Real Estate Strategy

Experiential Retail: A Balancing Act for Profitability and Appeal

Experiential Retail: A Balancing Act for Profitability and Appeal 1440 428 ASG

Transactional shopping is easy to do online, from the comfort of home, with free shipping and free returns. But consumers want a reason to leave their home, drive to your location, find a parking spot, and step inside your store—and it’s up to retailers to give it to them. And as the landlord, you want that foot traffic as much as the retailer does.

With attractions ranging from pop-up retailers with limited holiday engagements and entertainment spaces like theaters and concert venues to active leisure activities like axe throwing and escape rooms, today’s mall bears very little resemblance to these retail meccas of yesteryear.

Experiential retail shifts the focus from transactions to immersive experiences, aiming to offer customers unique, memorable interactions beyond what online shopping provides. It acknowledges that shoppers crave engaging, value-added experiences alongside their purchases.

Adapting to Experiential

How can landlords balance attracting foot traffic while safeguarding investments amid experiential retailers’ needs for space and tighter budgets? The short answer, of course, is to say yes. Offer flexible space, invite the experiential retailers in. Give consumers a reason to keep coming back.

Of course, it’s more complex than that and there are many factors that must be considered, but the mall of today represents a huge opportunity for retail growth and renewed consumer interest.

Doug Tilson, who leads ASG’s Tenant Representation, explains:
“The real struggle for landlords is walking this fine line between bringing in the experiential retailers that consumers want, while still meeting the financial goals for their shopping centers. A lot of these locations are publicly traded REITs with profit goals and shareholder expectations they must meet.”

Making the Most of Your Mall Space

How can landlords position themselves to benefit from experiential retail? How do they attract a beneficial combination of retail offerings that keep the traffic coming? Consider these factors:

Strike a Balance
How do landlords marry the need to show profits with less lucrative experiential retail tenants?
Tilson explains, “There is significant competition for space, especially in the top-tier shopping centers. So, there is a tradeoff between doing something the customer desires with the constraints of possibly lower returns,” he says. “If an experiential retailer pays less, does the landlord do it for the customer, or do they prioritize the more profitable traditional retailer? My advice: Look at your shopping center as an asset and stay relevant with your consumers. Ignore short-term quarterly earnings and focus on the long-term strategy.”

Curate Your Tenant Mix
Carefully curating the mix of tenants within a shopping center or complex is crucial. Selecting retailers that align with the experiential trend and offer unique, engaging, or interactive elements contributes to the overall appeal of the retail space, but they should not be the only priority.
“We saw this happen in many shopping centers when sit-down restaurants became popular,” says Tilson. “In a number of instances, landlords went overboard and ended up with an imbalance. They must be careful not to overdo any one type of retail. And consumers still want to shop; shopping centers still need traditional retailers. Don’t throw baby out with bath water. You still have to have products for consumers to buy, whether or not they have an experiential component to them.”

Embrace New Retailers, but Perform Due Diligence
Just because you may be considering bringing in more experiential retailers doesn’t mean you still shouldn’t perform due diligence. It’s important to maintain fiscal responsibility with new tenants, even if you’re providing more flexibility to the terms of the lease regarding space and scalability. Be sure to address the issue of liability, particularly as it concerns some of the more adventurous experiences.

Use the Fundamentals of Retail Real Estate Strategy
For landlords, consumer expectations may change, but the basic tenets of retail real estate investment have not. (For more, pick up Secrets of Retail Real Estate: How Successful Retailers Win by ASG founder Steve Morris). Location matters. Accessibility matters. The only thing that has really changed are the types of retailers. You’re more likely to have success with a grocery store as an anchor than a department store these days. And you may need to consider more flexible lease and space terms to attract the right kind of retailers to your space.

Embrace Agility
If the pandemic taught retailers anything, it’s that everything can change in an instant. Be agile and willing to change your strategy to suit shifting demand. Where department stores once ruled, it’s more likely your spaces will be filled with DTCs opening physical locations, medical retail, seasonal pop-ups, and experiential retailers. But this shift is an exciting one, because the changing dynamics of your location can be a draw for consumers who are looking forward to what’s next.

Design Stores for Flexibility
Flexibility is a crucial factor in designing retail spaces that attract experiential retailers. Consider allowing retailers to create dynamic and ever-changing environments by offering modular layouts, movable fixtures, and adaptable spaces that can accommodate distinct types of experiences.

Integrate Technology
Incorporating technology into retail spaces is necessary with experiential retail. From augmented reality (AR) and virtual reality (VR) elements to interactive displays and seamless online-offline integration, retail landlords should supply the infrastructure necessary to support these technologies.

Prioritize Sustainability
Embracing sustainability practices can resonate with consumers who are increasingly conscious of environmental issues. Retail landlords can encourage and support eco-friendly practices among their tenants, creating a positive and responsible image for the entire retail space.

Analyze the Data
Leveraging data analytics can help retail landlords understand consumer behavior and preferences. This information can be used to tailor experiences, optimize tenant mixes, and continually adapt the retail environment to meet changing consumer expectations.

Perfectly Positioned
Landlords can embrace experiential retail while taking a balanced and prudent approach by implementing these strategies. This holistic approach allows retail landlords to position their spaces as destinations rather than mere transaction points, creating a more compelling and competitive retail environment that will attract consumers for the long-term, while minimizing the risk of financial insolvency.

Modern Landlords and the Department Store Dilemma

Modern Landlords and the Department Store Dilemma 1440 428 ASG

As traditional department stores grapple with significant losses in a challenging retail landscape, modern landlords should adopt flexible leasing models to remain competitive. To navigate changing consumer preferences, department stores must innovate by investing in technology, enhancing online shopping experiences, and forming strategic partnerships. Success stories from adaptable retailers like Von Maur, Bloomingdale’s, and the unexpected return of Toys “R” Us offer insights into strategies for reinvention.

Department stores have been on a tough journey lately, and a big part of that story revolves around changing consumer behavior and the dynamics of retail real estate. Stores have seen a dip in foot traffic, leading to a struggle to pay the rents demanded by retail landlords.
According to Modern Retail, in just one quarter in 2023, Macy’s recorded $22 million in net losses, Kohl’s profits plunged 60% to $58 million, and Nordstrom’s net sales dropped 8.3%.

But it didn’t always used to be this way.

“Not only did department stores sell everything people needed to clothe themselves and furnish their homes, but they took advantage of the fact that, for the first time, consumers had disposable income. Department stores provided demos, offered lectures, and hosted entertainment events. Shopping was – get the irony here – an experience.”
– Carrie Barclay, President and CEO, ASG

Department Stores Struggle to Keep Up

This history of the department store is a reflection of our culture. But according to Frontier Economics, “the pace of the changes in the last year, including rising costs, channel shift and fast-evolving customer habits, has pushed many department stores to the brink. Even the biggest and best-known brands have faced difficulties. House of Fraser is under new ownership; Debenhams is fighting hard to stay alive; and John Lewis has reduced staff bonuses for the first time in over 60 years.”

Economic shifts and rising operational costs have made it tough for these former retail giants to sustain their traditional models. As a result, we’ve seen closures and restructurings as department stores grapple with these challenges. Meanwhile, shoppers are after more personalized experiences and specialized products, which many department stores find tricky to provide with their one-size-fits-all approach.

This shift in consumer behavior has hit the bottom line for these stores, putting pressure on their ability to keep up with the usual high rents in prime locations.

So, what is a modern landlord to do? Our top advice—be flexible.

Flexibility in leasing department store spaces allows landlords to remain responsive to market demands, attract a wider range of tenants, optimize space utilization, and mitigate risks, ultimately contributing to the overall success and sustainability of department store properties.

What’s Actually Happening to Department Stores?

Many traditional retailers have adapted to the digital age, exploring online sales channels, and implementing innovative strategies to stay competitive. The ones that didn’t are going the way of Kmart, like the following examples.

Bed, Bath, and Beyond
Bed, Bath, and Beyond went from being the retailer on top of the world in the post-economic downturn of 2008 to filing bankruptcy, suing suppliers, and being eaten up by Overstock in 2023. What happened?

The failure is “the result of an increasingly unwieldy corporate structure and its failure to fully reckon with the ascendance of online shopping,” according to the New York Times. In the article, Neil Saunders describes their situation as a death spiral, mostly caused by mishandling of debt.

Bed Bath & Beyond’s stores have closed, but Overstock acquired their intellectual property and took the BBB name in order to “acquire new customers and cement itself as a go-to home goods retailer,” according to CNBC.

Tuesday Morning
Tuesday Morning has closed its remaining 487 stores in 40 states after being approved for bankruptcy. Like Bed, Bath, and Beyond, the company was overextended, and when Wells Fargo increased their cash reserve requirement from $10 million to $30 million, it effectively eliminated any liquidity they had, as explained in a Retail Dive brief.

What Department Stores Can Do to Reinvent

The demise of the department store should be a wake-up call to all retailers to adjust course with the following strategies.

Adapt and Innovate
To survive and thrive, department stores must adapt to evolving consumer preferences. Investing in technology, enhancing the online shopping experience, and incorporating sustainable practices are crucial for staying competitive in today’s market.

The aging Boomer population and the multigenerational increased focus on health has opened doors to medtail, making “retail space a strategic necessity” that has created a dynamic landscape that continues to evolve as both the health care and retail industries face unique challenges.”

Collaborations and Partnerships
Strategic collaborations with popular and emerging brands can breathe new life into department stores. By creating exclusive partnerships or hosting pop-up shops, these stores can attract a diverse range of consumers and generate excitement around their offerings. Grocery stores and beyond are focusing more on consumer values, from sustainable, locally sourced products to products that are committed to protecting the environment.

Focus on Experience
Successful retailers are increasingly focusing on creating memorable in-store experiences. From interactive displays to immersive technologies, department stores must go beyond simple transactions and offer an environment that engages and delights customers.

As we previously reported, “The modern mall is undergoing a remarkable transformation to meet the changing needs and high expectations of today’s consumers. We are excited to be at the forefront, watching how retailers and mall owners embrace innovation, creativity, and technology to reinvent the mall experience. From immersive and experiential offerings to convenient and sustainable practices, the modern mall is poised to become a dynamic and engaging destination that goes beyond traditional retail.”

Contemporary Department Stores Getting it Right

While some department stores have sounded the death nell and others are facing imminent demise, several department stores are demonstrating a level of flexibility and agility that may help them survive in the modern era.

Von Maur
Headquartered in Davenport, Iowa, Von Maur is the parent company of Dry Goods, a women’s contemporary fashion store targeted toward modern young consumers. Von Maur is expanding Dry Goods rapidly, with 11 new store openings in 2023. Von Maur Dry Goods has been in business since 1872 but have managed to reinvent themselves time and again to keep up with consumer demand. Today’s focus is “fashion-forward style meets old-fashioned customer service.”

It might be surprising to see Bloomingdale’s on the list of hopeful success stories, but they have made some big moves to remain relevant, including appointing a new CEO. Unlike their parent company Macy’s that continues to struggle with relevancy and operational efficiency, Bloomingdale’s shows promise, says GlobalData Retail managing director Neil Saunders, who believes the new CEO’s international connections and experience will benefit the retailer.

In an interview with Modern Retail, Saunders said, “There are good brands in there. There’s a good selection. But really, there needs to be more differentiation. There needs to be more exclusive lines, more young, up-and-coming designers. There needs to be more newness.”

Toys “R” Us in Macy’s
Much to the devastation of generations of kids, Toys “R” Us closed their stores in 2018 and filed for bankruptcy. No one expected the brand to reemerge, but they now have 452 shop-in-shops in Macy’s around the country and have plans to open 24 flagship stores. Their new retail location strategy – air, land, and sea – will see stores opening in airports, on cruise ships, and in strategic locations throughout the U.S.

The Future Belongs to Innovators
“If the high street and the city centre are to survive, these important landmarks must find new ways to become destinations. Otherwise, the city may succumb to the 21st century’s version of retail modernity: the cavernous, windowless, invisible, under-regulated, under-taxed Amazon warehouse.” – Apollo

The state of department stores reflects a broader transformation occurring in retail. While closures of big box, specialty, and legacy stores may signal challenges, they also present opportunities for adaptation and innovation. As the industry continues to evolve, the key to success lies in the ability to embrace change and meet the dynamic needs of today’s discerning consumers.

Retail Location Strategy & Consumer Connection

Retail Location Strategy & Consumer Connection 1440 428 ASG

I have talked about the importance of retailers connecting with their customers – meeting them where they are, understanding how they’ve changed, and refining what is offered to better serve them. But this idea of connection goes further. Retailers are finding new ways to engage authentically with their customers, and there is an opportunity for retailers to provide space, purpose, and reason for people to reconnect with each other. But even as retailers seek to reengage with consumers, many people are finding that – for at least a couple of reasons – reconnecting isn’t as easy as they thought it would be.

They Don’t Remember How

As areas of the world come out of the most stringent lockdowns of the pandemic, many people have been saying the same thing: they don’t remember how to relate to other people. It’s become an almost-painful joke that underscores the extreme isolation of the last year. People are struggling with figuring out how to reconnect and be with others. 

Many are Experiencing Profound Loneliness

In and among all the parents struggling to work from home while supporting their children doing online school while never having a moment of quiet, there have been even more people struggling to simply survive the loneliness of the pandemic. Self-isolating and social distancing as a family is much different than self-isolating and social distancing for someone who lives alone. 

Retail Provides Opportunities – and Excuses – to Connect Again

I think this is one of the most understated purposes of brick-and-mortar retail. Beyond ordering something online, which is a one-to-one experience rather than an immersive experience, retail becomes part of the social fabric. I believe that this affords many opportunities for retail to explore different dimensions to socialization.  Whether it’s connecting with a friend in a newly re-opened café, shopping with friends for wardrobe updates, or enjoying a mani-pedi session with a family member that you haven’t seen in six months, retail of all kinds opens doors to connecting people. And as retailers consider the consumer desire to connect, it will impact the way they locate and design their stores.

As we observed in a recent Chute Gerdeman article:

People are actively seeking out communities to find support and belonging. Consumers are finding strength in numbers, and it’s clear that it’s impacting retail. No matter how big or small, brands are re-assessing their efforts to bring a sense of community into their offering. For some it’s sparked an entirely new format strategy, while others have created outlets that bring communities together.

Retail Location Strategies that Bring Communities Together

Retailers should meet and connect with consumers where they want to be. These days, it’s more than just at a mall. A great example of the future of retail location strategy is the opening of Bloomie’s in Fairfax, Virginia, this summer. The store will be roughly 10% the size of a traditional Bloomingdale’s department store. The store will “serve as a hub for experiences, with a focus on fashion, and feature Colada Shop, a restaurant serving coffee, Caribbean-inspired small bites and cocktails into the evening.”

Rather than locating in a shopping mall, Bloomie’s will be located in the Mosaic District shopping center – a mixed-use development with retailers, apartments, offices, town homes, a grocery store, and a movie theater. 

This approach by Macy’s (owner of Bloomingdale’s and Bloomie’s) is precisely where retail location strategy and consumer-centric retail converge: in the neighborhood, in a more focused space, with the goal of giving people a place not just to shop but to gather, socialize, and connect.

The Landlord-Tenant Partnership to Save Retail

The Landlord-Tenant Partnership to Save Retail 1440 428 ASG

The loss of specialty retailers, such as Jos. A. Bank, J.Crew, Lord & Taylor, and Pier 1, didn’t just impact the companies themselves. The ripple effect ran through the malls in which they were tenants and indirectly impacted the other mall tenants that relied on their presence as a draw. Many tenants had anchor store requirements that allowed them to renegotiate or even cancel their leases. Unfortunately, landlords are often caught in a tough spot, between tenants who are also trying to survive and must use every leverage point they can, and mortgagers, who require a minimum level of revenue to avoid foreclosure.

Landlords and Tenants Can Work Together to Save Retail

The worst situation for all parties involved would be foreclosure. Landlords and tenants are going to need to find ways to work together. The retail real estate industry must assume a collaborative stand with tenants through these unprecedented times. That doesn’t mean just agreeing to what the tenant wants. Understanding how a tenant makes money and what they can afford to pay is incredibly important. So owners, view your tenants’ requests for assistance as opportunities to strengthen the non-financial aspects of a lease. Reduce co-tenancy requirements, shorten terms, and remove exclusives or other cumbersome items that limit a landlord’s flexibility.

Anchor Stores Need to Change

The downfall and demise of the traditional department store means that anchor stores must change. Given the focus on consumer experience, it makes sense that the anchor stores should be experiential. From hotels and restaurants to gyms and theaters, reimagining retail space is a way forward that can benefit both the landlord and the tenants.

As e-commerce continues to grow, retail investors and tenants are being forced to reconsider what consumers gain from the brick-and-mortar shopping experience. Traditionally, landlord and tenant relationships were ultimately transactional. Today, the sides are teaming up, realizing that together, they can achieve a shopping experience worthy of drawing consumers away from their smart phones and devices. – CBRE

The Future of Mall Space Can Be Exciting and Functional

Elizabeth A. Whitman takes a deep dive into what can be done with retail space in malls that is no longer being taken up by department stores. Temporary options include becoming a vaccination site or converting to warehouse space for last-mile delivery. But long-term solutions are even more exciting in the potential they offer. One mall is transforming its now-empty Sears location into a fitness center with a pool. Another has converted boutique shops into micro-apartments for single tenants. The one common element of all of the reimagined uses of the space is that it recenters the mall as the place where people congregate to live, shop, and have fun – and that’s the key.

We use phrases like ‘omnichannel’ to describe scenarios as though every consumer wants to move seamlessly across everything a retailer, for example, has to offer. However, we have to turn that idea inside out and remember that for consumers it’s all about experience, and always has been. A consumer will choose the experience they want, based on the service or goods they are buying, and then the channel. The businesses that will be rewarded with brand loyalty are those delivering great experiences in stores and online.

Where Do We Go from Here?

Two truths on which we need to remain hyper-focused have come out of this year: One, tenant representation is essential – tenants who had someone capable of navigating, renegotiating, and changing lease terms were more capable of being flexible in meeting their customers’ needs; and two, the adversarial nature of the tenant-landlord relationship needs to transform into a partnership that keeps them all in business. If these things are not achieved, then banks are going to end up owning a lot of empty malls.

How Individual Cities Can Influence Real Estate Investment

How Individual Cities Can Influence Real Estate Investment 1440 428 ASG

Numbers drive virtually everything, especially in real estate. And no investor wants to establish real estate property if the prospects of success are poor. Before committing to any property development, a real estate investor wants data on business growth rate, the resilience of the economy, population size, tax incentives, and other components that are a piece of any retail real estate lease or contract. However, as the landscape of consumer demands becomes more personal, as well as socially mindful, individual cities are now defining the retail real estate market.

Economic size is only one factor.

Global leaders, such as London, New York, and Tokyo, are noteworthy cities in which to invest. Their sheer size and booming economies result in ambitious growth, accounting for a sizable percentage of global real estate investments. However, the markets are known to be cyclical. It’s a fast-paced environment with a sink-or-swim mentality, and not every business is capable of thriving.

Although large cities are attractive to real estate investors, they are far from the only option. Smaller cities captivated by innovation or driven by a niche product offer their own paths to success. Retail real estate is no longer limited to who can open the biggest store or have multiple locations throughout a city. The traditional approach to dominating the market has shifted, and consumers crave something more. Columbus is often the epicenter of retail.

Demographics and local interests matter.

Numbers drive virtually everything, especially in real estate. And no investor wants to establish real estate property if the prospects of success are poor. Before committing to any property development, a real estate investor wants data on business growth rate, the resilience of the economy, population size, tax incentives, and other components that are a piece of any retail real estate lease or contract. However, as the landscape of consumer demands becomes more personal, as well as socially mindful, individual cities are now defining the retail real estate market.

Individual cities have a unique competitive edge.

The cities that are most successful are those that have a distinctive reputation. Size does matter, but it certainly isn’t the only stimulus for achievement in retail. The enterprising mindset of the city itself, regardless of industry, will drive the innovation and unique experiences that consumers want. Peer groups have a significant influence on how a city grows and the retail that thrives, ranging from tourist hubs to entire neighborhoods driven by sustainability practices.

It can be challenging to balance efficiency and innovation, but different cities will demand completely different stores and retail strategies. What functions well in New York City is not guaranteed to launch similarly in Tokyo. A flagship store may do well in the suburbs of Chicago but sink completely in the neighborhoods of Toronto. The demographics of an area can be so specialized that two stores within the same city limits cannot market themselves the same way. Retail real estate must spend less time defining who they are and more time strategizing how they fit into a city’s existing strengths.

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