The re-engineering of the retail sector is underway. To remaincompetitive, stores and their real estate landlords are required toadapt. Without doing so, these businesses risk losing relevance andwill likely shut down in the long-term.

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Retail sales plummeted in April, which was the first month allnonessential retailers closed down because of the coronavirus.Despite this, and far before the coronavirus pandemic andstay-at-home orders, the process of re-engineering malls and theirtenants had already been underway.

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To compete, physical retail stores must continue evolving frombeing a stock room that displayed products to places focusing ondelivering a unique customer experience promoting client loyalty,product knowledge, and generating recurring business.

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Fitch Ratings asserted that Nike and Adidas are leaders in thishigh-stakes adaptation. These multinational companies havesignificantly increased their online and physical storefronts"direct to consumer" sales. For instance, Nike hasemphasized that its shops are consistent with both the quality andthe price of their products, that it directly communicates withcustomers, while also keeping an electronic record of customersizes and preferences.

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Nearly all companies along this retail spectrum will need tofollow transformation trends to remain relevant. If a retail storeis selling high-end products, providing a greater focus on servicesis critical for in-store and online sales. Stores that have soldmass-market products will continue to find tremendous competitionthrough online retail.

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Lastly, lower-end stores, such as TJ Maxx, will attract shoppersto its physical stores without much extra effort. In the shortterm, this purchase channel for lower-end stores will have asignificant advantage over competitors when factoring recentbankruptcies in the retail sector. Also a considerable decrease inshopping over the last quarter, which has drastically increasedsupply. That will allow lower-end stores to sell sharply discountedproducts that will draw people into its stores.

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In the long-term, all retail landlords will need to switch frombeing passive rent collectors to retail partners. That meansbecoming an actively managed shopping center that will enhance thecustomer experience.

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Fitch Ratings recommended ambiance and convenient transportlinks to improve the customer experience. Having a variety ofretailers and leisure activities will also draw families to malls,as would trending "pop-up" stores. These steps will attractcustomers eager for experiences not available on their computerscreens.

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Without these transformative moves, retail landlords could facea hit to their bottom line. Changes in retailers' cost-based plansand physical-space requirements must be analyzed. Fitch Ratings hasfound lease durations are becoming shorter as landlords haveaccepted their need for flexibility to change the retail mixprofitably continue.

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By making these re-engineering changes, key stores will nolonger serve as a purely click-and-collect venue in the long-term.Instead, when customers come to pick up their purchases, they willpurchase additional products in person due to the unique customerexperience.

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Michael A. Mora

Michael was born and raised in South Florida. He went to undergrad at Florida Atlantic University and earned his master's degree from the Columbia University Graduate School of Journalism. He is a litigation reporter for the Daily Business Review, as well as an editor for ALM Global. You can email him at [email protected].