Selling Experience: How Physical Stores Can Retain Market Share

By Narendra Srivatsa June 27, 2018

Brick-and-mortar stores still enjoy the lion’s share of the retail market at more than 90% in the first quarter of 2018, according to the Census Bureau, despite the continued strength of online sales. The trope of the “Death of the American Shopping Mall” continues to stir fear, but savvy investors and owners are reinventing their properties to stay relevant and competitive.

The strong labor market of 2018 continues to bolster retail.  Online continues to grow, but, despite much-publicized store closings, brick-and-mortar retail isn’t going away. These closings actually may benefit the retail sector as the model transforms from emphasizing large anchor stores to smaller, niche outlets. 

The commercial real estate (CRE) market will have to think differently and find opportunities for both the digital and analog worlds to take advantage of each other’s strengths. This means creating great experiences for consumers. Some retail owners have begun the transformation, as suburban shopping malls are scrapping their food courts in favor of high-end restaurants. These CRE leaders are helping to change the mall experience from one of utility, in which consumers purchase goods, to one of experience, wherein their properties become destinations for social outings.

An abundance of existing retail space will be revamped over the next several years. For example, the renovation and rebranding of Atlanta’s Peachtree Center as “The Hub” – expected to be completed by spring of 2019 – is planned to feature modernized shopping, dining, and entertainment experiences that cater to a burgeoning downtown population, 6,000 office tenants, and guests at 4,000 hotel rooms connected to the complex.

A focus on the consumer

CRE owners and investors will have to focus not only on their tenants but, even more important, on the retail consumer. What is the consumer looking for?  The retail sector will need reliable data and analytics to adapt to consumer needs.  

Fortunately, clues and data are already out there in the form of foot traffic and parking lot traffic data, average sales/transaction, and other metrics.  Overlay such data with macro demographics information  -- like employment by segment, wages by geography, same-store sales, crime analytics, supply/demand by square foot, and infrastructure indices – and align them with consumer interests, and a picture for success emerges.

Create a unique experience

Consumers in different regions look for different experiences, and the retail environment will need to adapt.  High-end or specialized cuisine; rock climbing and other physically challenging recreation areas; high-end stores for groceries or physical goods are all examples of what should be included in a retail environment, depending on the local demographics. 

Amazon succeeds because of the experience and quality service it offers at reasonable prices. For instance, a large category of niche books that cannot be stocked by physical bookstores is a substantial portion of Amazon’s book sales. While such books represent just 2 percent of all the titles it sells, they account for 37 percent of the site’s total book sales, helping to boost category sales by 60 percent.

CRE owners and investors will need to identify niche product sellers to attract visitors to their retail locations. By examining the data and analytics, they can create consumer personae and then craft experiences around them.

The bottom line

Of course, the basic rules of supply and demand must be factored in. Data and analytics can provide insight into what the consumer demand will be in varying regions. With many tenants being private companies, it’s important to get data on them that will provide clues as to their ability to pay rent – otherwise, rental income may be at risk. Retail space must be adaptable to change and serve multiple purposes to succeed, and CRE investors and owners need to use data and analytics diligently to transform and continue to grow profitability.

Narendra Srivatsa

Narendra Srivatsa is the assistant vice president for Verisk Commercial Real Estate.