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Eking Out E-Retail Rents from E-Commerce

Shopping Center Landlords Redefine Portfolios as Retailers Blend Brick-and-Mortar Stores With Online Sales
February 12, 2014
Faced with the relentless changes brought about by e-commerce, successful retailers are increasingly integrating their brick-and-mortar locations with robust online stores, using both in complementary ways to boost sales and provide more efficient distribution networks in hopes of engaging customers.

Like their tenants, shopping center landlords are also having to change with the times. They can no longer count on new store openings to drive rent growth. The changing retail strategy not only affect the size and physical makeup of stores, but also how rents are calculated and negotiated.

For now at least, national retailers continue their expansion plans. By one landlord's count, more than 81,000 new stores are planning to open over the next 24 months. However, the amount of space retailers are taking is shrinking. Landlords that once counted on new store openings for rent growth are having to eke out growth in part by helping retailers increase sales in the stores their retailers are already in.

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Meanwhile, landlords that once counted on large national 'goods' retailers to occupy their store space, are now seeking out more 'Internet-resistant' retailers, such as restaurants, service providers, even barbershops, doctors and grocery stores.

"The role of town centers in our communities has evolved in terms of adding restaurants, adding experiential uses, adding more events and programs," explained Stephen Lebovitz, president and CEO of CBL & Associates Properties. "Those are the types of things that we are focused on in terms of 'competing' with the internet, to make the mall experience as compelling as possible to our shoppers," Lebovitz told analysts on his company's fourth quarter earnings conference call earlier this month.

It’s something that every shopping center owner is trying to get a handle on and understand, Lebovitz added.

On the distribution side, CBL is considering adopting the same-day delivery strategy that General Growth Properties, Macerich, Simon Property Group and Westfield have undertaken.

In one such example, GGP joined forces with a new company called Deliv to provide same-day delivery service for customers that order online or purchase in the store. The program has been in place for about three months at nine of GGP’s malls and more than 50 retailers have signed on with more in the pipeline.

Although it is still early the process, the initial results look promising, said Sandeep Lakhmi Mathrani, CEO of GGP told investment analysts this month.

“You should note,” Mathrani said, “over 90% of online shoppers have visited a mall during the same three-month period. In addition, consumers who shop e-commerce and the store, shop an average nine times a year compared to web-only shoppers who shop three times per year.”

Supplanting Catalogues

Mathrani said he believes e-commerce is taking over the role formerly played by catalogues and retailers, and that landlords need to adapt their real estate to meet that trend.

According to Mathrani, e-commerce accounted for less than 9% of total retail sales last year. He believes the growth in e-commerce is primarily coming at the expense of sales previously made via catalogue and direct mail.

About half of online consumers have used a ship-to-store option when buying items online, and Mathrani said shoppers choose bricks-and-mortar retailers with an online store for a few reasons: The ability to return merchandise to the store; the push of a coupon or promotion to a smartphone when the consumer is near the store; and simply the instant gratification that comes from being able to buy online and pick up at the store.

“So hurrah for all the trees that we’re saving, and hurrah for a new channel being developed that allows retailers to globally expand their businesses through e-commerce, and create a seamless transition across all channels,” said Art Coppola, CEO of shopping center REIT Macerich

“The dot-com world and the catalogue world has been a source of great new retailers for our shopping centers, both in the past as well as the future. There are a number of retailers that were born in the catalogue world that now are some of our best brick-and-mortar retailers. There are Internet retailers that were born digitally, that now have great retail stores with us. There are digital pure-play retailers that never intended to have brick and mortar stores that have recently figured out that they need to have brick and mortar stores in order to really maximize their brand," said Coppola.

“The best e-tailers are also the best retailers,” he continued. “And for a retailer to have solely a brick and mortar platform, they would not be strong. And likewise, retailers realize that they need multi-channel platforms (including) both full priced stores, off price channels, their e-commerce channels, and now social media which they use tremendously to increase their brand.”

With the changes resulting in more and more stores becoming distribution centers for goods sold online, national retailers see an opportunity to leverage their wide footprint of brick and mortar locations.

GGP's Mathrani said converting more expensive retail space to industrial use is not as counterintuitive as might seem.

“If the online inventory and the store inventory could be transparent, the retailer will not have to duplicate merchandise, will not have to duplicate real estate cost, and will not have to duplicate manpower,” Mathrani said. “As a matter of fact, if they're able to service it from the store, it’ll be a far more efficient way for them to operate. The other aspect of this is that the goal here is to drive traffic into the store so you get additional sales.”

David Henry, CEO, president and chief investment officer of Kimco Realty Management, said bigger retailers favor converting portions of their stores to serve as fulfillment centers because it increases sales. According to Henry, stores sell $1.30 to $1.40 in merchandise for every $1 that’s returned to the stores.

"All of that makes it an effective counterweight to e-commerce,” Henry said.

Determining Rent for Online Sales

With the changes, landlords are also coping with how the changes brought about by e-commerce are impacting leasing costs.

"That’s easy," said David E. Simon, chairman and CEO of Simon Property Group. “They’d have to keep track of it if [the product sold] goes through their POS [point of sale] system, and it’s going to have to if the inventory is in the store, that’s a simple exercise. We have audit rights.”

Richard Sokolov, president and COO of Simon elaborated, adding store owners are very much aware of the role that stores play in the distribution of goods, whether online or store-based.

"Frankly, if that store is any part of the distribution channel for that sale, it’s going to count in our sales,” Sokolov said. “The retailers understand that, and the retailers are emphasizing the convenience and location of their stores as a significant advantage in their ability to maximize their contacts with the customers and their sales. So they very much view their stores as an integral part of their business going forward, and they are working with us in a cooperative way to try and maximize.”

That may be easy if you’re Simon Property Group, the largest shopping center owner in the country, said Garrick Brown, national retail research director for Cassidy Turley. Not so easy perhaps if you are not.

"Many landlords are fighting to get percentage sales that somehow worm their way into Internet revenues,” Brown said. “But the big retailers are generally saying “No,” and most landlords are backing down, ultimately.”

“It is one thing if you have a solo shop with a website, but realistically how do you try to claim a piece of Williams Sonoma’s e-commerce revenues for one store, say in Colorado? Plus the landlords need the retailers now more than they need any one particular landlord,” Brown added. “So outside of a few major players like Simon, Westfield, Macerich and others, it is not like the landlords have all that much leverage.”

Cassidy Turley's Brown said most shopping center owners understand that the strongest retailers are going to be those that master omni-channel retailing.

“They are the ones whose Internet presence is strong and profitable and also drives customers to their stores," said Brown. "While their stores offer a great shopping experience that bring shoppers back and that their bricks and mortar locations also drive traffic to their websites.”

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