Breaking The Connection Between Sales And Rent In The Age Of Omni-Channel Brand Management
We are in the midst of a paradigm shift in technology the likes of which we haven’t seen since the industrial revolution. Technology is changing and evolving faster than we can keep up. It’s having an effect on every part of society, but maybe none more significantly than retail. Our collective concept of what constitutes retail is changing not so much by the season, but by the second, and everyone is struggling to keep up and make sense of it.
The one area that has lagged behind is our overall understanding of how we value of brick and mortar retail. The media reports on the demise of brick and mortar retail have been largely overblown, but every time a heritage brand that is long past its prime goes the way of the dodo, they write that story again. Retail is finished. Malls are dead.
The reality is, America is grossly over-retailed with 7.3 sf of retail per capita, compared to 1.3 and 1.5 sf per capita in Europe and Asia. We are overbuilt and a natural correction is way overdue. Brands that have failed and closed their doors were no longer relevant to current culture. It’s not a mystery why some brands fail. Sears, once the most powerful retailer in the country, ceased to be relevant to the needs of Americans. When the car was invented, we no longer needed so many wagon wheel makers. Evolve or die.
Even as online sales continue to grow, online retailers themselves are discovering the wonder of creating physical spaces where consumers can interact with their products in real life. Amazon, the company that killed the neighborhood bookstore, is now opening physical bookstores. Once online-only brands such as Allbirds and Bonobos are rushing to open brick and mortar locations. So it’s not the value of having a physical presence that is lost on the industry, but rather how its value is determined.
Historically, rent was determined by sales per square foot. If you were in a shopping center doing $1,500/sf, then you could charge a lot more for rent than a place claiming average sales of only $500/sf. The value was based on the amount of sales you could expect from that one physical location. It was a logical understanding of how much value that space held.
But in today’s retail environment, brands take a more omni-channel approach whereby sales may come from online, wholesale or retail, and while there may be different profit incentives for each channel, the brand does not necessarily care where the sales come from. Brands recognize that brick and mortar retail can play a significant role in bolstering online sales, but retailers know that if they can show that sales are down in a physical location, they can expect to receive lower rents from their landlords.
But the reality is, with today’s big data analytics, we can show that consumers who visit a brick and mortar store, often make purchases online from that brand within two weeks of their visit to the physical store. They might not have made the purchase in person, but their physical trip informed their online purchase.
It’s time to decouple the relationship between sales and rent when it comes to valuing brick and mortar retail. The retailers abandoned this ages ago, with their omni-channel approach to building sales. They are more than aware of the relationship between their physical locations and their online sales. They may even view brick and mortar locations as a convenient place to take returns, especially if they can count those returns against sales. This is clearly not only disingenuous, it’s an inaccurate understanding of the value of a physical location to strength of a brand.
We need to recognize brick and mortar retail for what it is, a showroom for brand experiences, as opposed to a distribution center. That model is falling away due to online shopping and overnight shipping. But the more we live in the virtual world, the more we crave the physical experiences of being out in the world.
Studies have shown that millennials and younger are far more likely to spend their disposable income on experiences rather than merchandise. This is largely because they’ve grown up behind screens and are native citizens in the age of technology. They’ve never known a world where you didn’t carry the knowledge of everything in the palm of your hand. Actual experiences are unique, exciting and profound.
Retail that creates experiences and products that enable them, will always have a place in our culture, because humans are built to live in communities. We yearn for human connection and real experiences, no matter how interesting and mind blowing the technology becomes.
The value of brick and mortar retail is in how it can shape the experiences of consumers in the physical world. Developers must work with retailers to support their efforts to create memorable stories and emotional connections. If they do that, everybody wins.
David Todd McCarty is a Partner and Director of Branding at Panzano+Partners, an international consulting firm that specializes in retail and hospitality brands. They are based in Moorestown, NJ. Panzanobrand.com