, Spargo & Sullivan, Inc., a financial and real estate restructuring firm. www.hmsinc.net.
No comments found
Budget family-fashion retailer continues to expand
Forever 21 is growing its its lower-priced format, F21 RED.
The chain has opened three new stores, with locations in Brooklyn, New York; San Diego, California and Kendall, Florida. The Brooklyn store is 35,000 sq. ft., while the San Diego and Kendall locations are more than 20,000 sq. ft.
Forever 21 launched F21 RED, which carries merchandise for men, women and children, in the first quarter of 2014. There are currently more than 20 F21 locations in the United States.
Great Post! Thanks to share