Retail’s Bright Future Lies In Brick And Mortar After All

Early in the pandemic, the future seemed clear. People would increasingly buy online because stores were closed and unsafe. Plus, it was oh, so convenient for consumers, and think of the money the retailers would save by centralizing major distribution centers, setting up last-mile warehouses at in-fill urban and exurban locations, and pushing for same-day or next-day delivery. Everything—white goods, clothing, consumer electronics, even basic groceries—would be on trucks and step-vans crisscrossing metro areas, bringing people what they wanted.

But then, lockdowns ended, vaccines increased, and even though Covid remained the third largest cause of death in the country, hundreds of millions decided that being social animals really was a basic characteristic. Retailers, too, learned some important lessons, one being that having brick-and-mortar presence throughout the country had a lot of benefits.

It all has proved that while you can take retail out of the store, you can’t take the store out of retail.

NUMBERS SURGE AND THEN RECEDE Many analysts—and, let’s be truthful, a lot of people who had something to gain from pushing an online narrative—were sure that the pandemic had compressed many years of trend into a few months. E-commerce would become the dominant form of retail.

It had gone from 11.1% of total sales in the fourth quarter of 2019 to 16.4% by June 2020, according to Census Bureau data. Clearly things would only continue to grow.

“It’s a very impressive trendline,” Marc Werner, CEO of GhostBed/Nature’s Sleep, says. “Let’s not forget that. I’m an omnichannel guy. I’ve sold everything to every retailer out there.” His grandfather was the Werner who started the well-known ladder company.

And not to disparage the shift, but when it comes to consumers, things change. The pressure to stay indoors and away from others dissipated, people looked to find one another—friends, family, and even strangers—in the public square, including shopping.

The percentage of sales going through e-commerce dropped to 14.7% by the middle of 2022. Still elevated, no doubt, as a pre-pandemic trendline would have brought the use to about 13%, but the slope of the line came back to roughly where it had been. There was an advance and then the pace returned to what had been normal.

Survey data from CapGemini’s 2023 consumer behavior study shows that by November 2022, the percentage of consumers shopping at physical stores was about par with where it had been pre-pandemic. Since then, with inflation driving up the cost of living, that has gone down a few percentage points, but then people are also shopping less online.

What the industry was remembering, something the buying public hadn’t forgotten, was that having retail being where people were was a benefit.

“It’s an important part of the community,” says Emily Arft, a senior associate at Green Street covering the mall sector. “You get a lot of essential items from these retail properties. There’s daily activation at these properties and they’re essential to daily retail habits. Core retail is important in that sense. That’s one reason Walmart has been able to compete with Amazon, because they have the physical footage.”

E-commerce is also not a pleasant walk through the park. Getting the practice right is hard. Costly, too, even though the assumption is often that it should be cheaper than brick-and-mortar. Even without stores, there is real estate, overhead, many employees, and it is harder to break through online than putting up a website.

“If you’re a pure play e-commerce, it is expensive and time consuming to reach people,” Stephanie Cegielski, vice president of research at the International Council of Shopping Centers (ICSC), says. “You have to do the paid ads, the targeted ads, and Google and others are saying ad spend is being cut. For a store, it’s front-of-mind for somebody walking past it. they’re paying rent for that space, but not advertising for it.”

BRICK-AND-MORTAR BREAD-AND-BUTTER

Physical stores can be overbuilt, as many retail chains of all stripes have found. But properly placed, they offer many benefits.

You can think of effectively placed stores as advertising that pays its own way with profits. Like a giant billboard that people see as they go by. “For a store, it’s front-of-mind for somebody walking past it. they’re paying rent for that space, but not advertising for it,” Cegielski added. “We studied it in 2018 and will study it again, but we found that if a store opened in a market, their online sales in that market increased 37%. We found that if a store closes in that market, online sales decrease 33% in that market. It’s out of sight, out of mind.”

“We have never felt that online shopping is something to fight, we see it as a compliment to the brand,” says Spencer Jordan, senior vice president of leasing at the Easton Town Center in Columbus, Ohio, an upscale regional shopping complex. “Even before the pandemic, we were working with online-only brands to get into brick and mortar. The Halo effect is something we’re talking about more and more.”

Being in a place also helps with customer acquisition costs. Not only do consumers go by stores, they go to buy at stores. “Brick-and-mortar, with its set rent and proven returns, has been helpful in driving not only customers to the store for sales but to the website,” Jordan says. Easton has had e-commerce companies open pop-up locations “and see online growth of 38% to 40% in our market.”

In a modern expression of irony, traditional physical retail offers convenience that e-commerce was supposed to solve. “There is value to having that store there to make it quick,” says Cegielski. “We all want free shipping, we want it quickly, but sometimes it’s worth driving 30 minutes to do it all once.”

In-place retail also goes beyond that. “People want not only convenience, but they want customer experience,” says Brandon Duff, senior vice president and managing director in Northmarq’s Chicago office.

Getting the right experience is sometimes only possible in person and people are, well, hungry for it.

“I think the best barometer is really dining and entertainment,” explains Joseph Coradino, CEO of PREIT, a Pennsylvania REIT with retail properties across top metropolitan areas. “We’re seeing 20% increases year over year, 22 over 21. That number in some of our properties goes over 40%. People are getting out and they’re shopping, dining, entertaining, they’re out there.”

Coradino also echoes how pure-play e-commerce companies are recognizing the importance of stores. “One of the things we’re seeing is that many online retailers are opening up brick-and-mortar. They’re looking now to establish what is a significant brick-and-mortar presence.”

GETTING SMARTER AFTER THE LOCKDOWN

However, since the pandemic, retailers have had to learn, or relearn, important lessons about how to operate stores. One is a concentration on experience.

“Service has to be very good, and that means the salesperson has to be knowledgeable,” says Werner. “You walk into a Sleep Number store, those are very well-trained people, and if they can get you into the store, they’re going to do a very good presentation, probably have a high conversion rate, and do a lot [more] up-sale than you would otherwise.”

Werner also says they have products in stores that aren’t available online. His company has a line available only in physical locations. “We’ve made those mattresses bigger, better … at a good price.” They’re coming out with a massage mattress. “That’s the kind of thing that will help get people into the store. People will want to come in and check this out. You can’t get that online.”

Batteries Plus has been in business since 1988 and has 720 locations across the country. They’ve made big changes since the pandemic: cleaning up sightlines and adding better signage and digital displays. “They come in with a need, I need this bulb or battery, but they may not know some of the other products and services we have,” says Craig McNair, the company’s chief retail officer. They replace batteries, fix phone screens, cut keys and fobs, and offer all sorts of lighting. Experiences and service are fine, but someone has to let the consumer know.

“So much of what our customers rely on us for is expertise,” McNair adds. “The gap in online shopping, let’s say you went to a competitor and bought a key fob for your car. They may send you the key fob, but if you didn’t order the right one, it wouldn’t work, and it still has to be programmed. We’re going to ensure you get the right product. That expertise becomes the pivot point for why a customer wants to come into the store.”

Make life easy for the consumer. Provide for curbside pickup and easy-to-find orders that started online. “I’ve got 35 years in retail,” McNair says. “It’s about experience, multichannel, to get products and services in the ways you want to get them. We want to make sure you’re getting the most out of their investment.”

Making retail work is also a partnership with property owners. “The reason we’re doing so well and why we rebounded so nicely is that we worked with our tenants individually,” says Wesley Dodd, senior asset manager at Armada Hoffler. Even with deferrals, “they all paid them back, which means they’re doing as well if not better because they have to pay their current rent.” The company did lose some tenants, either ones that gave up or others that the REIT decided wouldn’t ultimately work and which may have already been struggling.

While retailers need to reorganize inside, property owners have to make the exteriors attractive to consumers. “All of our properties are Class A, maybe more seasonal landscaping, more pressure washed more often,” Dodd says. Offer drive-through spaces where possible because it helps certain types of retailers and becomes an attraction for them. “I’ve talked to a couple of national [fast casual] restaurants and they see anywhere from 40% to 60% in sales increased when they include one.”

With retailers and property owners all doing what they need to, brick-and-mortar is beyond an antiquated way of doing business. It’s the skeleton on which a retail business hangs—and thrives.