Investing in Retail in the Age of eCommerce
By Gilbert Trout
When it comes to retail, most investors rely on a classic and relatively simple matrix to determine if an asset is a sound investment. You plug in the sales figures, measure business stability, look at the lease rate and lease term, see who’s guaranteeing the lease, add a couple of other variables and you basically come out with a pretty good idea of whether or not you have a sound investment. But the rules of the game have changed.
Now, those matrixes are completely outdated. A retailer like Toys R Us looked fine according to matrixes 5 years ago. Now, they’re out of business. They may come back as Tru Kids, but will it work? Now, take your rent roll, and assume that at least half your retailers are the next Toys R Us five years from now…
Think of Moore’s Law. In the 1970s, it projected that the number or transistors on integrated chip circuits would double every 18 months. With the Internet age, it has been generalized to project the growth of everything Internet, including speeds, data traffic and IoT (the “smart” devices propelling our modern world). And don’t think eCommerce isn’t affected by this growth.
So, with the increasing fluidity between brick-and-mortar and online retailers, how do you, as an investor, make sure your investment is not just e-commerce bulletproof but also strategically positioned to surf through future waves of technological disruptions? Well, here are a few tips on how to make your investment property succeed.
The transparency that technology offers lets us peer behind the veil of both brands and consumer preferences. Use social media to gather opinions and attitudes towards your potential asset.
A quick search through social channels, Google and ratings sites will show you what people think about the brand and product, how helpful they feel the staff is, if the store has a convenient location and much more. Or, better yet, consider engaging a social media maven as part of your due diligence and have them report the social media status of the retailer to you.
Bricks to Clicks
It used to be that you could trust that a good number of people that entered your store each day would buy in store. Now, many people browse and if it’s clothes, try things on, but then they go home and buy online.
With the shrinking footprint of retailers, your investment needs to show how it is converting in-store visits into in-store purchases along with how online purchases are affecting foot traffic.
Ask the retailer: find out if they have a robust pick-up-in-store service, ask how much of their sales are from on-line purchases versus in-store purchases, and see if they have an impactful customer-service team to create meaningful customer relationships.
Feeling innovative? Check out startups like Placer.AI, a web-based service that tracks mobile users to understand customer cross shopping, void analysis, and retailer cannibalization.
Being eCommerce-proof Isn’t a Thing Anymore
People used to say that they’d never buy vegetables, baked goods, groceries or clothing online. They were eCommerce-proof products. Not anymore. The whirlwind acquisition of Whole Foods by Amazon, shows that the real grocery race isn’t for the freshest carrots, it’s for the data trends tracking how you and your family shop; or, perhaps this data is used to lead you to your next on-line purchase: Are you buying baby-food? Well, why not save money and also buy that discounted box of diapers via this on-line-only coupon? Additionally, artificial intelligence can now model how anything would look in your home.
Going to a brick-and-mortar home store, or physically shopping for something like furniture or artwork, is not a necessity. You no longer have to guess how that painting will look against your wall or if that vase will work as the perfect centerpiece. Ask yourself, what would make you take that extra time to drive and visit that store for something you might be able to buy on-line?
The Term on the Lease
The old adage was that the longer the lease, the better. If a retailer was in place for 10 or 20 years, it was a more secure value. In today’s environment, there’s a shorter life cycle for retail.
People in general are more entrepreneurial. There’s more of a start-up culture.
Formerly, people did what they did for decades, not really looking for change. Now, people hop from career to career faster and in a different rhythm than they used to. This includes both employees and business owners, making shorter lease terms more advantageous for all, including investors.
Bifurcation of Types of Retail
Is the retail store something people must visit or someplace they want to go? Nowadays, this is a trick question. No one must go anywhere.
When you’re looking at an investment, bring in a host of experts who can help you determine if the geographic location is good, or if the look and feel is right for the market. You have to see if the investment has a prevailing appeal that will drive people inside.
Flexibility Is Key
Demographic change happens fast. Your retail investment will most likely have to adjust to different types of customers as well as tenant-types, with new preferences and expectations than just a few years ago.
What about location? Is mixed-use best, or modular? Should you be in a building that includes offices? The answer may be different from year to year.
Even the nature of the business may need to change. A retail business can develop into a service-oriented business, or morph into something completely new. In today’s market, nothing is set in stone.
Grappling with an ever-changing market? We’re here to help!
If you’re looking to invest in long-term property, you need to look at flexible properties that can handle the winds of change. Trout Daniel and Associates can help you strategize and choose your investments wisely. Get in touch with us to get the ball rolling and help you determine your best investment options.
To contact a TD&A associate, call 410-435-4004