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The Retail Evolution: Telltale Signs of Change in a New Retail World

October 11, 2018 - By James Boreham

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Imagine walking through your local high street, where you buy everything from toys to clothes to groceries and everything in between, and noticing one day that all of a sudden, many of your favorite stores have just closed down.

This feeling is only too real for many shoppers for more than a year now; as small, medium, and large retailers alike have been closing down by the thousands around the globe.

The Scale of the Retail Crisis

In addition to US retailers being hit hard in recent years, retailers in the UK have also been experiencing a particularly turbulent time. The Guardian reported around 5855 store closures in 2017 alone, with over 1700 chain shops also shutting down in the UK’s top 500 towns. That’s an average of 16 stores per day, the highest in a single year since 2010. Consumer confidence has hit its lowest level in four years, as shoppers struggle with declining wages, record highs of consumer debt levels, and the growing burden of higher borrowing costs. PwC reported that the first quarter of 2018 was the toughest Q1 since the economic recession of 2010. A few examples of big-name retailers undergoing major store closures include Toys R Us, Mothercare, Debenhams, and House of Fraser amongst others.

In the US, many big-name retailers have experienced similar difficulties. The Atlantic explains that there have been thousands of big-name storefront closings and nine big-name retail bankruptcies in 2017 alone. Household names like Sears, Macy’s, J.C. Penney, and RadioShack, have each announced hundreds of store closures. Payless and Sports Authority have filed for bankruptcy and have been liquidated, respectively. Further, at several points in 2017, various well-known apparel companies’ stocks hit record lows, including Urban Outfitters, American Eagle, and Lululemon.

So, what exactly is driving this widespread retail crisis? The answer is complex but arguably the main driver is more customers now prefer to shop online instead of in-store. In the US alone, over 64% of households have an Amazon Prime membership. This mass transition in consumer shopping preference is now testing high street retailers, forcing them to ask themselves what they must do to turn around their failing retail storefronts.

Physical Stores: A Changing Concept

What many high street retailers have failed to do in recent years is turn their stores into captivating shopping experiences. CB Insights points out that leaders in retail all have something in common; their shopping experiences are innovative, forward-thinking, and original. They are holistic experiences, created to entice customers rather than the age-old come-buy-leave routine of most retailers.

For example, Apple’s store experience enables it to rank consistently as one of the top retailers in the world. In the US alone, its sales per square foot exceed $5500, while the average retailer in the US sells only $325 per square foot, according to CNBC. Apple’s philosophy focuses on positioning its stores as community spaces, acting as a gathering place for consumers to shop, bring in devices, and spend time in an open area with a clear design style.

Another example is Nike’s retail front. Nike plays with ‘experiential’ retail; for instance, one of its New York City stores features a basketball court and a treadmill where shoppers can try out Nike apparel as they play and exercise. Store employees use special cameras to analyze the physical action and make recommendations on footwear and apparel to the customers.

Beauty stores are also stepping up their game. Sephora is a great example, utilizing its new small-format stores to show off new AR-enabled mirrors for customers testing out its beauty products.

Necessary Evolution

With the recent success of e-commerce, retailers are having to reconsider their business models. As this new experience-focused way of conducting store business continues, retailers around the world will simply choose to close a select number of stores in an attempt to reduce costs and shift its focus towards e-commerce. Others may choose instead to downsize and repurpose their stores, which implies that many retailers may discontinue and restructure the terms of their lease contracts in locations that have become ineffective, or even too large, to operate efficiently.

According to data from investment banks and other businesses, as e-commerce continues to grow, physical store sizes are further expected to diminish in size. Retailers simply do not need that much space anymore and would benefit from drastically improving their customers’ experiences in smaller spaces.

In effect, having the ability to restructure retail store portfolios now looks more beneficial than ever for retailers – and they need to be able to evaluate lease occupancy costs for a number of different property types.

Lease Data: A Make or Break for Retailers

Consequently, for retailers, understanding all the terms of their lease agreements will prove to be vital, and they will need to rely on the flexibility from their landlords in order to be able to restructure their leases and repurpose their stores.

To regain competitive advantage in the changing retail landscape, renegotiating lease terms or pushing for shorter, more flexible leases now seems to be a necessity. Several landlords have already recognized that offering shorter leases with more flexible terms, which can include five-year leases with three-year kickouts, will prove beneficial to both, their retail tenants and themselves. These are the types of leases that will allow retailers to revamp their storefronts, allowing them to test out new store experiences and attempt to regain grounds lost to e-commerce.

Other favorable lease term elements that are particularly appealing to retailers include lease termination rights or early lease exits. A good option for when a retailer is allowed to terminate the lease contract, if an agreed upon sales target is not achieved within a specified time period.

Some final examples may include alienation and turnover rent implications. A deep understanding of all the options available when managing a substantial lease portfolio helps retailers effectively think about how to plan for this ever-changing retail climate.

Such flexible lease terms allow both retail tenants and landlords to address the increasingly questionable viability of storefronts and the possibility of not generating enough money to cover profit shares through a certain percentage rent.

In an era where retail, and thus leasing is changing dramatically, understanding and interpreting the data in lease contracts is more important than ever. And it doesn’t come as a surprise that we’re now seeing a wave of demand from retailers who are looking to manage their lease portfolio more proactively. A sign of things to come perhaps.

In part 2 of our Retail Evolution series, we dig deeper into some of the more common trends we’re seeing from our conversations with retailers, and how they’re leveraging a better understanding of their lease data. Stay tuned!