‘Eyes wide open’ as retailers close stores
This image from ESRI shows consumer spending for each local market by ZIP code.
Headlines are everywhere describing a “retail apocalypse” or the “tsunami” of retail store closures. Rest assured, the sky is not falling on the entire universe of brick-and-mortar retail. However, franchise operators are taking note of the changing retail real estate market and being more diligent when deciding where to locate new stores.
The retail marketplace is clearly in the midst of sweeping change that has resulted in a shake-out of weaker retailers and underperforming stores.
Retailers closed nearly 9,000 stores across the United States last year, and many industry experts are expecting an even higher number of closures ahead for 2018. For example, real estate firm Cushman & Wakefield is predicting the 2018 tally of store closings could reach 11,000 with big names such as Macy’s, Sears and JCPenney that all have stores on the chopping block.
The big question is how that shifting retail landscape is affecting site selection decisions.
“I don’t buy into the retail apocalypse and that this is the end of brick-and-mortar,” says Gary Sankary, retail business solutions manager at ESRI, a firm that specializes in location mapping software and spatial analytics.
Many retailers are doing very well these days and will continue to grow as the market changes, he adds.
It is important to recognize that some store closures could negatively impact existing and future franchise locations, especially as it relates to major shopping center anchors such as Macy’s, JCPenney, Sears or Toys R Us—all of which have announced store closings.
At the same time, that disruption is creating new opportunities, and it is going to be more important than ever for companies to do the analytics and understand the trends at play in the marketplace.
The shake-up in the retail sector is creating some clear winners and losers. There are still plenty of examples of malls and shopping centers that are getting it right with a strong mix of retail, restaurants and experiential tenants that continue to draw traffic and healthy sales. Urban retail and smaller format stores also are on the upswing, while many suburban class B malls, department stores and big box stores are struggling.
The impact of store closings is very specific to a particular trade area. In a smaller city or suburb, a store closing might create a domino effect that may result in a shopping center that ends up half empty. The same retailer that closes a store in a Philadelphia or Los Angeles mall might have very little impact on vacancy and foot traffic in a retail center.
“It is really a function of the type of center and the trade area itself as it relates to how everything is impacted,” says Brandon Famous, senior managing director leading CBRE's retailer-representation group in the Americas. To that point, franchisors and their operators need to take a micro view and look at the unique dynamics and drivers of a trade area, he adds.
One of the keys to keeping up with the changing retail marketplace is to look at markets holistically. “You have to start looking at markets almost like a living entity because of all the different variables that are going into the success and performance of a given market,” says Sankary. Operators need to look at factors such as customer demographics, proximity to other stores within their own store network and nearby competitors, as well as access to entertainment, services and transportation systems. For each retailer it’s a different set of variables.
“We certainly want to take a more holistic approach when we are evaluating sites,” agrees Chris Kondraske, vice president of analytics at Buxton Co., a firm that specializes in customer analytics for real estate and marketing planning.
Buxton incorporates different factors that define a trade area ranging from population and demographics to household incomes and retail sales data.
“We want to try to quantify all of the factors that we can that would impact the opportunity for a new site to perform well,” says Kondraske.
“Certainly, some of these retailers that are closing would play a role in that. But, ideally, we’re leading clients to opportunities that would have a number of factors working in their favor.”
The days when a franchisee could just follow in the footsteps of another retailer like Walmart and be successful are fading. Locating near certain co-tenants is still important, especially if they share the same customer base, but in most cases, that co-tenancy needs to be looked at along with the broader context.
The number one piece of advice is to focus on the customer, adds Kondraske. Know who the customer is and where that customer is. Franchise operators know who their customer is and are looking for locations that have the right types of people in terms of demographics, daytime population, income and a myriad of other factors that influence consumer preferences.
Franchisees also need to consider potential store closures in the broader context of a mall or trade area. Stores are just one layer in a bigger puzzle, adds Sankary. In the Washington, D.C., market, for example, people don’t like to cross the Potomac River because of the traffic congestion, notes Sankary. So, it is important to take an overall view of trade areas and relationships of where customers are and where competitors are along with unique market dynamic when analyzing site selection opportunities, he adds.
It is no secret that some retailers are struggling with weak credit and are implementing store closing strategies to reduce overhead and shrink store portfolios. Those names have been widely publicized. So, franchisees do need to use caution when opening a new store in a center that is anchored by a retailer who has a history of closing stores. “The bigger question is how is the overall health of the mall and the center,” says Sankary.
The good news for operators is that there are more tools and more data available to help make smarter decisions. For example, CBRE has a location analytics program with more than 10,000 individual data points. Couple that with the available mobile data and add predictive analytics and that can forecast sales in a specific location. “There are plenty of tools available to minimize the risk,” says Famous.
The end result is that, because of the available data, franchisees are better positioned to make a push into certain markets—regardless of any store closings that are occurring, notes Famous. Store closings also present some real estate opportunities for expanding businesses. For some franchisees, the store closings create more affordable expansion opportunities. “For as many store closings, you actually have just as many store openings,” he adds.
Service providers also are working on developing new tools that will allow clients to be smarter about anticipating where trends are leading in the future, such as tracking GPS data to show where people are going or not going, as well as tracking where store closures are occurring. “We are developing tools that will lead in the direction of being able to make more in-the-moment decisions that have better information about where things are trending in the future,” says Kondraske.
Go into site selection with eyes wide open, experts advise, and be aware of the retail store closures and the potential risk that poses to negatively impact a trade area or shopping center. “We also want to caution clients to not overreact to one piece of new information,” says Kondraske. “The trade area itself isn’t singly made or broken based on one retailer being there, but rather the presence of people that align with any franchise’s business.”