Jon Harris/The Morning Call – Some have described it as an apocalypse. Others prefer the term disruption. The more optimistic among us call it an evolution.
Terminology aside, the situation is pretty clear: The retail world is changing quickly, and its makeover won’t stop anytime soon.
Consider: E-commerce sales accounted for about 10 percent of all U.S. retail sales at the end of last year, up from around 6 percent in 2012, according to U.S. Commerce Department figures.
“It doesn’t sound like much, but it’s huge because of the effect it has on brick and mortar,” said retail expert Jeff Green, owner of Jeff Green Partners in Phoenix.
That percentage is forecast to grow quickly in the years ahead. Take it from research and advisory firm Forrester, which expects online sales to account for 17 percent of all U.S. retail sales by 2022.
It means the upheaval could just be getting started. In Outlook 2018, The Morning Call takes a closer look at the changing retail world. It’s a transformation that started gradually — the first purchase on the internet with a credit card was back in 1994 — but then suddenly, getting to the point where the once-dominant department store industry is shuttering hundreds of stores and turning to possibly its best remaining asset: its real estate.
Many sectors, however, have avoided the disruption. For example, home improvement stores still provide customers with in-person — and often much-needed — assistance, while off-price retailers such as Ross and T.J. Maxx remain one of the thorns in the sides of traditional department stores. In addition, even with Amazon’s purchase of Whole Foods Market last year, online grocery shopping remains relatively nascent, though experts expect that category to heat up in the next several years.
“Everyone is scared to death of Amazon, because they are a gorilla,” said Ron Friedman, a retail expert at accounting and advisory firm Marcum. As it is already, Amazon accounts for around one-third of all e-commerce spending.
As retail has evolved, so have the jobs.
Just look at the Allentown-Bethlehem-Easton metro area’s job figures from December, in the thick of the holiday shopping season. That month, the region’s retail trade sector had 40,800 jobs, down from 42,100 a year earlier, according to state Department of Labor & Industry. Meanwhile, the area’s booming transportation-and-warehousing sector had 29,400 jobs in December, up from 27,400 a year earlier.
The reason boils down to consumers increasingly trading brick-and-mortar for click-and-order. As online orders have surged, Amazon and Walmart have become two of the Lehigh Valley’s largest employers, each employing more than 2,000 workers across their area fulfillment centers. Its strategic location, close to major population centers, is one reason the Lehigh Valley is at the intersection of the retail changes, one where an in-store retail worker here could handle virtual orders at a fulfillment center instead and make more money — roughly $15 an hour in some cases.
With the boom in the sector, however, the pool of available warehouse workers has grown increasingly tight. The competitive job market has motivated many Lehigh Valley warehouses, where basic English is typically a requirement, to loosen some of those standards and tap into a plentiful supply of non-native speakers, though much work remains on that front.
All these changes have led to ongoing transformations in retail real estate.
While downtown retailers are making changes to compete, they also benefit — in fully developed downtowns, anyway — from a healthy array of dining and entertainment options, which help drive foot traffic. Meanwhile, shopping center owners are adapting by making changes and, often, turning to grocery stores as anchors. Many shopping malls also are trying to adapt, diversifying their tenant mix, lessening their exposure to struggling department store chains and, in some cases, turning inside out to resemble a shopping center with more exterior entrances.
Friedman expects the mall of the future to look like Westfield Century City, a 1.3-million-square-foot mall in Los Angeles that received a two-year, $1 billion makeover. The refreshed facility features a plethora of restaurants, an outdoor event space and a health clinic. Following the redevelopment, about 90 percent of its stores are new, including an Amazon Books location.
While malls such as Westfield Century City are well-prepared for the future, there will be plenty of low-performing shopping centers that don’t make the cut, likely going the way of the shuttered Schuylkill Mall near Frackville. Roughly one-quarter of the nation’s malls could close by 2022, by one estimate.
The tough part for these centers: They’re trying to remake themselves in an over-stored environment, one in which brick-and-mortar must downsize to survive.
Consider this: There are about 2,360 square feet of shopping center space in the United States for every 100 Americans, according to CoStar Group. By comparison, that figure is about 550 square feet in the United Kingdom.
Even with additional contraction, the National Retail Federation is expecting a strong year in 2018. The world’s largest retail trade association expects retail industry sales to grow between 3.8 and 4.4 percent this year, compared with 2017. That forecast is boosted by anticipated online and other non-store sales growth of between 10 and 12 percent.
On the association’s Feb. 8 annual forecast call, NRF officials said they expect strong consumer confidence — and tax cuts — to help continue the momentum for the retail industry, coming off a strong holiday season. The association also pointed to a Wharton School analysis, which showed the retail trade industry will save more than $170 billion as a result of the Tax Cuts and Jobs Act. The savings should allow retailers to redirect capital to employees and other aspects of their business, they said.
“The retail industry, while continuing to transform, is alive and well,” NRF President and CEO Matthew Shay said on the call.
While these are uncertain times for retailers, Friedman also described them as “really exciting times.” Some retailers will seize new opportunities, while others will not.
Even though the day and age of the gig economy has begun, both Friedman and Green said there is still room for brick-and-mortar, though the industry needs to resize and know its customers better than it ever has. Some well-known brands are opening their own stores. For example, Montgomery County workplace furniture and textile maker Knoll Inc. in January opened a home design shop in Los Angeles, its second direct-to-consumer retail location following the success of its New York City shop.
In addition, some physical locations can be repurposed to serve e-commerce. In fact, Walmart is converting up to a dozen of the 63 Sam’s Clubs it closed into e-commerce fulfillment centers, a move that will boost the retailer’s delivery of online orders.
The digital world, however, is giving new life to defunct retailers, such as Circuit City. A New York businessman who bought the Circuit City brand has vowed to launch an e-commerce website, potentially followed by kiosks and showrooms.
So, moving forward, Shay said the NRF expects to see more of the same in the industry, with retailers finding ways to stay competitive by reallocating resources from nonproductive investments to more promising ones.
Sure, some doors will close, he acknowledged, but others will open.