By Garrick Brown, Vice President of Retail Research, Americas
Before we get started with this week’s Newsline, we just released our Q3 Reports. You can find all of them (including our Q3 US National Shopping Center Report) online by clicking here. I will talk about that report and the stories behind those numbers at greater length with next week’s issue, but this week we are going to focus on some recent news, including one bit of information that I think is a potential bombshell… at least if you are active in the grocery world.
The big news this week should be that September’s retail sales surged. They had posted a decline of -0.3% in August but snapped back last month to a strong gain of 0.6%. This was the strongest performance in three months and reflects year-over-year growth of a sturdy 2.3%. It actually didn’t come as much of a surprise for most economists… the 0.6% gain was right on target with the median forecast of 77 economists that were surveyed last month by Bloomberg. This is in line with a lot of what we have been reporting in the Newsline, sadly in between the heightened news of retail closures, consolidation and bankruptcies. Of course, stronger retail sales is exactly what bricks-and-mortar retail needs even if we are still working through the multiple challenges of accelerated eCommerce growth, value conscious consumers and a marketplace that frankly remains over-retailed.
I crunched the numbers yesterday and the news is not all that bad. For years we have been seeing the number floated about that there is roughly 40 square feet of retail for every man, woman and child in the United States. I myself have been guilty of relying on that statistic too often… but according to the Costar group, there is currently about 10.5 billion square feet of retail space. Now, I know many of you out there have a love-hate relationship with Costar, but frankly I don’t think there is a third-party data provider that even comes close to covering the terrain they do with the depth they do. Are some of their statistics sometimes challenging, particularly for retail? Yes, but I think a great deal of this has to do with the lack of transparency that has developed in the marketplace… particularly when it comes to some of the major mall players and a lot of urban space out there. The reality is that regardless of retail property type (whether urban or shopping center), we are seeing fewer players being transparent in terms of some pretty simple things… like actually quoting asking rents or even being open about the amount of space that they have available. But Costar does have a pretty solid handle on inventory and though I would guess that as much as 1.0 to 2.0 billion of that 10.5 billion square feet of space may not really be truly competitive retail space (retail tends to be the catch-all classification for a lot of aging commercial buildings out there that don’t quite fit into any other box), I would guess that number is as close to accurate as you are going to get.
So let’s assume there is 10.0 billion square feet of retail space in the United States and that there is about 325 million Americans (the latest estimate from the Census that I could find had it at 324.7 million). This equates to roughly 31 square feet of retail per person. I’ve come across a number of recent forecasts on population growth where the consensus number is that by 2060 there will be roughly 100 million more Americans. Assuming this is true, even if the market added 25 million square feet of new retail space annually during the next 40+ years… we would be looking at a market with roughly 11 billion square feet of retail space, a population of 425 million Americans and roughly 26 square feet of retail per person. That being said, according to Costar through the end of Q3 we added a total of 26.7 million square feet of space and it looks like we will close the year with somewhere in the neighborhood of 30 to 31 million square feet of new deliveries. But that number is declining. The challenge will come, of course, in the types of retail that are developed going forward and that is where we will continue to see a huge shift towards personal needs, service, food and entertainment retail even while some hard goods concepts thrive and grow (like discount, off-price, etc.) and others continue to contract (apparel, department stores, office supplies, et al). My point is that our shopping centers and our retailers are going to continue to evolve, but don’t discount the very simple rationale that population growth will continue and even as online players like Amazon continue to disrupt the marketplace, the shopping center isn’t going to go away. Evolve, yes. Disappear, no. I should note that these numbers differ substantially from the ones we will be publishing in our new US National Shopping Center Report for Q3. That report will be coming out to you in the next day or two… but it just tracks shopping centers (neighborhood/community, power/regional, lifestyle and strip) in roughly 65 major metros. It doesn’t include many tertiary markets, rural markets or freestanding or mall retail in any market so we are not talking apples to apples.
Regardless, those solid September numbers should be the big news and there is likely to be additional good news when the October sales figures come out… Chain Store Guide recently released a forecast for October sales that predicts further gains (though they anticipate flat restaurant sales) and this remains the consensus of most economists. Though much of the country is experiencing a heatwave this week, temperatures are expected to plummet next week and the predicted early and cold winter (which would be great for the beleaguered apparel and department store sectors) could be on its way in just a couple of weeks.
But the reason I say that September’s strong sales growth isn’t what sticks out to me as the biggest news of the last couple of weeks is because of something that hit the wires a few days ago. Here is Curbed’s take on it: “Amazon Brick-and-Mortar Stores Are Coming: The internet giant plans on opening brick-and-mortar convenience stores.”
Now, we have seen this before… rumors of Amazon bookstores (true), rumors of full-service Amazon stores (not so true), mall pop-ups (true) and frankly anything Jeff Bezos does typically sends shockwaves through the retail community. Now this might be a pure play by Amazon to simply get into the convenience store business. Especially if they are looking at urban locations near universities and campuses where they could better connect with young consumers and build brand loyalty… and I have heard a few anecdotes here and there that could explain the move solely on that play alone.
But what if there is a different play here? Here are some things to consider… It’s no secret that the rise of the millennial consumer has been a driving force in the acceleration of eCommerce growth. They are digital natives; the first generation raised completely in the digital age. They’re tech savvy, they embrace eCommerce, and they use their smartphones to shop. And, according to the Pew Research Center, Millennials (75.4 million) surpassed Baby Boomers (74.9 million) as the largest living generation of consumers earlier this year. And they haven’t yet reached their peak. The same recent Pew analysis projected that they will peak in 2036 at 81.1 million consumers. In terms of the most active consumer spending demographics (ages 20 to 65), they could account for 50% as early as 2021.
As powerful as those numbers are, eGrocery sales still only account for a tiny share of the total grocery marketplace. Since 2010, annual sales growth for eCommerce has consistently averaged in the 15% per year range while bricks-and-mortar sales have climbed by roughly 3% per annum. With Amazon having built its distribution chain out by well over 40 million square feet during that time and now easily capable of delivering next day, if not same day delivery, to nearly everywhere in the continental U.S., clearly this is the next big opportunity for growth, right? Clearly we are on the eve of a radical shift in how people buy their groceries, one fueled by demographics and technology that over the next decade will rival what we have seen for traditional retail hard goods over the past decade, correct?
Until this news broke, I would have said probably not. According to a February 2016 survey conducted by Walker Sands Communications, 68% of consumers now prefer to purchase books online as opposed to in store. Likewise, the majority of respondents also preferred to purchase both consumer electronics and office supplies online. Yet, the majority of those polled still preferred the in-store experience over shopping online for all other categories. When it came to shopping for groceries, only 5% of all consumers preferred to purchase food online while 95% of respondents still preferred shopping in physical stores.
This has been a challenge for any pure play eGrocery player, including Amazon. And while we anticipate that these numbers will continue to shift in favor of eCommerce on all fronts with just one in twenty consumers currently preferring to buy groceries online, it would have to be a seismic swing of momentous proportions to drive demand for eGroceries to similar levels of consumer demand that we are now seeing for categories like books, consumer electronics and office supplies.
But it certainly isn’t out of the realm of possibilities for this to occur over the next decade, though it really hasn’t even started to occur yet. This is despite the fact that demographic shifts driven by the rise of the Millennial consumer have been so instrumental in driving the accelerated growth of eCommerce overall in recent years and for so many individual categories.
But I suspect that the reason this has not occurred yet has less to do with a generational shift and the rise of tech-savvy consumers and more to do with simple logistics.
Just as online sales growth has outpaced bricks-and-mortar gains by a ratio of roughly five to one since 2010, that same trend has been playing out in the world of eGroceries. Independent research firm IBISWorld recently published an in-depth analysis of this emerging sector and found that eGroceries averaged an annual growth rate of 15.7% from 2010 through 2015 and they project this marketplace to continue to grow at a pace of roughly 13.3% annually from 2015 through 2020 (the slight decline in forward looking numbers is primarily due to this forecast assuming the possibility of a typical cyclical economic downturn in the years ahead).
Yet, it is critical to note that eGroceries still only account for 3.8% of total U.S. grocery sales.
Meanwhile, over 52% of all U.S. eGrocery sales remain concentrated in just eight states; New York (13.8%), California (12.3%), Florida (5.3%), Texas (5.3%), Illinois (4.3%), New Jersey (3.9%), Pennsylvania (3.9%) and Ohio (3.3%) and sales in those states were overwhelmingly concentrated in the densest urban marketplaces (New York, San Francisco, Chicago, Philadelphia, Miami, etc.). These are the markets where consumers are least likely to own an automobile. They are also the markets where traditional bricks-and-mortar players have long offered grocery delivery as a staple service. This means that the lion’s share of eGrocery growth has been, so far, in places where grocery delivery not only is nothing new but where it has already long made sense for consumers.
Perhaps a more surprising statistic from the IBISWorld report has to do with who is actually buying their groceries online. Their analysis of the data indicated that consumers aged 55 or older (24.5%) were actually the top age demographic. The 25 to 34 age bracket was next (23.2%), followed by consumers aged 45 to 54 (18.4%). These age brackets don’t entirely line up with Millennial or Boomer definitions, but we think it fair to say that both groups are, more or less, the two primary age demographics accounting for the lion’s share of eGrocery sales. This data challenges the very assumption that eGrocery growth is a millennial phenomenon. Indeed, all of the indicators suggest that, so far, eGrocery growth has been a lot more about population density than it has been about demographic shifts. And if density is still the factor driving growth, this is because of the challenges that remain when it comes to final mile delivery.
Despite the strong growth of the last few years, eGrocery still accounts for just a fraction of the grocery marketplace and nearly all of the growth that has occurred so far has been in dense, urban environs where grocery delivery not only makes sense, but where it already has arguably been part of the retail culture to some degree. The issue of culture remains a challenging one for eGroceries. Consumer preference when it comes to groceries still largely favors the in-store experience. Some of this is simply due to shopper worries over freshness—a problem that savvy operators can overcome assuming the proper management of their distribution chain.
Yet it is really in the issue of the distribution chain where pure play eGrocery players are finding their greatest hurdle. The challenge is simply finding modern distribution space with significant refrigeration and freezer components in urban environments. Amazon has built an amazing eCommerce fulfillment network over the last decade and these distribution centers can often run upwards of one million square feet in size. The only problem is that most of them are on our outside the periphery of core urban areas where the land is cheap but that simply aren’t close enough to consumers to service Amazon Fresh.
In putting this week’s piece together, I consulted at length with our resident expert Ben Conwell. Ben runs our eCommerce and Electronic Fulfillment Specialty Practice Group and specializes in assisting retailers and pure play eCommerce players alike in tackling their logistics challenges as they look to grow their platforms. He concurs that most of the deals we have seen so far for pure play eGrocery concepts have been much smaller than typical eCommerce fulfillment centers—usually in the 40,000 to 80,000 square foot range, but not necessarily with existing cooler and freezer improvements. The cost of fitting out shells with massive cool and freeze infrastructure is significant. More commonly users are utilizing less expensive walk-in and reach-in cooler and freezer fixtures. Virtually all of them have been in urban settings and nearly every building involved has either been a recently rehabbed facility or has been an existing older project that required further extensive and costly upgrades prior to tenants taking occupancy. This is because there is virtually no existing, plug-and-play ready serviceable space available in this arena.
We surveyed the existing industrial availability of distribution space with freezer or cooler capabilities in the 20,000 to 100,000 square foot size range within the city limits of the 30 largest U.S. markets. We found only 17 properties where space meeting this criteria was available as of mid-August 2016. When we limited our search to just buildings that had been built since 2000 and thus likely had the capability of handling the high power requirements of an eGrocery fulfilment center this number dropped to just one.
When it comes to building the infrastructure that will be required for eGroceries to truly disrupt the marketplace, pure play eGrocers are starting from scratch. Some may opt for the cheaper development option of looking to build fulfilment centers on the fringes of urban areas but there they gamble with that critical final mile delivery cost and service level, and all of the other risks involved trying to serve a consumer base that is going to remain overwhelmingly urban for now. Most will opt for the safer, but much more expensive option, of rehabbing aging inventory in urban environments where options are few and where development issues can be expensive and complicated.
This is where traditional grocers currently have the advantage, if they decide to exercise it. Their existing bricks-and-mortar locations are already in the places where they need to be. The key for traditional grocery players is to revamp their existing stores to serve as the backbone of their eGrocery distribution chains while still maintaining an engaging shopping experience. In most cases this would require some retrofitting, but at costs that are a fraction of those that will be faced by the pure play eGrocers. Physical locations (whether owned or leased) will prove to be the greatest asset that traditional grocery store chains have whether the market moves slowly or quickly towards the embrace of eGroceries.
This all still holds true so long as the pure play eGrocers are still looking for urban industrial space to use as fulfillment centers…
But what if Amazon’s convenience store play isn’t really about going up against the likes of 7-Eleven and is about something a little more complex? What if this is simply another outside-the-box move by master chess player Bezos?
If you can’t find suitable or affordable industrial urban space to grow Amazon Fresh, what about suitable, perhaps somewhat affordable retail space?
Would it be beyond the pale for Amazon to have summed up the marketplace and come to the same conclusions that we have? That the biggest advantage traditional grocers have is their existing urban retail space… so why not just get your own urban retail space instead of trying to reinvent the wheel?
Now I should clarify that I have nothing to support this theory other than my respect for Amazon’s ability and willingness to think outside the box and the fact that it makes a whole lot of sense if you think about it. That being said, if I were a major grocer I would no longer assume that I had a relatively lengthy window of time anymore before I needed to ramp up my own eGrocery capabilities. If I am right with my theory, that window of time for traditional grocers may have just shortened from “a few years down the road” to NOW. But, hey, what do I know?
BTW, if you have the time here also are a few valuable resources and also events out there I would like to plug….
First, if you don’t subscribe already, I cannot recommend more highly subscribing to Jeff Lessard’s blog. Jeff runs our consultancy division here at Cushman & Wakefield and puts together regular commentary on big picture shifts in commercial real estate that is phenomenal. Click here for a link to his latest release where he looks at Forbes latest rankings of the best places for business and careers. If you would like to be added to Jeff’s subscription list, just drop him a line at Jeffrey.Lessard@Cushwake.com.
Additionally, I would also love to plug to one of the best demographic studies I have ever come across that tackles this topic of urbanization as well as a number of other major shifts. John Burns and Chris Porter of Burns Real Estate Consulting recently released “Big Shifts Ahead: Demographic Clarity for Business.” Burns is based in San Diego but does national consulting work focusing primarily on the residential real estate market. He and his Chief Demographer and research head Chris Porter were kind enough to share a copy with me a few weeks ago and I was blown away. You can check this work out here; it is well worth the investment, this is a must read for anyone in residential (single or multifamily) or retail.
I will be at ICSC New York in December. If you haven’t been, it’s far from being just a local show. With ICSC ReCon in Las Vegas and the Annual Western Region Dealmaking event in San Diego, this is among ICSC’s top three US shows. It’s obviously a must attend if you are active in the Tri-State area, but I would argue it is also if you are involved in high street retail anywhere in the US. You can find more information about it here. If you’re going and would like to connect with me at our booth I would love to meet you—drop me a line and we will set something up.
Additionally, in January, I will be speaking at Institutional Real Estate, Inc.’s (IREI) 2017 Visions, Insights & Perspectives event at the Park Hyatt Aviara Resort in Carlsbad, California. The event covers investment trends as they pertain to Commercial Real Estate and goes from Wednesday, January 25 to Friday, January 27th. I will be speaking on a panel on Retail Reinvention on Friday morning, but there will be a slew of topics covered from the State of Development to the State of Housing in the United States and Key Issues and Trends in the World of Debt and everything in between. The event has a stellar list of speakers and is going to be held at a beautiful San Diego-area resort in the dead of winter, so what’s not to love? You can find more info on the event here. If you can make it I would love to connect with you there.
Lastly, in February I will be speaking at the Entertainment Experience Evolution conference in Santa Monica, California. “Creating and Imagining the Next Evolution of the Retail Environment,” is the byline for this event. My topic is “Food Halls, Retail Mash-Ups and Cool Streets: Can Hipster Retail Concepts Save Retail,” but I will be joined by a heavy duty list of speakers including representatives from Wolfgang Puck Restaurants, Boffo Cinemas/The Lot, Rock n’ Brews, Lolli and Pops, IPic Entertainment, King’s Seafood, Surf Loch, Cinepolis, Cinemex, IP2 Entertainment, Dealmoon.com and others… and that is not to mention folks active on the development and landlord side like Regency Centers, Westfield, Madison Marquette, Whitman Family Development Federal Realty, Related Urban and others. Jerry France of France Publications (Shopping Center Business and a number of other essential trade publications) sponsors this event and if you were there last year you know already what an informative event this is at a critical time for retail. This is a time of retrenchment and reinvention for the retail world and this event, more than any other I am aware of, is at the cutting edge of tackling the issue of experiential retail and how entertainment concepts are critical in that reinvention. The event is being held Tuesday, February 7th and Wednesday, February 8th at the Fairmont Miramar Hotel and Bungalows in Santa Monica. You can find more information about it here. I hope to see you there.
Look for our new US National Shopping Center Report for Q3 in your e-mail over the next couple of days. In the meantime, here are some links to some of the latest retail research resources we have produced.
For our recent report on the Cool Streets of North America, click here
You can also check out our accompanying and ongoing video series; Cool Streets. More episodes are coming but you can click on the below links for…
And if you need any of our research reports, whether global or local, on any commercial real estate sector check out our research page by clicking here.
This post is commentary from the latest weekly edition of our Cushman & Wakefield Retail Newsline, which you can subscribe to for free by e-mailing firstname.lastname@example.org.
Garrick serves as Vice President of Retail Research for the Americas. He speaks frequently at industry events and has been a keynote speaker at symposiums, conferences and market forecasting events for groups like the Appraisal Institute, Urban Land Institute, CREW, ICSC and PRSM. He is also a member of Lambda Alpha International, an invitation-only land use society for those who are involved in the ownership, management, regulation and conservation of land, but also those who are involved in its development, redevelopment and preservation.