Demand for Retail Space Still High, but Internet’s Threatening
Undaunted by exponential increases in Web sales of consumer goods, the number of brick and mortar stores the country’s largest retailers plan to open in the next several years will match--if not exceed--the quantity of outlets that they built in recent history.
Indeed, it seems that reports of the shopping center’s demise have been greatly exaggerated. Even with many markets already saturated with stores, developers say demand for retail space has not abated.
Not only does the tremendous surge in Web shopping last Christmas not alarm them, some optimistic developers even suggest that growth in electronic commerce might actually increase the number of retailers looking for space in the physical world. They point to the way many successful catalogers such as J. Crew and Body Shop expanded into shopping centers in the last decade. Lately, Web retailer Gateway computers has begun to open stores in malls in an attempt to reach new customers and reinforce its brand.
However, business strategists insist that it’s just a matter of time before Web sales start to chip away at the demand for retail space, and plans for new centers must be shelved.
The 1998 holiday season provided the first evidence that the Internet could legitimately compete with retail stores. Shoppers spent more than $3.5 billion on the Net during that season, according to Forrester Research, pushing total sales for the year over the $8-billion mark. That’s less than 1% of the country’s total retail sales, but a hefty increase from the $2.4 billion spent in 1997.
By 2003, however, Massachusetts-based Forrester expects electronic sales to surpass $108 billion, or 6% of total retail spending. That’s enough to make a major impact on how retailers do business, including their plans for expansion, say retail analysts.
Hardest hit will be retailers like Wal-Mart Stores Inc. that sell commodity-type products, as well as book, music and electronics stores, which have figured prominently in new shopping center development in the last five years, Forrester says. Neighborhood shopping centers, which have more service-oriented tenants such as dry cleaners and takeout food are at less risk.
“The great time waster is buying house brands, commodity products or self-service-type items,” says Mark Borsuk, managing director of the Real Estate Transformation Group in San Francisco. “You don’t need to go to the store for those. This type of restocking can be handled online.”
Or, as one analyst put it, a Sunbeam toaster is a Sunbeam toaster, wherever you buy it. What matters is where you get the best price. And lately, that’s been on the Internet.
A 7% Loss to Web Could Force Closures
Although some retailers pooh-pooh the effect the Web will have on their sales in coming years, analyst Sally Gordon of Moody’s Investors Service says that if U.S. retailers lose only 7% of their sales to the Internet (the amount that sales decline in a moderate recession), their profitability can decline as much as 50%.
And that could force retailers, who have been on an expansion kick in recent years, to shutter many under-performing locations. That’s bad news for residents who have to live with the blight of empty stores and worse news for property owners, shopping center note-holders and the municipalities that have been wooing retail centers for the precious sales tax revenue they provide.
But most retailers, analysts and developers agree that a Web-driven shakeout is years away. Others think it may not happen at all, and predict it is the Web retailers who are selling on tiny or nonexistent profit margins that will go under.
“A legitimate retailer is one that makes a profit,” says Wal-Mart spokesman Mike Maher, declining to elaborate further. The surge in Web sales hasn’t slowed Wal-Mart’s same-store sales (even during the peak Web months of November and December) or its plans to roll out new stores in the next couple of years.
With 2,435 stores, wholesale clubs and super centers already operating, Wal-Mart is opening yet another 150 in 1999. Meanwhile, its Web site, which was launched in the middle of 1996, has yet to attract widespread interest. It generates less than 1% of the company’s total sales.
“I think the Internet appeals to a different audience than the one we see in our stores,” Maher says. Indeed, in many small towns, Wal-Mart’s huge retail barn serves as a gathering place and social venue. On this premise, Wal-Mart last year broadcast a Garth Brooks concert live in its electronics departments.
Likewise, developers say, Internet sites will never totally supplant the neighborhood shopping center, even in urban areas, simply because these days people have few other places to gather.
“Internet shopping is fairly asocial,” says Arthur Coppola, chief executive of Santa Monica-based Macerich Co., one of the country’s largest regional mall operators. “As long as people are social animals, malls will survive.”
Undoubtedly, there are some things people prefer not to buy on the Net, such as tailored suits, shoes and jewelry. And there are times, Coppola says, when even the Internet isn’t immediate enough, like when a woman needs a dress the night of a big party.
This need for instant gratification is what retail owners are saying is one of the limitations of the Web and one of the keys to their survival. To remain a part of consumers’ time-pressed lives, retail property owners are figuring out ways to blend the Internet with storefronts.
Macerich, for instance, is considering launching Web sites for its major malls, like Westside Pavilion in Los Angeles, that would allow customers to shop its stores online and schedule pickup at the mall in a matter of hours. Shoppers who hate crowds could drive into a loading zone at the front of the building and have their prepaid packages brought out to the car.
“We can combine the town center with cyberspace, making the mall into the place to be and a fancy-looking warehouse that serves 300 different stores,” Coppola says.
Borders Books & Music’s new Chief Executive Philip Pfeffer acknowledges the dent that online selling is starting to put in their same-store sales growth, which slowed from an increase of 3.5% in the third quarter of 1998 to 1.7% in the fourth quarter, which is traditionally one of their strongest months. The Michigan-based company launched https://www.borders.com in the fourth quarter, and is trying to bring customers back into its stores by allowing them to order books on the Internet and pick them up in person.
Pfeffer says he envisions a day in the near future when customers will have an epiphany at 3 a.m., log on and search for the books they need, buy them, and have them in their hands the next morning.
“There’s tremendous opportunities to create a very interactive environment between brick and mortar and commerce done on the Internet,” he says. However, most retail executives say they are still struggling to figure out just what customers want them to provide on the Net, and how much they want the virtual world to invade their natural world.
Rugged sportswear maker Eddie Bauer added Internet stations in its stores to try to increase sales from customers who couldn’t find what they needed in stock. The terminals were hardly used, says Bauer Vice President William McDermid, and the concept was discarded.
McDermid says it is likely, however, that the Internet will force subtle changes in store design to make shopping more pleasant and tactile, such as adding more room for customers to navigate around racks, and the elimination of counters and cabinets that block customers from touching and selecting their own clothes.
Learning to Harness Internet Will Be Key
But the rise of the Internet could make new business leaders out of those retail companies that learn to harness its capabilities and use it to drive people into their stores, according to business strategist Gary Hamel, a Harvard Business School research fellow and president of San Francisco-based consultant Strategos.
In a column in the Financial Times, Hamel observed that every time there’s been a big change in the retail industry, such as the arrival of Wal-Mart and other megastores, or the spread of factory outlets, the industry’s biggest players have been toppled. As Hamel puts it, the leaders of one paradigm rarely become the leaders of the next.
Property owners are for the most part unconcerned, saying online shopping is just the latest in a series of developments that were supposed to bring down their industry, following catalogs, factory outlets, television shopping and even the videocassette recorder, which was to have eliminated all the movie theaters in their centers.
“It’s the seventh-generation boogeyman,” Coppola says.
The only real effect online shopping will have on retail real estate, they say, is to raise the bar for providing entertainment to busy, fickle customers.
“The Internet will just require retailing to invent itself like it has so many times in the past,” says Robert Champion, Los Angeles shopping center developer and former mini-mall king. “A lot of retail shopping is one of experience. Those retailers that can create a unique experience will be able to enjoy a niche separate from the Internet.”
