By Garrick Brown, Vice President of Retail Research, Americas
First off, I want to thank all of you who attended the webinar that Ben Conwell (our eCommerce guru and former Amazon guy) and I did on the holiday shopping season yesterday morning. “Holiday Shopping Showdown: Is It Still a Tale of Clicks Vs. Bricks?” will be available in a day or two online as something you can listen to and/or download the slides if you couldn’t make it.
That said, I don’t want to be too much of a spoiler (though I suspect you already know my answer to the question of “Is It Still a Tale of Click Vs. Bricks?” That answer is unequivocally no. We are going to see a strong holiday shopping season this year for a bunch of reasons. Unemployment is near structural full employment. This may seem a direct contradiction to the challenges facing large portions of the United States (particularly places like West Virginia, etc.) but it isn’t. Since the Great Recession, employment for highly skilled positions has grown by about 6-7%. Employment for low skilled positions has grown by roughly 5-6%. But employment for medium skilled positions has fallen by 5-6%. Those lost jobs are the once good paying manufacturing jobs, coal mining, etc. That’s the once middle class worker that is struggling and this is a global phenomenon.
But holiday sales will be up this year because most Americans are working, income growth (albeit tepid) has been steady for going on 30 months, consumer confidence is at its highest level in 17 years, this year’s holiday calendar has an extra weekend in it and, lastly, nearly every major consumer poll that I have seen shows indicates that shoppers intend on spending more this year.
But none of that is going to change the issues of eCommerce acceleration, race to the bottom discounting, the erosion of middle class buying power and the continued trend of Millennials being less willing to spend money on things than on experiences. That last one I expect to improve slightly going forward as Millennials continue to reach prime earning years and dig their way out of student debt. But while I am forecasting overall sales growth of 4.2% (last year’s 4.0% boost surprised most of us who had predicted gains in the high three percent range), we will still see online sales growth tripling or quadrupling the overall total. That said, I don’t want to share too much more from our webinar—either to bore those of you who already saw it or to dissuade those of you who haven’t from checking it out. Ben and I covered a slew of topics beyond that including in-depth discussions of Amazon, Walmart, Nike and there were more than just a few major projections that we made. The biggest likely being the near certainty of Amazon entering the pharmaceutical world and the fact that unlike their entry to grocery stores (which will be a disruptor to grocers, but likely not to retail landlords), their traditional eCommerce fulfillment model should work just fine for most prescriptions. As a result, are drug stores about to experience the same challenges that traditional retailers have felt? I think so, though I don’t anticipate the real pressures of this to become evident until 2019.
Another prediction that we made is that next year (it’s already happening) will be a monster year for retail merger and acquisition activity. Publicly traded retailers, whether their performance has been good, bad or ugly, have nearly all seen their stock price plummet thanks to the overall pall of gloom hanging over the sector. There have been a few exceptions, but even chains like Nordstrom—which has remained profitable in the troubled department store sector—have experienced this trend. Unfortunately for the Nordstrom family, their attempt to take the company private again a few weeks back could not get financing at levels that weren’t prohibitive in the long-term. As a result, they are now one of the highest profile successful concepts that is grossly undervalued and at risk of a buyout. There are plenty of others. Check out the Retail Dive article, “Seven Retailers Ripe for Acquisition” in our Top Ten. And, yes, while I hope the Nordstrom family is able to find better financing to take themselves private again, I don’t think this will happen. I do believe that they are far too attractive an acquisition target to not be bought. The only question is who. Who could write a check for $7 billion +/- without blinking? Could it possibly be Walmart?
But Walmart?! Yes, if the Bonobos purchase a few months back didn’t make sense to you, maybe the announcement a couple of days ago (also in our top ten) that Lord & Taylor and the behemoth from Bentonville are teaming up online makes it a little clearer. Walmart, through acquisitions and partnerships isn’t just looking to ramp up their eCommerce efforts (they are a very distant second to Amazon), but to expand their reach into upscale retail. Suddenly in this light, a Walmart acquisition of Nordstrom makes a little more sense, as counter-intuitive as it may seem. Of course there are others out there capable of such a move…
This M&A craze will extend into the world of institutional investment as well… the announcement that Brookfield is making a bid of $14.8 Billion for the remainder of GGP (they already own about a third). While this is likely the first bid and is considered below market by many analysts (though the bid of $23 per share was a little over 20% the current value of stock), it demonstrates the trend to come. Whether it makes sense at this price is one question, but whether or not it makes sense for Brookfield isn’t. The GGP portfolio includes Ala Moana Mall—the number one mall in the United States in terms of sales per square foot. It also doesn’t contain a lot of duds. It’s mostly A+, A, A- and B+ stuff. And much of it is in urban locales—Brookfield specializes in those and, as of late, in renovating/upgrading urban properties to ensure they remain A-level or above.
The point is this… the storm clouds hanging over the sector are hurting the performers as well as the non-performers when it comes to publicly traded retailers or landlords. And this means that there are bargains out there. There will be even more bargains next year once the holiday season is over and we get to the traditional Q1 closure season.
But not all is bleak, I don’t want to get too far into the weeds on growth here—I will do that in the next edition. But I couldn’t help but have been thinking a lot about the store of the future the last couple of months. In fact, a couple of weeks ago I became fairly obsessed after visiting Santana Row in San Jose with my wife. If you are not familiar with this property in Silicon Valley, the configuration (including phases under development) is just under 2.6 million square feet of mixed-use space. It breaks out as about 1.1 million square feet of office, 770,000 square feet of multifamily, 115,000 square feet of hospitality and 545,000 square feet of retail. When it was first developed, it was 995,000 square feet total with the same level of retail and hospitality but just 335,000 square feet of office. It’s one of the most successful mixed-use lifestyles centers (if not, the most successful) that I know of. It helps being in Silicon Valley—consistently one of the top three (usually number one) performing local economies over the past seven years. But it also helps that the tenant mix favors restaurants and experiential retail.
I was in the Amazon book store with my wife when I realized that she was looking intently at some technical item they had on one of their non-book oriented shelves. “What are you doing,” I asked. “Looking for a better price.” “Really? You’re showrooming Amazon?” I was amused, but then she stared me dead in the eye, “Oh yeah I’m showrooming them.”
Of course, she ended up buying the device she wanted on Amazon two days later. Better pricing never quite materialized, but the point is that this is how we shop today. Bonobos, Warby Parker, Amazon Books…all of the stores seemed to be doing brisk business on this particular day, but those places were packed. Showrooms, of course, are really a newCommerce phenomenon. This is where retailers aren’t just omnichannel, but they also are fulfilling the promise of omnichannel—which is seamless integration of bricks-and-mortar stores with online platforms and fulfillment capabilities that operate out of either and are equally successful in delivering consumers the goods they want, where they want them with maximum speed and minimal cost. That’s a mouthful, but initially when I heard of Nordstrom’s new 2,500 square foot +/- store (Nordstrom Local) on Melrose in Los Angeles I immediately wondered if this might not be the store of the future.
I was actually there about a week ago and quickly realized that it is not, but it could be with some tweaks. Why not? Well, there literally are no goods in the store. Nothing. Zilch, Nada. Yes, when you go in you will be greeted and you can have (one) a glass of wine or beer while you surf through online clothing options with a personal shopper… but this really is about Nordstrom’s personal shopper service. I spoke at length with an associate and also heard similar from another Nordy-connected friend (though this might not be the official company stance), but the idea for this store really came about from local challenges. Nordstrom was closing their store at Westside Pavilion (that center is being razed and will likely see a Whole Foods anchored development go there in its place) and they were relocating to the nearby Century City Mall (as part of that center’s $1 billion renovation). What I was told is that the personal shopper business at Westside had been huge, but always problematic, as some of their biggest accounts were from the studios across town. Though it’s only about nine miles or so to Hollywood from Century City this equates to a three-day drive in Los Angeles traffic. Actually, it really can be an hour or so… and serving the personal shopping needs of those major studio clients was a concern. And so, Nordstrom Local, which is really just a satellite location for their Personal Shopping department.
But it could be more. A lot more. Right now if you order something there (at least this is what their sales associate told me), the inventory most likely would be coming from one of the local stores. It sounded like seamless integration between store inventories and distribution center/eCommerce fulfillment inventories wasn’t quite there yet, but something they were working on.
Still, imagine this same concept at 10,000 to 15,000 square feet. Interactive ordering screens all over the place and a variety of the best selling goods from their full-line department stores on the shelves. Combine this with a truly integrated inventory system that would allow consumers to order whatever they want and get as quickly as possible whether that item was in a warehouse in eastern Pennsylvania, a store at Tyson’s Corner or back at the Seattle flagship. And, lastly, picture the same level of exceptional customer service that is this chain’s primary brand, augmented by digital tools (like interactive smart mirrors and easy to use order kiosks) to enhance the shopping experience. And a returns desk that accepts goods purchased online (not only do consumers prefer it, but it’s a critical cost saver for anyone with an online presence), where consumers will likely spend much of their refunds on the array of beautiful impulse items that will be nearby. Suddenly the Hampton’s (NY), Vail (CO) and Carmel by the Sea (CA) and a dozen other small, but very upscale communities, could host a Nordstrom store. Or a Neiman Marcus store or a Saks. Just an idea… of course, I work with a very robust consulting group and so would love to discuss the possibilities with any of the Nordstrom brothers.
One last thing… our new Q3 2017 quarterly reports are available! Check them out 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.