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

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

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

Fitch Ratings asserted that Nike and Adidas are leaders in this high-stakes adaptation. These multinational companies have significantly increased their online and physical storefronts "direct to consumer" sales. For instance, Nike has emphasized that its shops are consistent with both the quality and the price of their products, that it directly communicates with customers, while also keeping an electronic record of customer sizes and preferences.

Nearly all companies along this retail spectrum will need to follow transformation trends to remain relevant. If a retail store is selling high-end products, providing a greater focus on services is critical for in-store and online sales. Stores that have sold mass-market products will continue to find tremendous competition through online retail.

Lastly, lower-end stores, such as TJ Maxx, will attract shoppers to its physical stores without much extra effort. In the short term, this purchase channel for lower-end stores will have a significant advantage over competitors when factoring recent bankruptcies in the retail sector. Also a considerable decrease in shopping over the last quarter, which has drastically increased supply. That will allow lower-end stores to sell sharply discounted products that will draw people into its stores.

In the long-term, all retail landlords will need to switch from being passive rent collectors to retail partners. That means becoming an actively managed shopping center that will enhance the customer experience.

Fitch Ratings recommended ambiance and convenient transport links to improve the customer experience. Having a variety of retailers and leisure activities will also draw families to malls, as would trending "pop-up" stores. These steps will attract customers eager for experiences not available on their computer screens.

Without these transformative moves, retail landlords could face a hit to their bottom line. Changes in retailers' cost-based plans and physical-space requirements must be analyzed. Fitch Ratings has found lease durations are becoming shorter as landlords have accepted their need for flexibility to change the retail mix profitably continue.

By making these re-engineering changes, key stores will no longer serve as a purely click-and-collect venue in the long-term. Instead, when customers come to pick up their purchases, they will purchase additional products in person due to the unique customer experience.

Instant Insights /

Re-Engineering of the Retail Sector Key to Long-Term Success

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