Robin’s Blog

The Great Retail Demassification

RR Retail DemassificationThe Death and Diminishment of Malls and Other Big Footprints

We are on the edge of the Great Retail Demassification. Prior to the “great disruptor” (that would be the Internet), and before the marketplace became ridiculously over-stored and over-stuffed, consumers were well served by massive regional malls (currently numbering about 1200), in which retailers located their stores and to which consumers travelled enthusiastically. To steal a line from the movie, “Field of Dreams,” retail growth strategy during the pre-digital era could truly be based on nothing more than “build it and they will come.” And they did. Fast forward: consumers have every retail store in the world resting comfortably in their pockets, just a key-tap away, wherever they are and whenever they choose to shop for exactly what they want. Why, then, would anyone spend the time and money to travel to, and shop through the malls; or for that matter, any large, impersonal, traditional retailer?

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Be sure to catch Robin Lewis on the CBS Sunday Morning show discussing the state of the American mall!

The period of mall “massification” was enabled by the construction of 54,000 miles of the interstate highway system in the mid-1950s, which also catered to the shopping desires of highly mobile and “motorized” families, eager to hop in the car and spend entire days shopping in these brand new social gathering spots. Initially, and for the following few decades, malls were a shopping novelty and paradigms of modern architectural retail temples. The 50s also marked the onset of the massification of department stores, and national chains anchoring the malls, and the growth of retail specialty chains required to further populate these shopping meccas. Then there was the explosion of strip malls — homes to the massive “big- box category killers” such as Toys R’ Us, Home Depot, Bed, Bath & Beyond — and discounters, Walmart, Target, ad infinitum.

And they kept building and building and building. And consumers kept coming and coming and coming … until they didn’t.

But this virtuous free-market cycle didn’t come to an end until we had built enough total retail space to divvy up 46-square-feet of it for every man, woman and child in the US; along with more “stuff” jammed into that space than anyone would ever need in a lifetime (for context, the UK has about 9-square-feet per capita). So, into this environment of total retail saturation — in which retailers exist in a constant state of cutthroat competition and price wars to win the consumer’s wallet — the great Internet disruptor enters. And its full-blown effect was like pouring gasoline onto an already-out-of-control fire. Try to compute how many square feet of retail space some five billion e-commerce retail sites have added to the congestion. Then add to this the unprecedented Great (no recovery) Recession, and we are now on the edge of witnessing a massive elimination, downsizing, or repurposing of brick-and-mortar stores, and the malls and shopping centers that house them. Finally, finally, and finally, maybe this industry will get rid of a lot of excess and bring some sane equilibrium back to supply and demand.

Indeed, this is the era of the Great Retail Demassification.

RR retail demassificationPlus, It’s What the Kids Want

This demassification and/or downsizing is not the sole result of e-commerce stealing share from brick- and-mortar retailing. It’s also being driven proactively by savvy retailers who understand the shifting desires and expectations of consumers, and particularly the Millennial generation who will drive roughly 40% of all retail sales by 2020. Smart retailers are listening, hearing, and responding to the zeitgeist of this new culture. Less is more for Millennials, and quality of lifestyle is desired over big quantities of everything. Smaller, intimate, and interesting environments trump massive, overwhelming space and choice. High-tech and even higher-touch experiences are requisites. Ostentation is eschewed for the understated. “Special-just-for-me,” highly personalized brands beat out publicly displayed badges of luxury. And social gathering places don’t need physical spaces. These are but a few of this younger culture’s many new mantras.

Finally, with 24/7 shopping access to everything in the world in the palms of their hands, the only way a physical store can tear them away from such convenience is to provide an incredibly compelling social and experiential community that they will want to seek out. So the disruption of e-commerce, adding virtual square footage to an already over-saturated marketplace still struggling from the recession, along with the shifting shopping desires of the new Millennial consumers, is driving the following strategic and structural changes in the retail landscape:

1. Recasting Regional Malls, Shopping Centers and Strip Malls

The health of these shopping venues, both large and small, depend on the health of the retailers who populate them, who in turn, depend on the economic health of the consumers who shop their stores. On a purely economic basis, the financial strength and growth potential of these venues and the retailers within them parallels the polarization and widening income gap of consumers. Thus there exists a bifurcated economic retail structure: upscale/more “wants” driven; and downscale/more “needs” driven. In both cases, the slow-to-no growth economy has a negative impact.

2. Upscale, More “Wants” Driven

With few exceptions, upscale brands and retailers are struggling to find new ways to grow. Even luxury nameplates, including Nordstrom, Saks 5th Avenue and Bloomingdales, have largely replaced full-line store openings with outlet store expansion. Shopping mall hosts will realize minimal opportunity for growth across the spectrum of higher-end retailers, and at the very worst, may systematically lose tenants who are downsizing their store count, pursuing a smaller footprint, and opening free-standing stores in local neighborhoods or within the mixed-use “village lifestyle centers” that are sprouting up. These new retail options provide quicker and easier physical access for time-pressed consumers; enable the store to better localize and narrow its assortments; and facilitate omnichannel shopping — ordering online and picking up in a more human-scaled, accessible store.

David Simon, CEO of the Simon Property Group, the largest mall owner in the US (most of which serve upscale customers), was quoted in CNNMoney. He “…admits growth in the United States is limited, even going so far as to say some lower-end malls around the US could close.” In fact, Simon is spinning off its strip and smaller malls into a REIT so it can focus on its larger and premium malls and centers to refurbish them and introduce new ideas to elevate the shopping experience. He mentioned his intent to make the malls more technologically sophisticated, acknowledging the new competitive pressures from e-commerce. He said, “Ideally what I’d love to do is know when our best customers are in the mall. If you show up I want to deliver a free latte to you [and] I know exactly what kind of latte you want.”

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So growth for the upscale malls and centers and their retail occupants will be slow at best, combined with the constraints of capital required to make major investments in creating compelling entertainment meccas. Even so, over time these reinvented malls could lose a substantial number of tenants seeking alternative neighborhood locations (both urban and suburban) with smaller footprints that provide greater personalized experiences and easier access for targeted niche consumer segments. And these local stores also become convenient omnichannel distribution centers, interchangeable with e-commerce for shopping, ordering, purchasing, paying, pick-up, returns and delivery.

3. Downscale, More “Needs” Driven

The malls Simon is spinning off are anchored by the likes of Walmart, Bed Bath & Beyond, Burlington Coat Factory, Ulta, JC Penney and Sears, just to name a few. This move could also suggest that Mr. Simon foresees a more intensely challenged future for this sector.

Obviously, the economy is having a much greater impact on consumer spending in ‘B’ and ‘C’ malls. And, certainly e-commerce, particularly Amazon, provides lower-priced access to these shoppers. So the economy and the accelerating growth of e-commerce will force many retailers in these malls to close their stores, if not to go out of business altogether. Thus, many of their mall hosts will in turn be shuttered or re-purposed, continuing to replace traditional retail tenants with more walk-in medical clinics, health and wellness centers, video game complexes, bigger Cineplex theaters with more 3D Imax screens, university extension schools, Boomer walking trails, and so forth.

Similar to the upscale retail sector, many big-box discount stores are de-massifying and opening smaller stores, and more of them, to be closer to where their consumers live. For example, a big part of Walmart’s share loss over the past several years has been to the rapidly expanding dollar stores, such as those operated by Dollar General, Family Dollar and others, now numbering about 15,000 across the US (vs. about 4,300 Walmart and Sam’s Clubs). This was due to the fact that the Dollar stores are more accessible, located in their customers’ neighborhoods. Struggling from paycheck to paycheck, these consumers opt to buy smaller quantities more frequently rather than spending time and gas dollars to drive out to Walmart. Walmart has responded by aggressively opening smaller Walmart Expresses, 15,000-square-foot, freestanding neighborhood stores.

Target has launched Target Express. Home Depot has its “lite” urban stores. Staples is rolling out 4,000- square-foot stores having researched that 90% of the revenues of their larger stores can be achieved in a smaller space. This has led to the need to re-purpose their big-box doors; one idea reportedly being developed is the use of space for yoga classes.

Finally, just as their upscale brethren, these retailers are using big data, technology, and omnichannel synergies, to provide more localized, curated and narrower assortments in smaller, more easily accessible stores — destinations for shopping as well as for use as distribution centers.

The New Exclusivity Paradigm

The retail paradigm is shifting in favor of an infinite number of finitely segmented consumer niches, being served by an infinite array of finitely focused brands. Three dynamics are working in tandem:

  1. Mass markets are in decline. Because of unlimited choice, consumers are seeking exclusivity. They want things that are special, just for them.
  2. The consumer’s ability to demand exclusivity is enabled by an infinitely fragmented and dispersed media and marketing infrastructure, including the explosion of new channels of distribution, the Internet and mobile commerce.
  3. Technology is further enabling consumers’ demands for exclusivity. Superior information, logistics, and distribution technologies are elevating supply-chain capabilities to support multiple market and brand segments as well as smaller exclusive niches, including different merchandise mixes according to geographic preferences.

The Future Is Present

Pick your niche, or if you are massive, de-massify by segmenting into niches. Create differentiation and awesome experiences for each niche. Distribute the total value of each on all possible physical and digital platforms. Embed technology into every element of your value chains, including POS augmented reality technologies. Build, understand, and mine big data to personalize products and service beyond consumer expectations.

You see it coming. Now, do something about it.

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