Rebuilding Place in the Urban Space

"A community’s physical form, rather than its land uses, is its most intrinsic and enduring characteristic." [Katz, EPA] This blog focuses on place and placemaking and all that makes it work--historic preservation, urban design, transportation, asset-based community development, arts & cultural development, commercial district revitalization, tourism & destination development, and quality of life advocacy--along with doses of civic engagement and good governance watchdogging.

Tuesday, June 07, 2016

Retail roundup #1: retail sales and department stores and shopping centers

1.  Retail sales are down and department stores and big boxes are especially affected.

2.  Aggregate sales data implies that consumer demand has declined and this is accentuated by a shift to online commerce for many retail categories.  A blog post by a retail consultant made the point that when you subtract gasoline sales and automobile sales from retail sales data, because mostly these goods are purchased in-person, up to 40% of total retail sales have been captured by e-commerce.

(Although I did read an article recently about how there is a new service, where a mobile gasoline truck will come to your house, "On-demand fuel startup Filld offers gasoline delivery at the touch of an app.," Silicon Valley Business Journal).

Losing significant tranches of merchandise categories, especially those with higher profit margins, is devastating to large retail stores especially.

Simultaneously many retail categories, especially for independents, have disappeared -- small office supply stores, electronics stores, travel agents are some of the categories.

From "Why Belk was smart to sell itself when it did," Raleigh News & Observer:
Customers shopping online generally are looking for specific items and aren’t subject to impulse purchases the way they would be when shopping in a physical store, said Richard Jaffe, an analyst at Stifel. And that can be a challenge for traditional stores.

“E-commerce has fueled a secular change in apparel consumption; undermining total fashion apparel consumption and eroding profitability,” Jaffe said in a research note this week.

Another challenge for department stores: Younger consumers have different purchasing patterns than their parents. Young people, already burdened by student loans and smaller salaries, are opting to spend on experiences like concerts and technology like smartphones, rather than on clothes, industry experts say.

“The normative behavior of younger customers is not fixated on trend purchasing, at least not in apparel and accessories,” Columbia’s Cohen said. “They have to have the latest iPhone, but not the latest sweater.”
3.  Sales tax declines as retail shifts to online venues will negatively impact local jurisdictions.  It's also devastating to cities, counties, and states when it comes to income streams from sales taxes.

For the most part, online transactions don't trigger sales taxes unless the company has "nexus" in the city, county, or state where the product is delivered (for example, a Macy's online transaction triggers sales tax if Macy's has a store in the jurisdiction, or an Amazon transaction will be taxed if the company has a distribution center in the state, etc.).

4.  Local commercial districts need new strategies to remain relevant.  The continued rise in online sales makes repopulating retailers in neighborhood and small town commercial districts doubly difficult.  This means a few things.

First, convenience retailers (food, pharmacy, hardware) will locate in a variety of locations, because of every day nature of their sales (repeat business transactions/consumables).  So if communities have a large enough population base, in their natural retail trade area they can count on getting some of those stores, and that can help anchor the attraction of discretionary retail.

Second, retailers in other categories, especially apparel, tend to cluster in regionally-serving districts, where they can count on access to more customers. There are exceptions though.  Willow on Upshur Street NW in the Petworth neighborhood is one.

Third, commercial districts of all types including shopping malls are putting a greater emphasis on food--after all people eat every day, and events and programming.

5.  Does your business or place even have a strategy?  A frustration in working in commercial district revitalization is that property owners and especially proprietors of individual businesses can be complacent, believing that they are already excellent and have limited need for change, or that they are particularly special and unique.

Competition is voracious.  No business can be complacent in the face of new competition from other businesses, commercial districts, revitalized shopping centers, and e-commerce.

6.  Shopping malls and centers.  Just like I had to come to the conclusion that it wasn't enough to say "sports-related economic development" projects don't work for local governments categorically, instead of focusing on what works, what doesn't and what could work better (a/k/a making a bad situation marginally better), the same goes for shopping centers and department stores.

Since the 2008 recession, the US poverty rate has doubled, from one person in twelve to one person in six.  Therefore, retail sales are down in many retail categories, and more people have shifted to lower priced alternatives.

Plus, many firms have gone out of business (e.g., Circuit City in electronics, Linens & Things in housewares, Borders in books) or have closed significant numbers of stores, so shopping centers are faced with having fewer retail tenants.  And when certain stores close, like department stores, lease clauses can be triggered that allow other tenants to break their leases.

7.  As a category, shopping malls are on the decline, sure, but the reality is more nuanced.  Class A shopping malls are doing great, while Class B and Class C shopping malls are declining ("Can a shopping mall renovation revive a tired suburban community," Washington Post).  Similarly, some strip centers are doing great while others are not

And while mall managers have always been focused on activation programming to attract and retain customers, they are getting far more sophisticated about it.

In a trend that started with lifestyle centers more than ten years ago ("Lifestyle Centers vs. Traditional Commercial Districts"), shopping centers are re-creating the multi-activity and experientially oriented downtown central business district, by adding "public spaces" and recreation and park-like and other civic elements, to make centers more of a community center and destination, and to keep customers onsite longer while spending more money.
Stony Point Fashion Park shopping center, Richmond
Stony Point Fashion Park will undergo a major renovation. The center’s western part, near Dillard’s, will home to “The West End,” an eclectic, open-air space where guests can play a game of bocce ball after a movie or relax on modern rockers in a lively, inviting courtyard, interspersed with fire pits, fountains and tables. Plans call for creating a roadway that would connect the north and south parking lots.  Image courtesy of Starwood Partners.

For example, the Stony Point lifestyle center in Richmond is expanding its experiential elements to remain competitive vis a vis other shopping options, including another very successful lifestyle center ("With $50 million renovation looming, Stony Point Fashion Park puts concerts on hold," Richmond Times-Dispatch). From the article:
As Stony Point Fashion Park turns its attention to a $50 million redevelopment plan, it’s putting its free Summer Sounds outdoor concert series on hiatus this year, according to a spokeswoman.  The mall in South Richmond has held the free outdoor concert series since 2011.
Shopping malls are changing in similar ways to remain competitive ("Malls are transforming as anchor department store tenants close," RTD; "Retail winners and losers: Not everyone can be Amazon" and "Macy's woes could doom a third of America's malls," Chicago Tribune).

Most department store companies are on the decline, ("Department Stores Need to Cull Hundreds of Sites, Study Says," Wall Street Journal) but certain locations work much better than others. I have argued for a long time that department stores work especially well in cities, or at least cities with higher incomes.  New York City is one place where new high-value brand department stores are being opened ("A Department-Store Comeback in New York City," Wall Street Journal).  But given changes in how people shop, urban department stores except in the biggest cities, are also on the decline.

The big companies with hundreds of stores--Macys, Dillards, JCPenney, Sears--are having problems.  Sears has been on the decline for a couple decades and continues its slow death spiral.  JCPenney is doing better after its debacle of a couple years ago.  Even Nordstroms, a company that had experienced significant success, is sputtering at the moment.

A few month's back, Macys announced they'll be closing 40 stores, mostly in small markets or in markets where they have multiple stores.  An interesting article from the New York Business Journal discusses the criteria the company uses to make the decision about whether or not to keep a store.  From the article:
Macy's then looks at which stores are underperforming and tries to model out the cash flows going forward, including the sales it would lose from closing the store as well as merchandise that was previously purchased but will inevitably be returned, regardless of whether it's online or at another nearby store, she said.

Hoguet also noted that when a retail location closes, Macy's sees a corresponding drop in sales on and She speculated that part of the dip in online sales could come from consumers not having a convenient way to return merchandise that doesn't fit or that they don't like.

"We then model out the cash flows going forward and compare that with the cash flows associated with closing – any proceeds if we own the store, working capital, et cetera – a nd look at the two together and decide if the value to operate is greater or less than the value to close, and we proceed," Hoguet said.
Smaller department store companies have some success.  Von Maur, a small department store chain based in Iowa, has more than doubled in size over the past few years, and has significantly expanded its operational footprint beyond the Midwest.  Boscov's which managed a rebound after being pushed to the brink of closure during the recession, seems to have righted itself and is growing some ("Boscov's Department Store Enters New England With An Opening In Meridien," Hartford Courant).

Discount department stores.  This category is dominated by Walmart and Target.  I argue that Walmart has reached close to its maximum store count and reach, especially because their business model focuses on lower income consumers.  But after a recent round of store closures earlier in the year ("LOL: Walmart closing stores") they seem to be on the mend according to more recent sales reports.  Time will tell.

Curacao is a California-based chain focused on the Latino demographic and the company continues to expand.  Shoppers World is a discount department store targeting low income markets on the East Coast ("Shoppers World CEO 'Undercover' shocker," New York Post) and it has big expansion plans.

The opportunities for mass marketing appear to be with niche consumer segments at the high and low end, and with experiential concepts.

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