What apocalypse? Southern California retailing has a new sweet spot

Dan Sheridan comments in this OC Register article.

What apocalypse? Southern California retailing has a new sweet spot

Jonathan LansnerSeptember 3, 2018 at 10:17 am

You could say that dining out saved the Southern California shopping center.

Yes, the downfall of many brand-name merchants has spread pain to employees, suppliers and retailing landlords alike. However, broader employment trends paint a different picture: The modern retail landscape is evolving into one that meshes our love of food with old-fashioned merchandising.

Ponder what my trusty spreadsheet found in the four counties covered by the Southern California News Group: Retail jobs have made a sharp move to restaurants, pivoting from traditional retail stores.

Traditional merchants in Los Angeles, Orange, Riverside and San Bernardino counties averaged 757,000 workers in the three years ended in July, up 74,717, up 11 percent vs. 2000-2002. Hiring growth has been scattered as old-line department stores and book and entertainment retailers saw steep declines that were countered by hiring at smaller, general merchandise and specialty stores.

Yet Southern California’s retail sweet spot is its restaurants. They added nearly three times as many workers — up 229,000 since 2000-02 to 617,500, a 59 percent jump.

That’s swift growth compared with how the rest of Southern California’s bosses hired, adding 647,000 jobs since the turn of the century, up 12 percent — yes, the same hiring pace as brick-and-mortar merchants.

All told, one-third of Southern California’s hiring this century was at traditional stores or eateries. Now while large share of hiring might say something about the overall health of the broader economy, what it doesn’t say is “apocalyptic” retail industry collapse.

“Retail isn’t dying, it’s evolving,” says Butch Knerr, president of Irvine Co.’s shopping center division.

Fresh thinking

Five years ago, Kim Gros felt her Long Beach neighborhood was lacking the communal gathering places she embraced during her European travels. She wanted to change that.

Oddly, she had zero retail experience as she was a corporate human-relations professional. And she couldn’t find anyone who’d take her vision seriously until she stumbled on Howard CDM, a construction firm that owned a rare empty lot on Long Beach Boulevard in the Bixby Knolls neighborhood.

A chat about that land became a series of brainstorming sessions and ultimately a partnership that built SteelCraft, a smaller spin on the trendy food halls. This one features merchants selling out of old shipping containers — a stylistic fit for a port town, Gros says.

“We just started to dream,” she says.

Food at yesteryear’s retail complex was an afterthought. Remember the 1980’s food court with barely edible grub? Today, in many ways, food is what draws the crowd.

Retail’s buzzword in 2018 is “curation” — picking a marketable mix of shops and/or eateries that say more than just “spend money here.” It’s an endeavor that often means a shopping center’s owner is taking risks on new concepts run by rookie entrepreneurs.

“Who do we bring in to dream with you?” Gros says. “You want people who are authentic, not just someone who can pay the bills.”

The merchant lineup at SteelCraft touches popular themes — pizza (Delano), BBQ (Pig Pen), craft beer (Smog City) bistro coffee (Steelhead), Asian (Tajima Ramen), sweets (Fresh Shave and Waffle Love) … and a florist (California Petals).

Since opening day 18 months ago, there have been no flops. That track record is helping expand the SteelCraft concept to two more locales — Bellflower and Garden Grove, both of which should be open by year’s end.

But SteelCraft’s success is not just about ringing cash registers. The retail hub builds community appeal by hosting events most days, ranging from music to art to fun for kids. And dogs are very welcome.

The instant success does not stop Gros from dreaming. She knows that being innovative means that this year’s tactics won’t work forever.

“We have to make sure we remember who we are. Our values,” she says. “We must evolve. We cannot become old.”

Food fight

So why have restaurants grown from roughly one-third of Southern California’s retailing jobs at the turn of the century to nearly half of this industry’s work today?

Follow the money. Namely, my spreadsheet tells me dining out’s clout is growing.

Federal stats on consumer spending in Southern California show that in 2015-16, the average local household spent $3,760 on “food away from home.” Not only is that 22 percent more than the typical American family, it’s up $1,457 or a 67 percent vs. 1999-2000.

That’s faster percentage growth than the region’s overall consumer spending, up 53 percent. And in dollars terms, dining outgrew more than the spending jump on gasoline (up $1,224); food at home (up $1,038); education (up $864) or entertainment (up $702).

Now, consider the growth curve of online shopping, another thorn in the side of traditional retailing.

Government e-commerce sales estimates show Americans spent $383 billion online in the same 2015-16 period. That’s a stunning surge from $27 billion in 2000.

At the household level, that equals a click-and-ship move of roughly $2,800 per family so far this century — a painful hit to traditional merchants but also one that’s roughly double Southern California’s growth in dining out.

Demographics are powering food’s growing retail clout, notes Motti Farag who follows shopping centers for the brokerage CBRE in Newport Beach. Across Southern California, CBRE found 427 restaurant leases signed last year — up 43 percent vs. the previous six year’s average and a record high for the region.

Restaurants benefit from youth — millennials are convenience-oriented and don’t want to cook.  “We know what we like and we know what we don’t,” Farag says.

And there’s the growing Asian population, which brings new opportunities for new restaurants and new tastes. “It’s amazing how sophisticated diners we’ve become in the last 10 years or so,” Farag says.

Think small

At first blush, nothing could be farther apart than the retailing challenges faced by Gros at SteelCraft and those juggled by Irvine Company, owned by billionaire Donald Bren.

But no matter your development budget, today’s shopper makes the retail business tricky for all. And small is the new black.

Two years ago, Irvine Co. made a bold bet: It chose not to renew Macy’s lease at Irvine Spectrum Center. It promptly demolished the old-school department store.

“You can run scared or you can reposition the mall for the next 10 to 15 years,” says Knerr of Irvine Co.

The replacement, which debuted Aug. 18 as part of a $200 million mall retooling, is a new wing that will house 30 shops and eateries — a collection that Knerr predicts will bring in 10 times the sales of Macy’s.

Already, the new facility has drawn an expanded Apple Store and H&M clothing shop plus niche merchants — Stance (socks), Gorjana (jewelry), Denim Lab (jeans), SoHa Living (decor) and Concrete Rose and UnAffected boutiques. There’s the Ra Yoga gym and eateries Hello Kitty, 85°C, BLKdot, Afters Ice Cream, Falasophy and Robata Wasa.

And it’s not just about the stores. It’s also a place to simply hang out. Mature trees line a walkway that’s dotted with shaded seating areas. There’s also a half-art, half-jungle-gym for the young ones.

Irvine Co.’s new retail marketing chief Heather Nykolaychuk came from toymaker Mattel where she witnessed umerous missteps at Toys R Us, which recently flopped. Despite having ties to seemingly every young American family, the chain never embraced anything more than being a toy seller.

“I know it’s cliche, but it’s about the experience,” Nykolaychuk says. “People don’t just want to come and shop.”

Taxing challenge

If you think the new retailing paradigms are tricky for shopping centers to juggle, think of another odd partner in the Southern California game: local municipalities.

Cities are more than mere regulators of local retailing. They’re heavily involved because local sales taxes help fill government coffers.

Boosting retail was never easy, but it had become routine for city leaders. The goal: Make sure local shopping centers and/or auto malls were as full as possible and help woo those now-failing, brand-name retailers to town. The game has changed.

In Ontario, for example, the retooling of its downtown and entertainment districts will include an emphasis on food.

“Shoppers today are looking more for an experience than for a product,” says Al Boling, assistant city manager. “A product you get online. Not so with an experience.”

Temecula has long been a “foodie town,” says assistant city manager Greg Butler, thanks to nearby wineries. And cooking innovation helped the rebirth of the city’s Old Town tourist district.

Nevertheless, Butler says Temecula’s big local culinary breakthrough was a recent announcement that the Cheesecake Factory chain is planning to open at the local mall. An online posting of the news was the city’s “top social media item ever.”

Look what’s at stake for municipalities regionwide. Taxable sales totaled $288 billion in the four Southern California counties in 2016. That’s up $100 billion since 2000.

But the pace slowed. From 2000 through 2008, Southern California taxable sales grew at a 3.1 percent annualized growth. In the next eight years, increases cooled to 2.3 percent a year — a troubling trend as many cities face rising labor costs.

Online shopping hurt the sales tax take, as many consumers skip paying sales tax through e-commerce.

Cities are also missing out on services, which aren’t subject to sales tax. Consider a common shopping center lineup and see where today’s consumer are steering their dollars: gyms, barbers, beauty shops and other personal services.

What we are witnessing is more than just fallout from the coming of age of online merchants and the failure of many traditional merchants to properly react. Southern California shoppers have dramatically changed how and where they spend their money when they leave their home, too.

“Over the last 10 years food has become cool,” says Dan Sheridan of Newport Beach, a shopping-center consultant for Hoffman Strategy Group. “It’s no longer just three squares a day and you’re done.”