As a follow-up to my recent article on how Simon Property Group is positioning itself for success in the era of “new retail”, I thought it would be useful to add some context. A wonderful article written by Austan Goolsbee, a professor of economics at the University of Chicago’s Booth School of Business, and an adviser to President Barack Obama, adds both perspective and economic underpinning to the whole “retail disruption thing”.
The article highlighted three undeniable forces that I’ve written about in the past, that are impacting retail now and the foreseeable future. They are the shift to big boxes, our ever-increasing income inequality, and our changing spending priorities. Here is my elaboration on some of author’s thoughts along with their long-term industry implications.
Obvious pressure is being placed on malls, their anchors, and the specialty stores that line their corridors. Beyond Amazon and the net, real forces are being applied by Target, Walmart, Sam’s Club and Costco. These retailers have been thriving while many of our once flourishing malls are in decline. In addition to over-expansion, the department stores and specialty retailers got too comfortable in repeating the same formula without taking note of changes all around them. They were providing undifferentiated offerings, while stripping out value added services and wondered why we were “losing the love.”
The disciplined investments made by both Target and Walmart, as well as the buying power and pricing at Costco and Sam’s club have created a value proposition that has been deemed so superior to the malls that they’ve become the choice for a broad segment of the population. In many cases the one-stop nature of these visits, pare well with our time-starved lives.
I know that my wife and I are typically gracing the aisles of Target often twice a week. Equally significant is the fact that we are shopping much more of the store than we did, just a few years back. This is no accident, as the competition in the segment has been fierce, and much “smart money” has been spent, addressing every aspect of unified commerce and its ever-changing impact on the customer experience.
Changing Priorities and a Shrinking Middle Class
According to the Pew Research Center, over the last 50 years the share of the nation’s income earned by the middle class has fallen from nearly two-thirds to around 40%. This has yielded what is becoming known as an hourglass economy. The beneficiaries have been the dollar stores which have seen monumental growth over the last decade. The leader of that pack is Dollar General, now over 16,000 stores strong, with plans for another 1,000 units in 2020.
Besides the shrinking middle class, expenditures on healthcare have more than tripled since the 1960’s and we spend more on business services, entertainment, and education than at any time in the past. Factor that in with the general movement away from conspicuous consumption, via downsizing, purging, and the increasing awareness of the peril of our planet. So no, we really can’t blame Amazon and the net for all of retailing’s woes, it’s really much more complex than that.
Retail’s Changing Complexion
As I indicated in my article on Simon’s future, I do believe that the best malls and specialty retailers will succeed. However, the very nature and even purpose of the stores must be “reimagined”. In a world of unified commerce, floor and shelf space should not compete with click pace; it should complement it. Correspondingly, there is no longer a correlation between scale, success, and quantity of physical storing, particularly among specialty brands. And because specialty retail makes up the vast majority of mall and center tenancy, it will be this segment that will be impacted the most.
Stores that once were primarily for storing, will store no more. As the internet has separated shopping from buying, it has become ineffective and cost prohibitive to use valuable mall real estate to store stuff. It’s become far more practical to employ large automated warehouses, which is evident as the internet, digital distribution channels, and last-mile initiatives coalesce. This will continue to change the purpose and function of much of the tenant space, from “one of storing, to one of exploring.”
From Transaction to Interaction
In the “New Retail”, these venues must take on “higher-ground” goals of engagement, interaction, reverence, loyalty, belonging, and “retailtainment”. Metrics involving lifetime customer value must supersede sales per square foot. What brands mean and value, takes precedence over what they sell.
These functions and attributes are in full display at Allbirds, b8ta, Bonobos, and Nike’s House of Innovation 000. Ultimately, when these venues are conceived, designed and serviced properly, they fuel the fulfillment machinery of our time.
A good example of the transition from transactional to interactive retailing is Pac Sun, which are opened two, bicoastal, landmark stores that illustrate this well. A 5,000 square foot Los Angeles location and a soon to be opened and 8,000 square foot SoHo, New York store were designed around core brand values, with an eye on engaging the local fashion and arts population. The two stores include “white space” for workshops, pop-ups, exhibits and performances that will cater, bi-monthly, to both brands and influencers.
Pac Sun is interested in building community around its brand by creating relevant, meaningful and authentic brand extensions that go beyond pure product presentation. These venues are an integral component of unified commerce, in which all brand touchpoints, the physical, the virtual, and everything in between, are interwoven, to build lifetime customer value.