The following article was taken from the Journal of Corporate Renewal which is the official magazine of the Turnaround Management Association
For the past decade, much has been written about the transformation of retail—specifically, what it implies for the future of traditional brick-and-mortar retail. The prime driver of this disruptive force has been the evolution of omnichannel retail, which is rapidly changing consumer expectations and behaviour. Armed with greater access to information, convenience through technology, increased purchasing options, and the desire for instant gratification, consumers are no longer shy about taking their business elsewhere if a retailer isn’t meeting their expectations.
Most retailer real estate portfolios, as they currently exist, fail to satisfy modern consumer expectations. An effective real estate strategy begins with a clear understanding of the role that store location, size, and format play in optimizing the ever-changing customer experience. Gone are the days of reactive, single-store real estate decisions, which were historically based on static four-wall profitability analyses. To remain competitive, retailers must take a holistic view of the marketplace, using all available data and robust analytics to proactively develop and manage their real estate portfolios.
This article explores how evolving consumer expectations drive the need for change in real estate strategy development, evaluation, and execution for retailers to remain profitable and competitive on a go-forward basis.
Consumer expectation 1: convenience, convenience, convenience
Today, customers expect the ability to use the most convenient and hassle-free shopping channel available. In response, retailers must proactively optimize their real estate strategy to fulfill the expectations of this me-centric consumer. If retailers fail to meet this convenience threshold, they will quickly lose customers, often permanently. According to a recent Salesforce survey, 67% of customers say their standard for good experiences are higher than ever and 70% of customers believe that connected processes, such as seamless handoffs across channels, are very important to winning their business.
The authors’ firm has developed its own framework for understanding consumer expectations after tracking tens of thousands of consumers over the last 15 years and, more recently, via a survey of 3 000 respondents regarding retail customer expectations. Based on this research, every transaction between the consumer and the retailer can be broken down into five basic building blocks: access, product, price, service, and experience. Weighing consumer expectations in relation to each of these attributes will become critical to retailers’ strategic decision making in this new era of shopping, as retailers reassess their location strategy.
Ultimately, to establish customer loyalty in today’s environment, retailers must offer a convenient, hassle-free omnichannel shopping experience.
This finding suggests some important questions that retailers should consider when transforming their real estate portfolio. For a mall-based retailer, location within the mall is now a critical decision to fulfill buy online, pick up in store (BOPIS) purchases. Store locations that are further in-line (i.e., distant from external entrances) are less desirable for curbside pickup than locations by entrance points. Retailers considering a BOPIS offering must consider what the typical stockroom of the store looks like and if it is practical for use in filling a large quantity of orders in a cost-effective manner.
A key question underlying capital-intensive transformation plans is: Which brick-and-mortar locations are worthy of omnichannel investment? To answer this question, retailers must look beyond the traditional four-wall analysis approach to analyzing the financial viability of keeping a retail location. Determining whether a location by itself is cash flow positive or negative (via direct store sales) no longer makes sense in an omnichannel world, as this view ignores many important benefits of a particular store location.
These varied benefits are increasingly common. For example, companies like Target have been able to turn brick-and-mortar locations into fulfillment centers to maximize sales and delivery times in markets. Recently, Target announced that it fulfilled 95% of all sales (in store and online) from its physical stores and fulfilled 75% of online orders through in-store pickup, curbside pickup, or store shipment. In addition, some retailers, such as Bonobos and Nordstrom, with its Nordstrom Local concept, are using the front of house to feature products in a guideshop setting, with little to no inventory on site.
Consumer expectation 2: balancing in-person and digital sales
While there has been a significant rise in online sales as a percentage of total retail sales, the in-store experience will continue to play an integral part in a retailer’s brand image. Approximately 85% of retail sales still occur in stores, a figure that’s likely to stay significant for the foreseeable future. Even direct-to-consumer, digitally native brands such as Parachute, Brooklinen, and Hoka have identified the key role that the in-person shopping experience plays in establishing customer loyalty and recently announced store opening programs.
It is thus critical for retailers to understand the distinct contribution that physical and omnichannel store-related sales make to the bottom line and how each respective strategy can impact customer perception of the brand. When developing a real estate strategy, retailers should consider how the following characteristics impact their brand image:
- Store fulfillment capabilities. While considering the question of store omnichannel investment, retailers also have to decide, on a by-location basis, whether to adopt a guideshop model, where the store holds limited inventory and most purchases are sourced from a distribution center, or a traditional model, where higher levels of inventory are held in-store. The store concept decision needs to be made in conjunction with the greater omnichannel strategy for each geographic market. Additional factors to identify when considering store fulfillment needs are median household income, average age in the trade area, and proximity of the store to company distribution centers.
- Store format. Thoughtful store formats play a crucial role in steering the customer toward a purchase decision. Today, customers arrive in shop with access to a significant amount of pricing and inventory availability information, and retailers need to connect customers’ virtual and in-store experience in a seamless way. Many retailers, such as Bed Bath & Beyond and Ikea, have made significant investments to modernize and declutter store designs to meet the expectations of a better-informed customer. For example, in the case of Bed Bath & Beyond’s flagship store in New York City, high stacks of merchandise were replaced with lower sightlines, wider aisles, and neatly arranged products that create an at-home feeling and inspire customers to shop.
Mall quality and co-tenancy risk. The physical condition of a shopping center increasingly impacts the retailer’s brand image. Deferred capital expenditures, convoluted store layouts, or accessibility challenges, such as a lack of parking or external entrances, drive down foot traffic. Retailers must apply the same vigilance in assessing property quality as they do to the interior of their stores; both favorable tenant mixes—i.e., seeking out locations with tenants serving similar customer profiles—and well-capitalized landlords that are able to continuously invest in their centers are increasingly influencing store performance. It is thus crucial for retailers to look beyond base rent and assess the quality of the shopping center, co-tenancy compatibility, changing customer demographics, and ability to support an omnichannel customer experience when choosing a store location.
Consumer expectation 3: right store, right location for a seamless omnichannel experience
Establishing a frictionless transition between in-person and digital shopping has evolved from a competitive advantage to a competitive necessity. Retailers must now compete for relevance as customers use their phones to instantaneously assess relative value (Am I getting a good deal?) and identify alternatives (Where else can I buy this item nearby?). The increasing demand for immediate satisfaction, no matter what channel they are using to purchase, permeates nearly all buying decisions.
Unfortunately, most retailers’ current real estate portfolios are ill-equipped to satisfy these expectations. The long-term nature of most real estate leases, landlord capital constraints, co-tenant store closings, changing customer demographics, and outdated store formats present tremendous challenges and require a significant capital investment. To develop an effective real estate transformation strategy that seamlessly intertwines physical and digital capabilities, retailers need to consider key questions.
Answering these questions starts with determining what the consumer wants and how to deliver it in a cost-effective manner. Retailers now have access to a plethora of data sources that were not previously available to them, including psychographic and demographic profiles from credit card sales, email, text communications, social media, cell phone location service, and app usage. Gathering and analyzing data from these various sources allows retailers to determine where, when, and how their customers shop. An endless availability of geospatial data can provide retailers with average drive times, walk times, delivery times, shipping costs, traffic patterns, and other KPIs needed to optimize omnichannel experiences and costs.
Data interpretation and prioritization pose a bigger challenge than collection, since all markets and stores within a market will not require an identical customer experience or omnichannel support. Some trade areas will be best served by a single distribution center, while others are better suited toward ship-from-store. With consumer preferences trending toward shorter delivery times (the Amazon effect), retailers need to reassess their delivery capabilities at a much higher frequency than at lease expiry.
Simultaneously, retailers must also consider the rising cost of fulfilling orders across multiple channels. Although there may be opportunities for retailers to establish ship-from-store operations at existing locations, these investments are often significant and may require landlord preapproval. Any resulting delays in establishing an omnichannel strategy will result in near- and long-term margin erosion via increased real estate costs.
Balancing the composition of stores and distribution centers in a retail portfolio is becoming an increasingly challenging task, which is complicated by ever-changing consumer preferences. However, unlike during past disruptive cycles, retailers have access to significantly more data points related to their customers. The ability of a retailer to efficiently translate this data into useful and actionable information that can effectively drive real estate strategy will be a key indicator of long-term survival.
Conclusion
While the fallout from retail disruption has taken a break in 2021 after a tumultuous four years, retailers must remain proactive. Required real estate portfolio transformation, driven by rapidly evolving customer expectations and costly omnichannel support requirements, will only intensify, putting pressure on margins, profitability, and capital requirements. The largest and most costly risk for a retailer is a business as usual approach to real estate. The days of reactively managing a portfolio on a single-store basis, using rudimentary four-wall store profitability analytics, are gone.
A bold portfolio transformation strategy is now required to remain competitive with the likes of Amazon, Target, Wal-Mart, Home Depot, Nike, Apple, and others that that may even compete for the same consumers. The ability to weaponize the massive amount of data available to modern retailers and efficiently turn this information into a transformative marketplace real estate strategy will determine future victory or defeat.
