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Retail redux: How brick-and-mortar businesses can adapt to an e-commerce world

The North Village Shopping Center in North Brunswick.

A string of retail failures — including Wayne-based Toys R Us, and others across a variety of categories like Sears, Bon-Ton, Wet Seal and RadioShack  — has some experts questioning whether brick-and-mortar companies can survive in the age of e-commerce. But brands that keep close track of their markets and are willing to adapt can do well despite today’s challenging environment.

“We hear a lot about troubled retailers like Sears and Toys R Us, but retail stores continue to open,” said Stephanie Cegielski, spokesperson for the International Council of Shopping Centers. “This is actually an opportunity for retailers to reimagine the way their business operates.”

Amazon isn’t always the culprit

The popular perception is that Amazon and other online retailers doomed Toys R Us, but the real culprit was debt, she added. “Toys R Us was overleveraged following its acquisition by private equity firms,” Cegielski said. The company was acquired by a group of investors in a 2005 leveraged buyout that reportedly added nearly $5 billion of debt to the company’s balance sheet — from the nearly $1 billion it had already incurred — and raised its annual interest payments to $450 million, almost twice as much as the company’s annual net profit.

Shopping centers are also evolving

To continue to compete in today’s environment, shopping centers also need to evolve, said Stephanie Cegielski, spokesperson for the International Council of Shopping Centers. “Successful ones tend to have a diverse tenant base,” she said. “For example, instead of a majority of stores carrying apparel, you’re seeing more of a mix, with an Apple store, perhaps a Peleton [a chain that sells exercise equipment] as well as department stores. Food and beverage [restaurants] is another growing category, with about 1 million jobs added in the past three years.”

She pointed to The Mall at Short Hills as an example of that kind of change. “Saks Fifth Ave. closed its Short Hills Mall location [and is relocating to the soon-to-open American Dream megamall], and the space was taken up by Crate and Barrel on one floor, while Canadian bookseller Indigo will take up the first floor.”

The Garden State Plaza in Westfield also diversified and drew in a variety of stores to successfully attract customers, she added. “A mall used to be a box with four anchor stores,” Cegielski said. “Today, demand for traditional department stores is down, and it’s being replaced by boutiques, gyms and other stores. The very concept of malls is also changing, with some properties being developed as an outdoor town center experience.

The “substantial debt service obligations impair the company’s ability to invest in its business and future,” noted then-CEO David A. Brandon in a September 2017 Chapter 11 petition. “As a result, the company has fallen behind some of its primary competitors on various fronts, including with regard to general upkeep and the condition of our stores, our inability to provide expedited shipping options, and our lack of a subscription-based delivery service.”

It’s not just a matter of dollars and cents, however. Companies that continue to do well, like fashion retailer Nordstrom Inc., make an effort to research and meet the needs of their target market. “The successful retailers know they have to draw in the millennials, who want a positive customer experience and a good deal on pricing,” Cegielski said. “Nordstrom, for example, still has big-box locations, but the company is also trying smaller-format stores with less inventory — millennials want to see touch and feel a purchase, but they [can order it online and] don’t have to walk out with it  — and even the smaller-format stores still offer manicure, personal shopper and other individualized services.”

A recent Morningstar research report supports that notion. While Macy’s and other department store competitors have suffered declining sales, Nordstrom increased revenue from about $10 billion to $16 billion between 2010 and 2018, according to the report, and “consistently reported positive same-store sales growth over this period.”

“The company has about 140 full-price stores, nearly all of them in desirable Class A malls” where sales top $500 per square foot.

Building a customer base

Nordstrom has “cultivated a loyal customer base through its reputation for differentiated products and service and has built a narrow economic moat based on an intangible brand asset, in our view,” according to Morningstar, which also noted the company maintains “successful full-price, off-price, and e-commerce channels.”

This kind of balance, supplementing brick-and-mortar outlets with e-commerce, also works in reverse, noted Cegielski. “UNTUCKit [a clothing company launched by Franklin Lakes native Chris Riccobono] was originally online only, and then began establishing physical locations, including one in The Mall at Short Hills.”

Millennials and other demographic cohorts also want a fresh experience, she added. “They like Marshalls and T.J. Maxx because both have new items constantly coming in, and offer a good deal on pricing,” Cegielski said. The two chains operate off-price department stores owned by TJX Cos. that offer apparel and home goods.

The most successful retailers across all categories “are offering quality products while finding new ways to engage customers,” said Matthew K. Harding, CEO of Levin Management Corp. “Grocers, for example, are working to distinguish themselves with enhancements like online ordering, in-store demonstrations, more proprietary and prepared foods, and café-style seating. Walmart’s new ‘town center, model, which incorporates a mix of uses in its stores and Kohl’s successful partnership with Amazon are other examples. TJX brands are experiencing continued growth and success due in part to these stores’ continually changing merchandise, and the ability for shoppers to purchase designer items at deeply discounted prices.”

In LMC’s 2019 Retail Sentiment Outlook survey, “68.2% of respondents who have adapted their business models said they are seeing the benefits in terms of sales and in-store traffic,” he added. “The single-most incorporated change — embraced by 63.3% of LMC survey respondents who have adapted their business models — centers on increased training and focus on customer service.”

Other enhancements include increased use of technology-centered tools to assist customers in-store, increased use of technology-centered marketing tools to reach customers outside the store and increased in-store services and incentives. “The latter often includes in-store, online ordering, with free shipping, for out-of-stock items and in-store pickup/returns for purchases made online,” Harding said. “Retail is embracing change and this sector must constantly evolve to survive and thrive. Consumers are spending more time on-line than ever before, and likewise, digital technology is transforming the retail real estate industry. As a result, shopping centers are evolving from places that simply offer goods and services to sources of recreation and community engagement. The most successful properties today are striking a balance by offering a diverse tenant mix that provides ample reason for consumers to visit.”

He cited North Village Shopping Center in North Brunswick — where LMC serves as leasing and managing agent — as an example. “In 2016, Barnes & Noble vacated a 25,000-square-foot anchor space at the property. While filling it with a like replacement was one possibility, we opted to carve out a portion of the former Barnes & Noble space to accommodate a specialty grocer and subsequently secured a lease with Trader Joe’s.”

The strategy enabled the company to allocate the balance of the vacant space for additional retail units. “As part of the resulting retrofit, our construction team completed a program of exterior and common area renovations and widened one of the property driveways. The new Trader Joe’s has successfully bolstered North Village Shopping Center’s competitive position. Following the supermarket’s late 2017 opening, the property drew new commitments from national retailer Ulta Beauty and hair care franchise Sport Clips.”

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