An inside look at the reported doom and gloom of retail real estate

Be fearful when others are greedy, and greedy when others are fearful.

— Warren Buffett

Brick and mortar retail has been getting crucified in the press recently. Store closures, bankruptcies, and job losses paint a grim picture for what was once considered the only option for leisurely shopping in America.

Recently, I sat down with Eric Hohmann, Co-founder and President of Bond Street Advisors to get his opinion on the state of retail. A 30 year veteran in the business, Hohmann highlighted the dynamic nature of the industry and its uncanny ability to adapt to new demands. Retail is not dead; it’s evolving.

 

Not All Sectors in Retail are Created Equal

 

Let’s start with the bad news first.

There is certainly a sector in retail that is struggling to keep pace with new online channels and shifts in consumer shopping habits — department stores. Business Insider compiled this list of high-profile retailers like Macy’s, JC Penney, and Sears shutting down stores across the country as they struggle to attract shoppers.

But this doom-and-gloom narrative represents one sector in the retail industry. Hohmann points out these stores reside in older class B malls. “A-malls have never been stronger,” he says. “They continue to attract reinvestment capital and are adding mixed use elements to drive revenue.”

So what characterises an A-mall? And how are they different from the big enclosed malls we are used to seeing in suburbia? A-malls are often located in high-income, heavily trafficked areas that cater to upscale clothing and technology tenants.

But that’s not the only sector doing well. Homann says that retail success is based on a store’s ability to provide high visibility, great accessibility, and a superior merchandising strategy. Real estate presence and physical space is important, but at the heart of a great merchandising strategy lies a sensitivity to the behavior of modern shoppers.

 

Shoppers Seek Experiences with Their Merchandise

 

You can differentiate your product by how you deliver and, in particular, how you merchandise to achieve superior results
— Eric Hohmann, Co-founder and President of Bond Street Advisors

Retailers like to focus on the millennial group. And with good reason — at 75 million strong, they are now the largest population group in America. They also command an estimated $1.3 trillion in annual consumer spending. A survey conducted by Harris Poll found that this group of shoppers not only highly values experiences, they are spending money on them.

Hohmann has observed that the retail environment is seeing a much greater increase in the amount of gross saleable area attributed to dining and beverage. “The old rules of thumb in shopping centers was to allocate no more than 10% of your gross saleable area to food and beverage. Now we’re seeing as high as 20% if not more in specialty retail centers,” he says.

And it’s not just the quantity that counts. Hohmann has seen double-digit growth in the fast casual sector — restaurants like Panera Bread, Freshii, and Shake Shack offer retail shoppers more affordable, high-quality food experiences than fast food or dining. These companies even create apps to pre-order food that can be picked up or delivered.

And then there’s Deus Ex Machina — an Australian motorcycle company that has a store on Lincoln Blvd in West L.A. that doubles as a coffee shop. “What they’ve done is taken this sort of entire motorcycle aficionado experience and create a space to hang out with people who want to swap stories,” Hohmann remarks.

Stores like Deus Ex Machina and fast-casual restaurants are claiming their spot in the evolution of the retail industry. They look beyond transactions and think of ways to improve the experience with their brand. They create environments that respect their customer’s values above all else. Even if they don’t get a sale on day one, this strategy aims to foster loyalty and repeat business in the long run.

 

The Challenges of Selling Online

 

Hohmann notes that online retailers have their own set of problems to deal with. “You get to that last mile query. How do you solve the last mile?” he asks. The lack of physical retail space to distribute their goods creates shipping costs that can start to add up.

According to financial firm PiperJaffray, Amazon has a warehouse or delivery station within 20 miles of 44% of the US population. That sort of precedence poses a challenge for any online retailer looking to compete. “There’s a real cost of shipping and the online retailer has to absorb it because of the competition,” Hohmann says.

And then there are costs of return as well. If you don’t like the product that arrived at your door and decide to send it back, online retailers often eat this expense. “Online returns average about 30%,” Hohmann says. “That’s a significant cost that online retailers, again, because of Amazon, they cannot charge back to their customers. That’s a cost that has to be absorbed.”

The advantage of physical stores is that the customer must travel to it to pick up their product. There is no cost to deliver or return. Another advantage is that it serves as a powerful marketing force that attracts customers in high-traffic areas.

Real estate really is marketing, it’s a way of acquiring customers. If you don’t have physical real estate, you do have to find customers. And you have to spend, there’s a lot of marketing expense in doing that.
— Eric Hohmann, Co-founder and President of Bond Street Advisors

 

Brick and Mortar Retail Continues to Evolve

 

Hohmann brings up catalog sales. At one point, newslines screamed that they would be the demise of retail once and for good. And while many niche retailers like Restoration Hardware do still rely on a 500-page book to get their products in front of customers, that form of marketing, when first introduced, barely made a dent to the same malls that are now dying out.

Hohmann thinks that the absence of a dominant trend in apparel makes it an example of a product that will see a shift in distribution outlet. “30% of apparel sales are now done online. Not only through Amazon, but through other online retailers as well,” he says.

*****

The retail environment, it turns out, is more complicated than we expected. To label brick and mortar stores dead without proper context suggests a loose understanding of the situation. Hohmann finds the study of this industry the best part of his job. “So it’s intellectually a fascinating area, as it’s always changing, always evolving,” he says.

“Look beyond the headlines. Unpack the stories. Look at the motivation of some of these short sellers. Sometimes I wonder if they’re talking up their books, so be a little skeptical. But definitely look beyond and unpack what the real story is. That would be my advice.”

That’s pretty good counsel no matter what side of the debate you’re on. One thing is clear: retail is an industry that is extremely sensitive to the needs of its customers. Instead of the apocalyptic tale you hear on the news, Hohmann illustrates that retail is changing, and that change will benefit all of us.