The Rise Of E-Commerce Clouds Retail's Future, But Also Contains Silver Linings

E-commerce may have eroded the traditional world of brick-and-mortar retail, but panelists at Bisnow’s Chicago Retail Forum Thursday morning said it also brought about a transformation that will create opportunities for many years.

Few people understand how big of a bite the internet has taken out of traditional retail, Heitman Senior Vice President Emi Adachi said to kick off the first panel. Most know the total amount of sales attributed to e-commerce is less than 10%, but once automobiles and other large items get stripped out of the calculations, the true percentage is in the low to mid-teens, which she expects to increase.

But that does not make her a pessimist about retail’s future, she said — store outlets still play roles in many online transactions. Purchases done by the click-and-collect method, where a shopper buys online but picks up the items in-store, typically get counted as e-commerce, and retailers that help consumers complete such purchases are more likely to thrive over the long term.

The rise of the internet may give retail a needed kick, DL3 Realty managing partner Leon Walker said. He said much of the sector was boring and more concerned with merely delivering products at the cheapest prices, rather than giving shoppers memorable experiences.

Sneakerboy in Australia uses the internet in ways that shows retail’s true potential, he said. Its shoppers visit an outlet, try on product and make purchases with a store app. The company then ships the shoes from a central location, and since the stores don’t need a vast amount of stock on hand, they can dedicate most of their space to futuristic displays of every item for sale.

RPAI Vice President and Leasing Director Stacy Short is leery of outlets that don’t find ways to innovate, and instead complain how Amazon is killing their business.

“It means they’re not being creative and thinking ahead,” she said.  

All retail sectors need to rethink how they operate, and how using the internet will help. That includes grocery stores, which many landlords and investors consider relatively safe from online competition, according to Nick Wibbenmeyer, the Chicago-based managing director of Regency Centers.

“For grocery stores, the disruption is going to be much slower, but we’ve already seen the weaker players, like Dominick’s and Winn-Dixie, struggle as they figure out how to survive,” he said.

He believes the retailers most likely to make it are those that not only utilize the internet, but also start out with great locations and deep pools of capital they can use to refurbish outlets with modern design.  

Perhaps the most significant challenge for landlords is that retailers may need only half the outlets once considered essential to cover a metro area, Wibbenmeyer said.

Adachi said retail's footprint for years expanded faster than overall population growth, and deciding what to do with spaces now considered obsolete remains perhaps the toughest challenge in retail, one that will take years to solve.

In the meantime, tenants will continue to have the upper hand in lease negotiations, as most will have ample opportunities to pick and choose their spaces.

"It's difficult for us to sign favorable deals," she said.

The retail sector's shake-up has led to a proliferation of new concepts and experiments, especially with fast-casual restaurants. Sorting through it all and discovering what succeeds will not be easy.

"At some point you realize that they're not all going to survive," Adachi said.

All of the panelists agreed this means retail will be more capital-intensive in the future, as landlords scramble to renovate and update the spaces left empty when new tenant concepts fail. 

But there is a silver lining to the surplus of retail product.

“We’re definitely oversupplied with retail, but the stores that retailers decide they really need will then play a much more critical part of their business,” Adachi said.

That opens the possibility of garnering rental rates high enough to sustain well-located properties, and even make new construction viable.

“We know independent shopping centers can see increases in demand, because we’re already seeing it across our portfolio,” he said.

Last fall, Regency Centers did what few developers feel comfortable doing these days, and opened a new shopping center. The $200M Mellody Farms in Vernon Hills, a Lake County, Illinois, suburb, is occupied by dozens of tenants, including Whole Foods, Nordstrom Rack, HomeGoods, REI and Cafe Zupas, and attracted huge crowds on opening day.     

The company was confident about its prospects because however much the overall retail footprint shrinks, innovative centers in the right locations should capture the remaining demand, Wibbenmeyer said. 

“Vernon Hills will continue to be Main and Main for the entire county,” he said.  

And on the horizon is the millennial generation, Adachi said. This demographic group, the nation's largest, is about to hit its peak spending years, and retailers that know how to use the internet will get revenue boosts for decades.

"At some point, we'll see retail right-size, and then we'll finally start seeing net growth."