The Change in Retailing and its effect on Real Estate

 I was at one time  bothered by retail sales reports in the news and thought that when I read them that the report I would rather see than what such and such stores sales were, is a report on the manufacturer of the product, not the distribution channel. I felt that the  manufacturer added more value than the retailer, not the other way around.  But over the next few minutes I would like to examine the history of retailing and then discuss how the current stage of evolution is going to affect the commercial and residential real estate markets.  Distribution is just as important as manufacturing. There are three general components that play a vital role: the manufacturer, the retailer, and the consumer  

First I want to share a personal story. Back in 1964 I was an eleven year old about to get my first taste of entrepreneurship. I had been invited to travel the following summer to Germany. My father told me that if I earned enough money for half the fare, he would match it. He then taught me how to propagate a shade loving ground cover called pachysandra.  You see, grass would not grow in the shady neighborhood I grew up in, but pachysandra would.  I built wooden flats, clipped cuttings, dipped them in a hormone powder and stuck them in the sand in the flats.

Within six to eight weeks I had flats of pachysandra to sell.  I loaded up the flats in a wagon, and walked door to door in my neighborhood. I carried with me a small advertisement from the New York Times from a nursery that was offering the plant for fifteen cents apiece. My price? Two for a nickel. I spent the rest of that summer selling door to door and “growing flats” to order.  My only expenses were the small jar of rooting hormone powder. I didn’t think about it then, but I was production, distribution, sales, and when I offered to plant the plants for a fee: service.  As an eleven year old I thought I was just selling plants and I was enamored by the pleasure of growing money from almost nothing. Little did I realize that I was a microcosm  of the product cycle and a basis for a retail business.

The retail industry, prior to 1945 was dominated by Mom and Pop stores, predominantly general stores that served their local markets. After World War II chain stores began to develop with companies like Woolworths, JC Penney, and Macy’s. These retail outlets allowed for one class of entrepreneurs to concentrate on production and leave distribution up to another set of businessmen. Starting in about 1975 the huge discounters began to evolve and the retailers themselves now took over as the customer to the factories. They were the tail wagging the dog. They dictated products and eventually opened up category killers like Home Depot, Best Buy, and Staples.

Starting in the 1990’s there was rapid consolidation in retail as margins eroded and distribution channels became centralized and streamlined. Now more than ever the retailers has the upper hand on products and were dictating now only what the manufactures would produce but when they would be produced and what they would be paid for their production.  I owned a pong-pong table factory during this time. We produced from March to July and shut down the rest of the year, such was the emphasis on the big box customer and the Christmas toy season. We are the total mercy of our largest customer: J.C. Penny.

“In store” brands began to evolve in the 90’s  and by now store brands are ubiquitous throughout the mass retailers.  But on line retailing is changing much of that.  It is now possible for that small guy figuratively growing “pachysandra plants” to compete with the big national chains.  On line retailing grew from about $150 Billion in 2008 to over $210 Billion 2012. But we still at the beginning of that growth as only 6-7% of retail sales is yet on line. The growth in internet retailing is ahead of us.

Last night I had a discussion at a Christmas party about the effect of on line sales with a developer of single tenant retail centers. His mind set is on repositioning; repositioning from the retail big box to the infrastructure that will be needed for rapid distribution to the consumer.   More warehouses, less stores; more specialty stores, less square footage per retailer and of course lower rents.  The consumer, for more and more of his purchases, will shop at home, not in the store.  Because of the internet, small brands can compete with big brands.  A website “store” can be designed to serve 200 or 200,000 consumers for the same “building“ cost. The scalability of a web site is infinite and the incremental cost for growth almost nil.

Technology has allowed automatic receiving and processing of orders; and one click purchases are becoming the norm. Third party distribution chains like UPS and Fedex will work for the kid growing pachysandra in his back yard as well as for the massive producers of smart phones. The third component, manufacturing, may be the equalizer.  For large volume commodities the large scale producers will win out – either by producing in places like China or by making huge capital investments in production equipment as to make the small competitors unprofitable. But look for growth of the small, consumer driven producers of unique and customer items. After all, their distribution and retail selling costs are the same.

The effect on real estate of this evolution in retail will play out over the next three to five years. Bricks and mortar stores will become showrooms and unite with on line store fronts.   The stores that will remain strong will offer the products that are specialty, customized, and products that consumers still want to see, smell, and touch before they buy.  Examples are furniture, clothing, jewelry and locally made goods and perishables. One stop shopping where the consumer can get his prescriptions filled, do grocery shopping, and buy hardware as well as clothes is becoming more the norm than the exception.

There is a real estate adage that the commercial market lags behind the residential market.  Retail stores follow the residential building. But distribution and order processing facilities will be centrally located and the residential market FOLLOWS the jobs. A large Wal-Mart distribution center built on low cost land on the outskirts of town, for example, will spur residential growth in that area, and that in turn will incite retail development.

 

 

1.       Continued downward pressure on rents.

2.       Smaller and more specialized retail.

3.       At the same time larger more “all-inclusive stores” for one stop shopping.

4.       Growth in centralized distribution.

5.       Return of more small Mom and Popo style stores both on line and in bricks and mortar.

6.       New distribution and e delivery media (Note same day delivery by AMAZON  in some markets.)

7.       The growth of showroom stores that are internet integral.

8.       Repositioning of shopping malls while the anchors try to differentiate themselves.

9.       The direct approach electronically of stores to consumers (Think “flash sales”).

10.    A consumer-centric approach to business instead of a product one. (“What can we make for you today?”).

Till next week.

Gregg
Gfous@marketamericarealty.com

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