By Garrick Brown, Vice President of Retail Research, Americas
I want to talk about a release that came out yesterday that is already inspiring some media coverage that seems to support the idea of dead malls being transformed into eCommerce distribution space.
The piece came from Fitch Ratings and it doesn’t exactly say that dead malls should be transformed into eCommerce space, though it certainly plants that seed in a big way and builds a case for it. Now, let me clarify a couple of things before I tackle this topic. I love Fitch’s work and think particularly highly of their credit analysis of firms. They also produce some great white papers and economic analysis regularly and are a voice you should listen to.
That said, I don’t want to be guilty of setting up a straw man to do battle with. Their release never specifically states this, though it clearly suggests it. But it suggests a lot of things about the convergence of retail and industrial space that is beginning to happen. And I agree with nearly every single point they make. But I see the same trend and I see an entirely different outcome for a few reasons. Regardless, their release coincided with me working on a whole lot of things covering this period of heightened integration of eCommerce and bricks-and-mortar retail ahead, which I am referring to as the newCommerce Age. And I thought it might make for an interesting read for me to present their thoughts, with me sharing mine. Think of it as a panel where there is no fire marshal turning anyone away and extra bonus, you don’t have to look at my ugly mug. And I should note, I actually agree with a whole lot more here than what I disagree with. What I have already got a strong disagreement with is the idea (which gained steam with this release) that eCommerce distribution facilities will be one of the potential adaptive reuses for dead malls. They should be. It would make sense. It would be smart and it might even be economically savvy. And it certainly would be the easiest fix. But it simply will not happen that way.
Below, in bold text, is Fitch’s release on the topic “Retail & Distribution Space to Converge Due to eCommerce.” My comments are in standard text font.
Fitch: Retail & Distribution Space to Converge Due to eCommerce
The growth of eCommerce and the increasing emphasis on delivery speed as well as pick-up services for retail goods will likely precipitate a convergence of industrial distribution and retail real estate, according to Fitch Ratings.
Brown: Agreed. This is now the newCommerce age. It’s no longer the eCommerce or the multichannel era… we are entering into the next evolution of online sales impact and in this new era there are going to be a few changes. Now I know what you’re thinking, “Brown, what are you talking about? Sounds like a lot of market positioning mumbo jumbo. It is what it is.” I get it. Another term being thrown around in an industry that loves to make up new terms sometimes seemingly just so public speakers like me have something to talk about. Really, I do get it. I despise acronyms and generally view them as anti-communicative (let’s face it, they’re designed not to explain what the initials actually are but to force you to ask an expert to have to explain them—and that’s where all the acronym-slinging consultants of the world get you. “Hire me so I can explain the incomprehensible gibberish of an alphabet soup I just described to you.”) But there really is something here.
I could breakdown the evolution of eCommerce going back to 1995, but let’s ignore the initial startup Early Days (Pets.com and the initial tech boom and bust) and the ensuing Pure Play Years from 2001 to 2009 that saw the current wave of eCommerce giants gradually building their capabilities. Let’s start with 2010 and the emergence of what I call the eCommerce Years. This period was when Amazon eschewed the previous model of seeking distribution sites in sales tax advantaged states (under the idea that tax advantages were among the greatest lures to consumers) and made the seemingly radical gamble of seeking to aggressively build its distribution chain across the nation (with the idea that ultimately speed to consumer was the greatest allure of eCommerce).
What happened is that Amazon went from about 30 million square feet (MSF) of eCommerce fulfillment space in 2011 to roughly 100 MSF of eCommerce fulfillment space by the end of 2016. By the way, in 2011 Amazon ranked as the ninth largest US retailer in terms of total sales. By the end of 2016, it was number four, behind only Walmart, CVS and Kroger players in the grocery or drug fields where Amazon is just now ramping up their capabilities.
Of course, by about 2012/2013, it was becoming apparent to bricks-and-mortar players that they better catch up. So this era was also marked by the beginning of a trend that is still in place today… that of traditional retail players looking to ramp up their own distribution chains and eCommerce platforms as they chase market leader Amazon. But while that trend continues, I see this period, the eCommerce Years, as having evolved into a new phase, the Omnichannel Age, around 2015.
What changed? After all, traditional bricks-and-mortar players building their eCommerce capabilities certainly qualifies as omnichannel. But what is different here is that this is when we started to see pure play eCommerce players starting to open their own bricks-and-mortar stores. This is when omnichannel retail started to go both ways. Warby Parker, Bonobos, Marine Layer … it started with smaller online players going this route… but now we are seeing new concepts being launched with this strategy. And new players that are doing extremely well in both the physical retail and online retail worlds like Kate Hudson’s Fabletics, Indochino, Rent the Runway and a slew of new players like Duluth Trading, Adore Me and others that are either already or about to begin physical store ramp-ups.
But still the question remains, how have things changed and how are we entering into a new era. After all, we still see the trend of bricks-and-mortar players ramping up their eCommerce capabilities (eCommerce Years) and the trend of pure play eCommerce concepts going bricks-and-mortar (the Omnichannel Age)? How is this different?
The newCommerce Age will prove itself to be different in that this new age is one in which omnichannel will be a given. Outside of a very few retail categories, survival as a retailer in the United States will be contingent upon having a presence in both worlds. And, in this new world, we will eventually see the silos between retail and industrial real estate converge and breakdown to varying degrees. And here is where I think Fitch absolutely nails it in their opening statement and in their general take on what is happening. But before I move on to start dissecting their report, let me share a few other points about what we will see in this newCommerce age that we are entering.
Luxury retailers, who have generally been late to the eCommerce game, will be undergoing a major ramp up in their eCommerce capabilities. Luxury concepts have not faced the same level of disruption as mid-price players for sure. After all, if you are going to be buying Louis Vuitton at full price, you probably want to have the full customer service experience of going to their stores and being treated like royalty. And jewelry? Do you want to buy Tiffany online and miss out on the experience of being served champagne and walking out of that store with an ecstatic loved one on your arm clutching that little turquoise box? Well… guess what? Total eCommerce penetration of US jewelry sales as of the close of 2016 stood at 11.5%, up from 8.9% just two years ago. Luxury hasn’t been hammered by eCommerce, but it is feeling it. And this is where the next online ramp-up is happening… but most of these players operate small boutiques. If they want to serve consumers successfully in the newCommerce age, they will need to respond to the marketplace with delivery speed that can compete with Amazon or risk eroding market share. And huge investment in industrial distribution facilities across the nation simply makes no sense (I am not saying there won’t be an investment, but dispersed and localized industrial fulfillment centers likely won’t be the path for most). Against this backdrop, you will see existing stores becoming the fulfillment centers.
The newCommerce age will also be notable for the ramp up that we will see in regards to eGroceries, as well as Amazon’s entry to the online prescription drug business. The rise of eGroceries, however, at least for the next few years will all be about urban real estate. And it will generally not be about industrial space in urban locales simply because not a lot of this space exists and it would be costly to develop. But retail space exists and can be had. And existing urban grocers looking to get ahead of Amazon as Bezos’ behemoth would be smart to realize their existing real estate is their greatest asset. They just need to create platforms and start delivering from their stores. In the meantime, I still assert that the recent opening of a convenience store by Amazon in Seattle isn’t because Mr. B wants to sell Slurpees and smokes, but this could likely turn out to be the model of Amazon Fresh in urban markets. Small, convenience type stores that could deliver a limited selection of groceries out the back door to small trade areas where the challenge of final mile delivery costs simply will not be an issue.
In other words, the newCommerce age will be one in which the lines between bricks-and-mortar retail and industrial distribution will increasingly become blurred—utilizing elements of both in a world where it won’t matter where the sale is made so long as it is made and where the success of nearly every retail concept (whether it had bricks-and-mortar or pure play online roots) will be about having a seamless omnichannel presence.
To continue reading Part II of this blog post, click 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 email@example.com.
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.