Commercial Real Estate Solutions for a Post Covid-19 World.
Editors Note: Admittedly, I debated with whether to publish this "white paper" but have come to the conclusion that the benefits far outweigh any narcissistic attitudes I may have had by withholding my ideas for the post-Covid19 economy. Having only shared limited information with a select few, I came to the conclusion that I could, in fact, have a greater impact and influence in assisting more business' in remaking and rethinking their operations, including big box retailers, restaurants, Landlords and supply chains. What I have outlined within this article is a starting point, a place where I hope that thoughtful analysis, creativity and the imagination come together to expose the pitfalls and benefits of such an endeavor. My hope is others will fill in the blanks for their respective business', both large and small. I am however, asking that you share this openly and acknowledge where/what/who has proposed this and allow me opportunity for expanded exposure, networking and the consideration to work with you on projects where my insight and creativityay prove invaluable. So without further adieu I give you:
Retail Apocalypse 2.0
I think we have all known that traditional malls and retail would eventually have to reinvent themselves to survive. The pandemic has now created a sense of urgency and for some (or most) this awakening will come too late. But take heart, even through bankruptcies, if you consider what I am proposing, I believe you will thrive in the new retail economy.
Traditional malls and large retailers. We all understand that there are a myriad of reasons for the declining Brick and Mortar sales, but the top 3 are rather easily traced to stagnant business models, technology and the 800 lb. gorilla that is Amazon. Declining sales are directly attributable to, archaic supply chains, inefficient space planning and falling behind the technology curve all of which accelerated simultaneously and magnified the scope as well as depth of their shortcomings. However, with this pandemic we are now presented with an opportunity to reinvent and bulletproof retail for the foreseeable future. Brick & Mortar retail's very survival depends on it.
So what is a large retailer (and mall owner) to do?
We start by first acknowledging that the business model is obsolete and is no longer viable in the anticipated new economy. Changes to every aspect of the business are now on the table and those who are innovative have an opportunity to lead. Looking past the short-term pain, there is a clear path forward in the modern marketplace, if, you are paying attention to the broader markets. Thoughtful, introspective and imaginative leadership will define what comes next. Shedding operational costs is the easy part for any executive, but defining the company's direction may prove more challenging than ever before. The industry has an urgent need for real estate leaders sourced from outside the industry to fill the creative void in their companies. Long-tenured insiders often live in a vacuum and at critical times miscalculate underlying fundamentals of forces occurring in the macro-marketplace and are slow or resistant to react.
Utilizing outside consultants (or having a macroeconomic-consumer executive on board) who understands the broader markets will pay large dividends in most cases. It's not about restructuring personnel, it's about positioning the company within your category. It's obvious that at the top of the retail chopping block list (and singularly short-sighted) the most likely option is to close underperforming locations, reduce rents and lower occupancy costs where you can by extracting concessions from Landlords. This eases the pressure points in the short term, but does nothing for the long term health of the company. Your bottom line is still getting squeezed but at a slower, more controlled pace. Under this direction you are given a false sense of security. So what is the long term solution for both retailers and Landlords? The answer may exist in space sharing and co-ops.
SPACE SHARING & CO-OP'S: THE ANSWER TO RETAIL'S PROBLEMS?
If you were to rethink retailing and consider "space-sharing" and "Co-Op's" with your competitors (and/or complimentary business partners) big box retailers could theoretically create economies of scale in line with Amazon and Walmart. In fact, I submit that large retailers will be MORE SUCCESSFUL if they opt for this method.
As an example; Let's say JCP with a typical big box space which is 60k-100k sf., is located in a power center or declining mall. If their space was shared under agreements with other major retailers such as Sears, Macy's, Neiman Marcus etc. it's unlikely that they would go dark. Having a space-sharing and co-op agreement in place would have accomplished several things vs. if they went it alone (as is the case now).
- Reduction in overall operating costs through smaller floor plates, inventory levels, labor, and distribution costs while increasing service and customer satisfaction.
- Created a new shopping experience and destination retail environment, while selling products within the same category and class.
- Increase foot traffic while simultaneously increasing online sales volume.
- Created a superior, unrivaled last mile delivery system.
Why in the hell would I want to partner and share space with a competitor?
Well, technically you already are! In any location you can think of, you are sharing space with your competitors anyway with each major retailer having large inefficient footprints, excessive inventory and paying higher rents. Creating a shared cost environment under one roof intuitively lowers costs without effort. Each reduces their overhead at individual locations by an estimated minimum of 50%+/-. That 100,000 sf. dinosaur you own or rent is poorly utilized space which has been operating at a loss. Shared Space creates operational efficiencies across the board with cost reductions for everyone.
Wait, What? Simply downsizing or closing locations does little to support the bottom line. Suppose for a minute that retailers tweak their forward facing B&M locations towards a "showroom system" and not a distribution system. The efficiencies created with a showroom system with integrated technologies such as utilizing more robust inventory tracking and utilizing AI to track consumers across the chain will reduce operations costs while expanding sales on reduced traffic volume. The consumer experience is seamless as I explain in more detail concerning the supply chain.
MYTH: Less Inventory on the floor equates to lost sales. REALITY: given this scenario sales would increase when tied to the new supply chain which is incorporated. As an example, in a showroom environment there is no reason to carry 12 items of each size of a women's dress. Carrying 3 in the most popular sizes would be sufficient. 2 are for the floor displays and 1 held in back stock for quick-out the door must have urgent occasions. Using this methodology considers retail operations may have to increase disinfecting/sanitizing between dressing room changes and assists in lower these new costs.
PLEASE HEAR ME OUT ON THIS.
Supply chains: This is where each member of the Co-Op (or consortium if you prefer) really begins to gain traction against the likes of Amazon and Walmart. Through selective merchandising based upon the AI at the "showroom only" sales floor, AI can predict consumer demands of the localized markets and support the supply chain distribution channel, thus becoming the Co-Ops biggest competitive advantage. Controlling end-to-end supply chain is a game changer for each Co-Op member. Aggregating merchandise in centralized distribution locations and putting under one roof reduces current redundancy across Co-Op member chains and creates economies of scale. Also, Industrial space is significantly cheaper than retail and acquiring logistics positioning early in the rebound will increase profitability. Positioning warehouse space in select major markets allows you to compete with Amazon. (As an example Lowe's Home Improvement has 19 distribution centers throughout the US and gets packages to stores or consumers overnight). However, the goal is not just compete but to take back market share.
How is this accomplished?
Accomplishing this is easier than you may think. Having the merchandise centralized allows for the reimagined supply chain inventory and AI technology to take control.
- All inventory is held in market central locations between the members.
- While technology already exists at the store level upgrading with AI will significantly lower costs. (ie. Lowe's Home Improvement comes to mind with their (albeit a archaic) Linux system as it tracks inventory between store locations, deliveries times and location stock. Adding AI improves predicting localized demand.
- The utilization of Gig Workers! I've coined this "UBER COMMERCIAL". Supply chain reimagined! Imagine a customer purchasing a dress at a B&M "Showrooms" but she doesn't take the dress with her! Instead, it is paid for, goes into a centralized order system, and goes out to the closest distribution center instantaneously. The dress is immediately placed in the Que, is packaged and is sent to the loading dock, where a UBER COMMERCIAL driver is waiting to pick up packages and deliver directly to the consumers doorstep! In most cases, you are now offering same-day delivery (2 hours?) and the package may actually arrive at the consumers address BEFORE they return home! As gig-workers Uber Drivers can be paid flat rates or per mile with efficiencies and profits generated by built in markups within the system. Making distribution a profit center for Last Mile deliveries.
OBSERVATIONAL POINTS
- We've all been to Las Vegas and seen the Taxi's and Uber's line up on a big weekend. Utilizing Gig workers to compete against Amazon as reimagined last mile is easily integrated into retail deliverables.
- So, what happens if a customer needs an item right away from the Showroom? The limited back-stock comes into play. Easy access to pre-determined AI essentials and a limited back stock makes this possible and customers happy and engaged.
- Reduce overhead by having a 3rd party manage the supply/distribution chain is another avenue to explore. Having managed distribution as a clearing house/aggregator and paying a fee(s) for services may make more sense to some.
It's about the sales stupid.
How can retailers increase sales through downsizing?
Two words, VOLUME and EXPANSION The dinosaur of a former over-leveraged space now gives way to shared spaces which are capable of easy replication and scaling accomplished through reletting existing OR innovative new construction design. Restaurants and now retailers can now retool and embrace the capability to cost effectively scale in multiple markets and do so quickly. What I'm proposing is not entirely new as we've already seen National Brands like Dunkin Donuts housed with Baskin Robbins, Kentucky Fried Chicken with Taco Bell etc. to name a few. Those are hybrids to my proposal but can be integrated as well under the right circumstances.
I know what you are thinking, how do they expand in this climate as they cannot easily dispose of current locations and cashflow is non-existent? Therein lies the challenge. I'm not expecting this to happen overnight. Understanding existing locations are going to have to adapt regardless. The point is they will be chasing continued revenue losses by standing pat and modifying stand alone locations. Most will waste precious capital by throwing money at a long term problem that doesn't bring a return on investment nor does it provide a real solution. There is no doubt that many will be forced to go this route and all will ultimately fail without a reduction in operating costs (Rents/CAM top of the list). Landlords should not be a willing participant by taking a haircut due to tenant inefficiencies. Landlords will be looking elsewhere to add value long before they concede on rents.
What about the Landlord???
Initially, Landlords may not appreciate and/or resist placing multiple former big box retailers or restaurants into one space. Smart Owners however, will recognize this for what it is, an opportunity to stabilize and optimize their centers by way of aggressive leasing and reimagining retail for the long haul.
Adaptive landlords will be creating an entirely new destination experience, yet bring with it familiarity which comforts consumers. Both being achieved through new construction design or reimagining older distressed centers. An added bonus is gone will be the days of cheap rents to fill space to non-retail uses.
Included within my re-imagining is a vision of creating centers with stand alone "Villages" which house different categories of retail in a well thought out plan which flow seamlessly between buildings. As an example, a dead mall with multiple big boxes and small shops can now be split into multiple themed buildings or new centers can be created using a hub and spoke design as a reference point. The configurations are unlimited and can work.
Landlord Efficiencies
Landlords will gain efficiencies in operations as there will be less maintenance and better defined fixed costs under my proposal. Further, looking at a worst case scenario where a tenant goes dark, the landlord has many more options to successfully replace a smaller footprint. Landlords may also invite retailer input by giving them an opportunity to select from those options or possibly add a member organization from another location, thereby engaging tenants to have some stake in their overall success. Additionally, a few dark corners are not as detrimental to the overall health of a center nor does it mean the demise of the Co-Op/partnership.
REimagineering snapshot:
- Co-Ops, Partnerships, Joint Ventures, etc. create synergies between competitors by having complimentary retailers housed under one roof to reduce overall costs for each.
- Establish proprietary supply chain/distribution centers across multiple locations similar in size and scope to compete directly against Walmart/Amazon while delivering more efficient last mile services.
- Landlords share in the reimagining process and create a new sustainable business model which stabilizes centers for the long term.
- Opportunity to assist in the creation of the retail version of Uber/Lyft commercial services by creating more diversified retail jobs without adding overhead to any single individual business unit.
RESTAURANTS! WHAT ABOUT THE RESTAURANTS!!
Umm. I didnt' forget! This also may not be as difficult than it appears. At this point in time, we all believe full service restaurants as well as QSR operations will likely be put in a chokehold through the limiting of patrons entering through their doors. Much like the retailers, the solution is similar in nature and the model has already been proofed in some markets in the midwest. I believe however, a few changes/upgrades can be made to improve operations and reduce costs.
There is no dispute restaurants rely heavily upon foot traffic. Most are being propped up by creating to-go menus or are already in that realm and have come to rely on Door Dash, Uber Eats etc. for their near term survival. Malls in their glory days introduced the masses to food courts and we all flocked to the QSR's every time we were there. The new modern adaptation is "Food Halls". Some of you may not yet have experienced one or possibly even never heard of them.
Places like Urban8 and Legacy Food Hall have popped up in the midwest and are well positioned for the post Covid-19 economy. In essence, it is 8 or more QSR's under one roof with a shared common space with seating and/or entertainment areas (a food court with a modern twist).
These venues are great opportunities to reinvigorate large distressed properties and expansion is only limited by your resources and imagination. The concept ties nicely into the reimagined retail that I'm proposing. Unlike needing to form a Co-Op, these spaces are flexible and individual. Current distressed centers with large vacant space could be easily retrofitted from dark single use big box spaces to reimagined entertainment venues. Smaller spaces run about 12,000 sf+/- and would be well received in the "Village" design I have proposed. Operators such as Chili's, Panera Bread, Outback, Olive Garden, etc. could fill these spaces and maximize their space utilization to only need BOH while sharing dining (and entertainment) space. One item of note I would change is adding centralized drive-thru's with multiple lanes and a central pick up point for a more on-the-go friendly experience.
Given what lies ahead, I believe landlords, developers and retailers will adapt and there will be new entrepreneurs who take retail to the next level. The options I've presented can certainly be expanded upon. In the immortal words of Abraham Lincoln- "The Best Way to Predict the Future is to Create It".
Gary Bonacci is a residential & commercial real estate investor, consultant and manager who periodically produces content as a freelance real estate writer. Mr. Bonacci is President of Italus, Inc. and CREreimagined.com and has had previous success in predicting real estate market movements and forecasting trends. Mr. Bonacci has been executive producer of Real Estate Live Radio Show in Orlando which produced live real estate content in Spanish language on Onda Mexicana Radio for the MVS Mexican Radio Broadcasts. The opinions and content are strictly Mr. Bonacci's and not an endorsement of any business, product or entity. All content is presented for informational purposes only and no relationship is expressed or implied with any person sharing this article. Mr. Bonacci requests any persons who may have an interest in doing business, please contact him at 1+407.457.4551 M-Sat 9:00am-7:00pm eastern.
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