The U.S. retail industry isn’t just “over-retailed.” It’s worse that than. It’s “under demolished.”
That quip from Naveen Jaggi, JLL, one of the panelists on this morning “eTail” session at the Localogy 20/20 virtual event may seem a little bit flippant. But it drives to the heart of the perfect storm the retail world now faces. Many of the problems retail faces predate the pandemic. In particular, the acute oversupply of retail space was a big issue pre-COVID. As it has with so many other things, COVID has ripped the bandages off of retail’s festering wounds and exposed them to the elements. Sorry about the graphic imagery. But it seems apt.
We had two experts on this morning with moderator Dan Hight to examine the state of retail in the pandemic. What is the fallout and how can retailers adapt and, dare we say it, even thrive?
Jaggi is President of Retail Advisory Services at the real estate investment firm JLL. Ken Madsen runs Mad Creative Production, which advises brands on digital transformation.
The conversation touched on several major points around the pandemic’s impact on retail and offered a dash of hopefulness alongside the sobering reality about what happens next.
First, Sobering Reality
As Naveen noted, the U.S. at least, had a massive overcapacity of retail space well before anyone heard the term COVID-19. In fact, the U.S. had more than 2X the per capita retail square footage as developing markets.
He expects a few things to happen. Much of the retail space that is shuttering will never again be used for retail. This could result in significant blight without creative repurposing, or as Naveen noted, demolishing.
“Don’t look for that empty J.C. Penney to be tuned into another retail business,” Naveen said.
We’ll say more on the repurposing notion below.
Another reality that Naveen expects, based on the experience of the 2008-2010 downturn, is that consumers will “downshift to value.” This means more Dollar General. Less Restoration Hardware.
And because of changing consumer habits, demand for physical retail is just unlikely to ever return to pre-pandemic levels.
Ok, Now for the Signs of Hope
Physical retail will never disappear. Naveen recalls reading a magazine cover story a few years ago about “retail armageddon.” By a few years ago, he means 1998. Point is, we’ve been here before and retail always recovers.
That’s not to argue that the “new normal” (I’ll pay the fine later for overusing that cliche) will not mean less physical retail. Or that shopping behaviors won’t have changed.
“Without a doubt, we will have a hybrid way of doing things,” Ken said. “Are 20% of us doing eCommerce? I think it’s more. Whether that becomes 70/30 or 75/25, real estate will come back. Because we miss it.”
It’s true that many physical retail locations may never again be occupied by stores (as noted under “Sobering Reality”). But that doesn’t mean we won’t see creative uses of space. One example the panelists cited involved covering the widows of a retail brand’s shuttered locations into media space. This particular brand had shuttered the stores to cut costs but still had months remaining on their leases. They offset some of this cost by posting advertising messages on the windows.
We could also see the creative use of large shopping malls. Residential developments, performing arts space, last-mile logistics warehousing, and so on. “How to repurpose these shopping centers will be the big play over the next five years,” Naveen said.
Ken also predicts that native online retailers may swoop in to occupy abandoned retail space, taking advantage of the favorable terms. “I can see a million etailers, maybe 5%, convert to retail,” Ken said. This is a move that Shopify may help facilitate for its community of small online retailers.
“I am looking at a glass that is half full in terms of what we can do with this repurposing,” Ken said.
This Might Be a Good Time to Adopt New Technology
Another positive is the way in which the pandemic has accelerated the digital transformation of retail businesses of all sizes. And of course, as has been noted throughout the day, the businesses that are unwilling to adapt are not long for this world.
“The key to retail is flexibility and the ability to pivot,” Ken said. Actually that seems to be the key to everything right now.
Ken actually sees this acceleration of tech adoption as an opportunity for smaller retailers.
“Small businesses are more agile,” Ken said, noting there are more than 8,000 martech solutions out there for SMBs to choose from to help them with everything from point of sale to mobile payments to CRM.
“Small businesses can use this technology to seem bigger than they are,” Ken said. “And to connect online to offline.”
eTail Triggers Retail Transformation
Six months ago, eCommerce was on an expected linear trajectory of growth. That curve has been disrupted. Even before COVID-19, retail was undergoing restructuring. With the explosion of eCommerce and the implications of COVID-19, the size, scale, configuration, and experience of retail will be radically altered.Speaker(s):
Naveen Jaggi, JLL
Ken Madsen, Mad Creative Production