The Evolving State of the Retail Sector

The retail sector has suffered adverse headlines during the current economic expansion, but a closer examination of brick-and-mortar retailing shows the present and future are bright. The pressure from online retailers and store closures are not without merit, though are somewhat overblown as retailers evolve their offerings to thrive in a new environment. Companies are moving away from a transactional model and moving to experience- and necessity-based retailing, which can’t be replicated by online retailers.

Threats to the old retailing model are real, yet most of the pain in the sector is likely in the rearview mirror. Online sales continue to grow as a percentage of total sales, buoyed by rapid delivery reaching a greater share of the population. In large metro areas, where warehouses are established, and large e-commerce companies have logistical networks that enable same-day delivery, further penetration of online sales is expected to slow. As companies like Amazon and brick-and-mortar stores with a large online presence continue to create more efficient delivery networks in smaller markets, the impact of online penetration is also going to be relatively inconsequential relative to the changes that occurred over the past few years.

Big box closures grab headlines and generally serve as the public’s barometer for the health of retailing. However, the closures reported by large, established stores such as Sears are not nearly as consequential in context of the broader retail market. Without a doubt, the introduction of large blocks of dark space to the market is problematic, particularly for malls that rely on these anchors to draw traffic that eventually supports the inline stores. This trend is evident when looking at store closures this year. Payless, Charlotte Russe, Gap and Things Remembered are closing hundreds of stores, largely due to the mall sector that historically relies on anchors. Sears and Macy’s are closing dozens of additional stores this year, offering evidence of future struggles, and transitions, for malls.

Outside of the dated mall format, retail is thriving. Nationwide, vacancy is near all-time lows and rents continue to set new peaks. This resurgence is due to the creative reinvention of the sector from retailers with an understanding of consumer wants and needs. Two major trends are driving the market forward: experience-based retailing and irreplaceable physical locations. Retailers are blurring the lines between wanting to go shopping and needing to go shopping. Whole Foods is a prime example of this model. Over the past few years, the grocer has moved away from purely transactional purchases by opening bars, restaurants and coffee shops in its stores. These high-margin concepts now occupy a significant percentage of the store’s footprint and serve to improve sales in the hypercompetitive grocery market. They also offer an experience that keeps consumers within the format longer. Whole Foods is not the only format leveraging services to enhance foot traffic. DSW, a traditional shoe store, is opening nail bars in several locations after finding success in a proof of concept. Millennials are taking a particular interest in the new service. The shop-in-shop concept is expected to become more prevalent in the future as companies like Macy’s experiment with the idea.

The other path retailers have chosen is making shopping convenient, or necessarily physical in concept. Rising household income, low unemployment and a strong economy is supporting consumer spending at restaurants, which remains a healthy segment of the retail market. Gyms are flourishing. The high cost of healthcare is a component of this trend as companies are subsidizing memberships for their employees. Social media and technology are also likely contributors to the increased demand in fitness and the retail space it occupies. Wearables, such as Fitbit and the Apple Watch, are making more people aware of their daily exercise. Smartphone apps make consumers more conscious of their diets, which is driving health food purchases.

Grocers are another bright spot for the retail sector. Contrary to the Whole Foods model, some grocers are opting for the most convenient offers possible. Kroger, for example, recently acquired Home Chef, the nation’s largest private meal kit company, providing shoppers a quick and easy option. The company is also expanding a “Scan, Bag, Go” service that allows shoppers to avoid long checkout lines. Whether retailers utilize experience to keep shoppers engaged, or leverage technology and other innovations to make transactions more convenient, it is safe to say the death of retail was greatly exaggerated.

Erin Patton is the executive director of the National Retail Group for Marcus & Millichap.