Over the last decade there has been an explosion of dependency on technology and the internet. Today, very few people walk the streets without a smartphone in their pocket with access to the web and the numerous e-commerce websites. Companies such as Amazon, eBay and Alibaba are growing exponentially in an age where we are becoming more and more reliant on technology. E-commerce is very much changing the way many of us shop and it is this phenomenon that critics are citing as the reason behind the supposed downfall of the brick and mortar retail industry.
The classic example of how physical stores have suffered as a result of the success of e-commerce is the demise of the traditional book store. Companies such as Borders went out of business, seemingly overnight, as consumers started to take advantage of the convenience of Amazon. The fact that you can browse online for anything from books to clothes to electronics and purchase them with one click without leaving your chair has certainly caused the retail industry to evolve.
This “Amazon factor” has seen many stores close across the nation and left shopping malls with considerable vacancy problems. Over the last three years, retailers such as The Limited, Wet Seal and Sports Authority have all gone bankrupt, while companies such as Sears and Macy’s have seen closures of over 100 stores each. This trend has helped fuel the sentiment amongst commercial real estate investors and in particular the media that retail is a dying asset class and therefore not worth investment.
This general perception however is not actually reality. Although many stores are struggling to compete with online platforms, there are a significant number of stores that are not only weathering the storm but are thriving despite these tricky times. Dollar General for example added 1,000 stores throughout 2016 and are projected to add another 1,000 during 2017. Target is another example of a store which many believe to be struggling but is actually adding a new stream of smaller stores throughout the country.
One study carried out by Delloite suggested that throughout Q4 of 2016, which is the busiest retail period of the year, online and physical retail grew by the same amount of $12 billion. Due to the superior size of the brick and mortar industry, this represented a 2%-3% annual growth in the physical retail industry versus a 13%-15% annual growth in the online industry. The physical retail industry is therefore certainly not dead and is still growing healthily despite the competition from e-commerce.
Since e-commerce is clearly winning the retail battle in terms of convenience, the physical retailers have been forced evolve in order to keep pace with the internet. This is the big difference between the retailers that are failing and the ones that are leasing new spaces in malls across the country. The successful companies are finding ways to offer something different which cannot be offered by online stores. By understanding the consumer and offering a unique experience, retailers are seeing ways to reattract shoppers back into the stores.
Best Buy, the famed electronics company had been losing consumers to online retailers ever since e-commerce started picking up pace. Recently however, they have begun to claw back shoppers by offering a unique experience. Consumers can walk into the store, sit down and try out all the latest game consoles and audio systems. This concept is bringing people into the stores and has helped Best Buy turn the corner and begin to see increased growth.
Another important point to note is that a large percentage of e-commerce sales are actually done by brick and mortar retailers utilizing their stores as distribution centers. According to an ICSC study, 30% of all sales online in 2015 were attributed to regular physical stores and not “pure-play” e-commerce (solely online retailers). In fact, one study carried out by Scott Galloway, professor of Marketing at NYU, suggests that brick and mortar stores that also have online services are doing better than the pure-play companies. This is because the transportation costs of regular brick and mortar are far less than those of pure-play as they use their local stores as distribution centers. It is this fact that has prompted many pure-play e-commerce companies to actually open up physical stores around the country.
The general perception that retail is dead is therefore just a perception and is only true of those stores that have failed to evolve to the changing demands. Investment in retail real estate is very much alive today provided that tenants are assessed and chosen carefully for their ability to operate in the new digital age.