Taming The Internet

Retailers are getting better at integrating online and physical store operations to boost sales and promote their brands. Joel Groover/Shopping Centers Today - The fear once was that Internet sales would lead to the shuttering of brick-and-mortar stores. But this assumption is being turned on its head as chains go all out to make sure their physical stores and online channels feed off each other. “We have repeatedly heard from retailers that online sales are directly influenced by the presence of a physical store in that market,” said David E. Simon, chairman and CEO of Simon, in an earnings call. “When the retailer opens a physical store in a market, they see their online sales increase, and likewise, if they close the store, they see their online sales in that market decline.” Similarly, Conor C. Flynn, president and CEO of Kimco Realty Corp., told analysts during his company’s earnings call that physical stores have “proven to be a driver of online sales.”

Does this mean that retailers everywhere now want to lease as much space as they can to bolster their online businesses? Naturally, the situation is quite a bit more complex than that, experts say. Nonetheless, many observers do agree that the relationship between brick-and-mortar stores and online channels continues to tighten in ways that highlight the enduring value of real estate. “Retailers with both a physical and e-commerce footprint are starting to understand how they complement each other and are seeing incremental increases in both,” said Jonathan Spooner, a retail strategist at Intersection, which specializes in helping clients connect the digital and physical platforms. J.C. Penney CEO Marvin Ellison reportedly put the brakes on Penney’s store-closure plan this year in part because shuttering stores could harm the retailer’s surging online business. Dick’s Sporting Goods, too, puts a priority on using stores to support its fast-growing e-commerce channel. The chain continues to chart stronger online sales in markets where it operates physical stores, Spooner says.

“Today shoppers are starting to prefer ordering items online and picking them up at the store, because it’s convenient and allows them to save on shipping costs,” Spooner said. Research by eBay Enterprise, an omni-channel operations provider that tracks data from millions of online orders annually, shows that physical stores fulfilled 72 percent more online orders during the 2015 holidays than in the comparable period in 2014. “The numbers point to the value of using stores as the final step of an online order,” Spooner said. In particular, he says, so-called click-and-collect programs, in which people order items online and then pick them up at a store, are increasingly popular and hinge on maintaining physical locations close to consumers.

Operating physical stores can also bolster brand awareness in ways that provide a competitive edge in today’s media-saturated marketplace, according to Michael McGrail, COO of Tiger Capital Group, an appraisal and disposition firm. “It is hard enough to get people’s attention at the mall, but it’s doubly difficult if you’re Internet-only,” McGrail said. “Well-located stores showcase your brand. When consumers think of you first, you’re more likely to see this translate into an online or in-store sale.” This is part of the reason formerly online-only retailers such as Warby Parker, Bonobos and even Amazon are now opening stores in densely populated metropolitan areas, McGrail says.

Barnes & Noble, Bloomingdale’s, Foot Locker, Macy’s, Nordstrom and Walmart, to name a few, are also using their stores as fulfillment centers for same-day delivery of online orders. As time passes, more shoppers will begin expecting conventional retailers to deliver online merchandise with such efficiency, says Fred Schmidt, president and COO of Coldwell Banker Commercial Affiliates. This “battle of the supply chains,” as Schmidt calls it, gives certain retailers even more reason to continue leasing space from landlords. After all, without fulfillment hubs close to their consumers, these chains will lack the ability to offer faster and cheaper delivery of online goods. In June of last year, Coldwell Banker Commercial Affiliates worked with Harris Poll to survey roughly 2,000 Americans in a bid to better understand shifting consumer expectations. According to the survey, 50 percent of the respondents -indicated that they are more likely to buy something online if there is a same-day delivery option, and 40 percent said they now expect this option to be available when they shop online.

The survey results point to another potential reason for omni-channel retailers to think twice about closing stores: Overall, nearly 70 percent of the respondents said they prefer to make purchases in physical stores rather than online. Perhaps surprisingly, this was most true of the younger, so-called “digital natives” who grew up using the Internet and smartphones. According to the survey, 72 percent of Millennials (age 18 to 34) indicated that they prefer to shop in physical stores, versus 65 percent of Gen-Xers (35 to 49) and 68 percent of boomers (50 to 69). “What we see in 2016 and beyond is the continuing importance of the consumer experience,” Schmidt said. “When people go to malls and stores they want fun, food and beverages, in addition to shopping. That blended approach is very important.”

But while certain chains might seek to support their online efforts by leveraging stores, the reality is that many others — Abercrombie & Fitch, Aeropostale, Barnes & Noble, Macy’s, Office Depot and RadioShack among them — have shuttered stores over the past few years. It is quite a contrast from the blistering pace of retail -expansion that occurred all over the world in the 1980s and ’90s, says Lee Peterson, executive vice president of brand strategy and design at WD Partners. “When I started at The Limited in 1980, we had 200 or 210 stores,” Peterson said. “When I left in 1991, we had 4,500. In a 15-year period, The Home Depot opened almost 2,000 stores, Walmart almost 4,000.”

In a market like Columbus, Ohio, national retailers no longer need to scatter stores across the entirety of the metro area to be competitive, Peterson says. Instead, a smaller number will suffice to keep brand-recognition alive and to function as hubs for returns, product pickups and shipment of online orders. “If, say, Staples were to go completely dark in Columbus, certainly that would negatively affect its online sales,” Peterson said. “But that does not mean Staples has to operate 35 stores in the market.” Nor do higher-end brands always need to operate at multiple malls in such markets, Peterson says. In Columbus, most of the regional malls that were popular during the ’80s and ’90s have gone belly up, and so retailers -moving into Columbus tend to see only one property — Steiner & Associates’ Easton Town Center — as offering the sort of flagship-quality space needed to showcase their brands, Peterson says. “At Easton you’ve got brands like Tesla Motors, Kate Spade, Nordstrom or North Star Café — which is a cool, fast-casual restaurant,” he said. “Most of Easton is outside, with a streetscape and other things going for it. In the meantime, all of these other malls have gone out of business.”

Relative to the past, in other words, the demand for retail real estate is still greatly reduced. If today’s retailers have growing appreciation for the way brick-and-mortar stores can support their multichannel business models, this should be kept in realistic perspective, Peterson says. Even as some chains close stores, after all, Internet sales continue to grow. Peterson cites an Adobe Systems report noting that Thanksgiving 2015 sales for U.S. e-commerce websites jumped by 22 percent over the previous year. “That is just a phenomenal increase,” he said.

Last, if operating physical stores helps retailers’ online sales, a key question is whether this is actually good for landlords, according to retail consultant Jeff Green, who heads an eponymous firm in Phoenix. “For the retailer, what really counts is overall sales and market share — you have to assume that if you’ve got the sales, whether from online or brick-and-mortar, you will have the profits,” he said. “But landlords are not getting as much out of this. If you look at brick-and-mortar sales overall, they are flat at best.”

These days, if an in-store shopper cannot find shoes in her size, a sales associate armed with a tablet can order them for her. But will this online order count toward the landlord’s percentage rent of in-store sales? Retailers and landlords are still hashing out such questions, says Holly Rome, an executive vice president and director of retail leasing and property services at JLL. “If the retailers aren’t tracking sales made online in the store, it affects the overall occupancy costs and value of the center,” Rome said. “In cases where JLL has structured deals for percentage rent, the exclusion of such sales revenue also negatively impacts the percentage-rent margins.”

From JLL’s perspective, all sales generated or fulfilled at stores should be tracked and counted, even if the Internet is involved, Rome says. This is easier said than done, however. “One of the challenges is in tracking the online sales that are directly influenced by the retail store and made online while at the store,” she said. “Whether the purchase is made on a personal device or a device provided by the store, and with or without the salesperson’s help, the store is generating the sale. It should be attributed to that store’s sales volumes.” Retailers do not necessarily agree. “We’re starting to see retailers putting language into leases to protect themselves with regards to omni-channeling,” Rome said. “This is presenting new challenges in negotiating leases on the landlord side.”