Retail Revolution

This is an HTML version of an article that ran in the May 2014 issue of Real Estate Forum. To see the story in its original format, click here.

South Moon Under offers a mix of men's and women's clothing, swimwear, accessories, jewelry and gifts for the home. The company currently has 21 stores in Maryland, Delaware, Pennsylvania, Virginia, New Jersey and New York and is pursuing growth on the East Coast and online. What's different about this retailer? Though the customers range in age and gender, the sweet spot, according to the firm, is a 20-to-30-something who is well educated, has a good job and loves fashion, art, music and great dining. “It is a rare niche,” says the retailer.

What sets the company apart from others, according to Jay Lepselter, director of real estate, is that it differentiates with its buyers, “doing a superb job of editing the lines that we carry, matching their buys to our customers' taste, and provide unparalleled boutique-quality customer service in an upscale shop environment.”

Another retailer, Earls Kitchen and Bar, gears everything, from menu to décor to staff, toward attracting its target customer—Millennials. And another, Flywheel Sports, began as a simple idea of creating “making indoor cycling epic.”

What do these companies have in common? They are just a few of the many retailers that are more specialized and niche oriented, a trend that Wilson Commercial Real Estate president Scott Burns says is quickly becoming a national movement. “To compete in today's retail world—against other brick and mortar stores and the Web—retailers must really differentiate their offerings,” says Burns.

There has always been niche retail—with places like Whole Foods, Lululemon apparel, Sunglass Hut, to name a few, but according to Burns, “today with income disparity, the Internet retailers are picking a segment of the market and focusing on it. They're doing everything they can to tailor the experience to meet their respective customers' needs.”

Faith Hope Consolo, chairman of the retail group at Douglas Elliman in New York City, tells Real Estate Forum that the old mantra, “location, location, location,” has given way to “experience, experience, experience.” Brick-and-mortar retailers have realized that they must be entertaining 'places' to shop to attract customers, she explains. “And online retailers have come to understand that they must add a physical component to broaden their audience base.”

Another example is Union Market Tustin, a new concept at the District in Tustin, CA, whereby a company is converting a former Borders space into a 22,000-square-foot artisanal marketplace of independent gourmet food, fashion and lifestyle businesses. Union Market Tustin will offer a combination of independent retail and restaurant concepts with a variety of indoor and outdoor communal areas for gatherings and events. The concept's founders have done this successfully in two other places in the US—OC Mart on 17th Street in Costa Mesa, CA, which served as the seed idea for the ultimate partnership in the OC Mart Mix, followed by the recently opened Market LV in Las Vegas.

Union Market Tustin is the brainchild of Andrea and Russell Young. Andrea Young tells Forum that the concept was originally inspired by the Ferry Building Marketplace in San Francisco. “I was a store owner when the market dropped. I was paying very high rent on a large space and my husband and I came up with an idea to offer stores small square footage, all under one roof, living off each other's synergy,” she says. By offering spaces that range from 200 square feet to 3,000 square feet, Union Market Tustin seeks to provide independent businesses a launching pad and attract tenants of emerging artisans and brands, says Young.

Current tenants at Union Market Tustin include Hatch, Rolling Boil, Grain and Vine, Taco Bandito, Olive Oil and Beyond, Kettle Bar, Oh Hello Friend, Timree, Luella, Le Pop Shop, Front Porch Pops and more. And according to Young, who refers to the concept as “retail revolution,” there are no plans of slowing down. “We absolutely plan to expand to more locations.”

Landlord Vestar embraced the concept because it expects the niche retailer will drive traffic to the center. Jeff Axtell, VP of acquisitions and development at the firm in L.A., tells Forum that “independents are important to the District at Tustin Legacy because it complements our existing tenants, creating the variety that the market demands.” He adds that “by giving shoppers variety unavailable at nearby retail centers, it entices them to come to the District for a different experience…it differentiates us from the other retail centers in Tustin and Irvine.”

According to Axtell, retailers are experimenting with different concepts, increasing service and spending dollars on their interior look in order to be more competitive to fight for consumer dollars, “especially when the economy is weak like it has been for the past several years.” Axtell says retailers are also experimenting with pop up stores to test concepts before they commit to major roll-outs.

“Niche retailers offer the consumer an alternative to the traditional national chain store,” he adds. “They offer a more eclectic mix of merchandise that is unique. It's a small-lot concept versus the mass marketing-type retailer.”

If they're not being (super) niche focused, retailers are finding other ways to differentiate themselves. For example, fashion retailer C&A Brazil took real-life data from Facebook and threw it back into the physical space. The company's FashionLike clothing hangers tally up online Facebook “Likes” with clothes available to buy on the shop floor.

At last year's ICSC RECon 2013 event, Randi Zuckerberg, founder and creative director of Zuckerberg Media, says this example was a retailer's way of taking advantage of tech innovations to separate yourself. “Consumers are motivated by putting games to everyday events,” she told attendees during her keynote presentation at the event.

And in another example, a year or so ago, a retailer came out with a scale that could be configured to auto-tweet each weigh-in along with the number of pounds you need to gain or lose to reach your goal. “It's about motivation,” said Zuckerberg, “something retailers should take advantage of.”

Gamification is a current-day example of retailers attempting to find a “hook” that will resonate with the customer, explains Lew Kornberg, national practice lead of retail tenant representation at JLL. “In many respects, it serves the same purpose as an old-fashioned coupon. The distinction is the 'bait' that has been cast on the actual hook—games are just a means to engage the customer. The more engaged and interested shoppers are in a competitive landscape, the more likely they are to remain active and loyal.”

Another stand-out concept is retailers that are making consumers feel like part of a collective. REI, for example, has a membership, where benefits include an annual refund—typically 10% on eligible purchases. Or the concept of contributing to a cause, like Toms, where buying certain products gives back and helps fund educational programs for children and adults worldwide.

There has never been a more empowered and connected consumer, adds Kornberg. “As such, retailers have been forced to raise their 'game' in an effort to stay relevant in the eyes of their existing and prospective customers. Differentiation has become a 'must' among retailers who want to remain competitive, but differentiation has to be thoughtful and meaningful to the consumer in order to work.”

For retailers to remain relevant and competitive, Kornberg says, “their point of differentiation has to provide value—be it real or perceived, service based or tied to its product.” The difference needs to matter, and if it does not, he adds, shoppers can and will take their business elsewhere.

“I think John Naisbit, author of the book Megatrends , had it right when he identified 10 trends, one of them being 'high tech/high touch.' Naisbit's premise was that with the increasing use of technology in our work and lives, people would seek more high-touch human experiences and interaction,” explains Gary Smith, SVP of asset management at Passco Cos. “In today's retailing environment, the most successful retailers have to win the hearts, minds, and most importantly, the pocketbooks of consumers.” And in this day and age, he says, “They not only have to do this in the physical realm of their brick-and-mortar store, but also in the many layers of the digital realm as well.”

Smith adds that consumers have become more demanding of a “total” shopping experience. “They not only expect great products at reasonable prices, but also high service in all facets of their shopping experience, including in-store, online and via telephone.”

An example of a retailer that is winning in this high-tech/high-touch race, according to Smith, is Chico's, which has created an inviting and classy in-store experience, a well-designed web presence with both its website and mobile website, as well as a “solid” mail-order catalog-based component of its business, which offers clients special print and digital coupons along with exclusive client-only events.

Chico's has also kept the human touch element alive with personal phone calls and follow-up on shopping experiences, Smith adds. “They really have done a fantastic job of integrating their brand across all channels and allowing the customer to choose their most desired path.”

It's all about omnichannel retailing, explains Douglas Elliman's Consolo—knowing your shopper (by leveraging technology) and customer service. “Look at a Bonobos or Warby Parker, e-tailers turned retailers—they understood that people are social animals who want to shop in groups and talk to each other as they do so,” she explains. “Meanwhile, the highest-end designers are offering their goods online, understanding that the affluent are as time-pressed as everyone else.”

All are using the data they collect to better serve shoppers—sending targeted email and text messages, and even using the information to determine new store locations, she continues. “And the power of a personal relationship and service (from offering wine in boutiques to associates informing shoppers of sales early to the genius of the Genius Bar) keeps them coming back for more!”

According to Garrick Brown, research director of Terranomics, e-commerce is about convenience, and it's creating significant shifts in the retail marketplace and will continue to do so. “Mid-priced, hard-goods retailers will be most heavily impacted,” he says. “Yet, even as those sectors are moving to contraction or no-growth mode, we are seeing strong growth from food users (restaurants and grocers), service retail and entertainment concepts.”

Gary Smith, SVP of asset management for Passco Cos., says that one area that online retailers haven't been able to penetrate is the food and entertainment sectors. “Convenience will continue to be a major driver for the consumer. This is why you are seeing traditional soft goods retailers such as Target, for example, incorporate grocery stores within their existing footprints. The thought being, if you can attract the consumer to your store by offering discounted grocery items, they are more apt to buy other soft-good items in that same trip. This creates an added convenience factor since they are already at the physical location, making it easy to purchase other goods that they might otherwise have purchased online.”

The smart players, Brown says, are adapting and they are who will survive and thrive. “But the evolution of the marketplace will hasten the demise of the weakest links.”

With all that being said, Brown says a tsunami of store closures and failures is not coming, but a wave is. “Footprints will shrink for most retail categories in the years ahead, and many categories—but certainly not all of them—will be in contraction mode.”

With the smaller formats, though, retailers are not cutting down on their showroom space but instead, are reducing the amount of inventory they keep on hand, says Smith. “Successful brick-and-mortar retailers have embraced technology, instead of trying to combat it. By using online price matching and mobile apps, as well as allowing customers to make in-store purchases and having the items shipped directly to the customer, brick-and-mortar retailers have been able to reduce their operating costs and remain competitive.”

Essentially, Smith adds, these retailers are utilizing their brick-and-mortar stores as showcases for their products. “Retailers are aware that consumers are using their stores to inspect merchandise and then utilizing the Internet to compare prices.”

JLL's SVP of national retail tenant services, Michael Hirschfeld, also sees a significant impact that e-commerce has on bricks-and-mortars, “specifically when retailers redirect their resources, as when traditional CAPEX for new stores is moved to developing a greater Web presence.”

Hirschfeld points out that companies whose model was e-commerce only are moving into a brick-and-mortar experience. “The most successful retailers are always striving to create an 'experiential' environment—making the visit to the store a memorable experience. With so many people having so little time to shop, retailers have to do more with less—they need to make the trip to the store worthwhile.”

That can happen through a number of avenues, he says. Social media, for example, can create a buzz about a “limited” opportunity. “A great emphasis can be placed on customer service and the interaction between customer and retailer oftentimes starts with a greeter at the door welcoming them in and helping to direct the consumer.”

Smith says that some of the most successful online retailers are in fact brick-and-mortar retailers, including Walmart, Target, Nordstrom and Macy's. “These retailers provide customers with what they want in today's consumer market: the ability to shop in the privacy of their own home, and yet, also be able to walk into a physical location and make returns/exchanges without having to go through the hassle of shipping items back. In many cases, consumers can go online, look for a specific product, and see which of their local retailers have it in stock, even narrowing it down to size and color, thus, eliminating the need to call multiple locations or drive all over town.”

One of the more visible of the offline-online merchants is the clothier Bonobos. They have opened brick-and-mortar “guide shops” that dealt with a very important flaw in online fashion sales—the need of customers to “touch, feel, try on” and just see what an item looks like in three dimensions, not two, Hirschfeld explains. “The original guide shops were tucked away in office buildings. The newest ones are on the second floor overlooking a shopping street or actually on the ground floor.”

The brick-and-mortar space is being filled with major brands looking to tell their story, their way, Hirschfeld explains. Brands occupying larger flagship stores that interactively sell to the consumer and the continued growth of “shopping as entertainment” are trends that appear to be accelerating as retail continues to re-invent itself, he says.

Nike, as an example, is available through just about every channel imaginable: direct-to-consumer, multi-brand footwear stores, specialty footwear stores, department stores, etc., Hirschfeld says. “Yet, in New York City alone it has committed to a major flagship store in Soho, and another relocation of a flagship on Fifth Avenue. The company is creating the Nike experience as both an event and a branding tool.”