Three Questions that Determine the Future of Brick-and-Mortar Retail

The foundation for a retail reawakening already is in place. Now retailers and landlords just need to build on it.

Physical retail was undoubtedly hit hard amid the pandemic in 2020 as customers limited their shopping to mostly essential items, and e-commerce gained momentum. Despite these challenges, we now are seeing many retailers position themselves for significant expansion later this year and even more so in 2022 and 2023. As consumer confidence returns, surviving retailers with strong positions and new brands and concepts will reap ample opportunities to capitalize on pent-up demand. 

For those who want to expand, these are some of the most important questions they must answer to position themselves for sustainable, long-term brick-and-mortar growth.

What data and new technology will lead to successful store optimization? 

Whether expanding, contracting or reconfiguring an existing footprint, retailers will use data as a key driver in decision making. Today’s data goes far beyond compiling population stats, consumer spending and traffic counts. New technologies such as massive mobile data and geofencing are constantly evolving, allowing retailers to be even more precise in making data-based decisions.

This data will still answer traditional questions such as where new stores should be located, how many stores should coexist in a given market and what square footage should encompass optimal footprints. However, data is now expanding to account for factors such as co-tenancy and tenant mix, the proper combination of which gives retailers a heightened chance for success.

Other new strategies are emerging that can help retailers rethink their real estate portfolios. A prime example is last-mile locations. As e-commerce continues to grow, some retailers may decide to cut down on the number of brick-and-mortar stores in a given area and instead add fulfillment centers there or nearby to support their expanding online customer base. They may decide to incorporate fulfillment into their existing store as well. This decision requires factoring in logistics data points such as drive times, transportation infrastructure and targeted inventory replenishment—many of which are new concepts to traditional brick-and-mortar retailers.

All of this flexibility depends on retailers’ becoming more comfortable with new, rapidly expanding technologies.

What type of properties should occupiers target?

There is no question that the traditional retail footprint is changing. A trend away from mall shopping has existed for years, with some malls closing down and others adapting for another use entirely, often the last-mile or fulfillment centers already cited. While some malls will not survive, it’s clear that many malls have a path to success, albeit potentially not as a traditional mall. Instead of asking what else a mall can be, we should be asking what else a former anchor space can be. 

Smart landlords are already repositioning properties to incorporate other uses into malls that can help drive traffic and daytime population beneficial to existing retail tenants. Medical is a key example of this reuse in recent years, as anything from outpatient centers to chiropractic practices have helped backfill space in well-located retail centers. Look to malls to take a page from this playbook. However, with malls, the potential could be even greater as we see opportunities for residential activity—whether through traditional multifamily or senior housing—to take hold. This evolution would be a natural, almost symbiotic relationship that existing retail tenants would desire. 

We can’t rule out office as an option for malls either. As the workforce comes back to the office, many tenants may be looking to occupy low-rise locations closer to their employee base to offer a more flexible working environment. Retail sites could support this strategy. For example, Scottsdale Fashion Square in Scottsdale, AZ, has added an 80,000-square-foot expansion that includes coworking space. 

As retailers look to expand, dynamic mixed-use properties could be the most desirable locations.

How can the store become a real part of the supply chain?

This is perhaps the true million-dollar question for brick-and-mortar retail. Standalone, last-mile fulfillment centers will be a part of the solution. But for those who truly want to maximize their current and future retail footprint, the game changer comes with integrating fulfillment into existing stores to best serve customers.

Retailers need to appeal to multichannel consumers—those who use both physical stores and e-commerce for purchases. By developing a true brick-and-mortar retail location that caters to both channels, retailers will be solving for two problems: giving their best customers all the dynamic options that they want, and optimizing their supply chains to recoup the most profit possible. The latter avoids many of the cost inefficiencies that come with ecommerce. Individually-ordered products for last-mile delivery are often incredibly costly and erode profits for retailers. Incorporating existing stores into the supply chain could help alleviate some of the logistics issues associated with e-commerce. 

Recently, CBRE posited a hybrid model retail store, which will include both front-of-the-house, consumer-facing retail and a back-of-the-house fulfillment center. This model will give retailers personal interaction with their consumers, while also developing a more efficient e-commerce delivery and return model. This could be a prime solution for retailers moving forward.

We may not see this expansion activity or implementation of some of these strategies until later this year, but it is a positive sign that these discussions are taking place. It’s also encouraging that many retailers, as well as private equity firms, see a robust future for brick-and-mortar retail.