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Market Adjustment in the Retail Space

According to a new Credit Suisse report, up to 25% of U.S. shopping malls may close in the next five years signaling a retail space market adjustment.

Market adjustment in the retail space leading to the closure of the New South China Mall

What are the reasons for the market adjustments in the retail space?  Of course, Amazon and online shopping are the most glaring causes.  However, another factor is mall overexpansion.  Currently, there are around 1,200 malls in the US.  Between 1970 and 2015, the number of malls grew more than twice as fast as the population.  That number is predicted to decline to 900 within the next ten years.

Brick-and-mortar retail stores will never completely disappear because of the needs listed above and because humans are social by nature; only the type and make-up of retail stores will change.  Pop-up stores (a strategy utilized with great effect by Halloween stores) will likely become more common.

Market adjustment in the retail space could impact iconic brands such as Macy's

Another consideration

The market adjustment may result in the closure of 300 malls over the next decade. What to do with the vacant buildings?  There is a lot of space that could be used for other purposes.  Maybe mall owners will lower their rental rates to continue use .  In some areas of Manhattan, retail rents have declined 10-15%.

More housing? Closures from major chains like Macy’s and J.C. Penney are pouring up to 37 million square feet of space back into the market.  That could reduce some housing costs however more expensive housing markets generally have greater discretionary spending. The discretionary funds are often used for shopping.  Also, the time and cost to demolish existing structures, rezone, and rebuilding them into residential properties along with their infrastructural linkages are not insignificant.

Some mall owners have indicated that vacant properties will be renovated and updated to attract new tenants and raise rental rates.

Market adjustments in the retail space requires new ideas to adapt to changes

What to do?

Who knows what the future will bring but keep in mind that juggernauts like Walmart, Macy’s, and Sears are affected, so starting a service or online store that doesn’t compete with what Amazon sells is a safer option.  Branding your own product (e.g., Bonobo, Dollar Shave Club), and controlling your own distribution is another option.  B2B businesses are insulated from mall closures as no one buys industrial components at malls.

Services such as dentistry, restaurants, car mechanics, and large difficult-to-ship products such as mattresses, etc. will remain (so far) an insulated industry.

Analyses such as what is shown above are a small and cursory part of the industry/market analysis and strategy consulting services provided to clients.

How to Beat Amazon

vs amazon

With Sport Chalet closing and even Walmart showing losses, Amazon is the clear competitor to beat.

So far no one has a clear winning strategy:  click and mortar, brick and mortar, online, no one is safe when it comes to retail.  However, there are some that are surviving and thriving by offering something online purchasing cannot match, a visceral shopping experience.

Retailers have to make their stores into a destination.  Funky decoration, unique customer experience, seminars/lectures, a sense of community, etc.  This is really where the personality of the business (the “brand”) is shown.

One example is The Last Bookstore, a bookstore in Los Angeles.   The photos below show a stark difference from Barnes & Nobles.  These aren’t Bookstore temporary holiday decorations but long-term attractions that draw crowds.

This piece invokes a sense of fantasy and imagination that some fictional works brings to readers.

Like other bookstores, there are stationery/craft goods for sale.  The wheel doesn’t have to be reinvented…just tweaked to a unique way.

This “nonperforming” space, in the traditional retail paradigm, would be scrapped in conventional stores.  The book tunnel is a big draw for shoppers.

The current version of The Last Bookstore is actually its 3rd stage.  First opened in 2005 in a loft, it quickly expanded into the former Citizens National Bank’s 22,0000 sq. ft. downtown space (an insane space for any retailer let alone an independent one).

Experiential shopping obviously has a bunch of challenges; you may need a unique space, maintenance of store fixtures, uniquely trained staff, only local reach (for the time being which I will get into at the bottom of the article), possible higher insurance, and other differentiating factors which all can result in tighter margins.  However, having a challenging strategy is better than having none at all.

Implementation

  • The Last Bookstore:  They are known as the largest independent bookstore in Los Angeles.  They have a crazy interior.  They also sell used books for $1.  This price point is important because buying a used book online will not be cheaper after shipping is factored in.  Also, books offer a fundamentally different tactile experience from eBooks.  So customers walk in to check it out.  They wander the vast selection, and take pictures of the funky decor.  They  wander through the store they touch items, a psychological factor in sales.
    • Now they’re are not just a consumer.  Now they’re a consumer at a super hip, independent, small business.  They feel good about themselves.  They tweet to their friends about it.  Repeat.
  • Clothing Retailers:  Using my client Maitri Yoga as an example, a yoga clothing retailer; don’t sell too many existing/famous brands.  About 40-60 (name/unknown) mix.  You’re not going to be able to compete on price and there are also covenants on discount pricing for name brands.  People already know the sizing for these brands so they will use your store as a showroom (like Best Buy used to be before offering price matching).  Sizing and other factors are not uniform throughout clothing, so the product needs to be felt and tried on.  Therefore you have to offer goods that aren’t known and aren’t sold on Amazon.  They come in for a Prana top but see a new unknown brand.  Now you’re the hip store that sells up and coming brands that aren’t offered on Amazon.  In order to do this, you and your purchaser/procurement officer has to know market trends, know which brands have good quality, nice design, etc.

The work doesn’t stop there.  The store has to be laid out in a manner that draws in the customer.  New items in the front.  Focal decor near the front and in the center/back.  You’re going to have to go to estate sales, yard sales, furniture store liquidation sales, etc. to purchase furniture, decorations, accent pieces that fit the company’s brand.

Additionally, you have to build community engagement.  If you’re a Williams Sonoma, you have to offer cooking events.  If you’re a Nike, you have run Clubs to build engagement. Potential customers will come in for the event but may purchase something that caught their eye.  The costs for holding public relations activities such as events can grow beyond the return on investment so keep an eye on public awareness expenses.

The good news for small business owners is that the unique, boutique atmosphere each independent retailer has cannot easily be matched by larger companies.

Every industry is different so I would have to consult with you on an individual basis; then look at industry & market trends, the culture of the brand, the company’s financials (look at its performing items and overhead), etc.  This is all under my strategy consulting services.

 

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