by Randy White
Bricks-and-mortar shopping is under attack on multiple fronts.
Growth of online retail sales is out-pacing U.S. bricks-and-mortar stores. Online sales of apparel, accessories, and footwear grew a staggering 17% over 2008. Online sales now account for 6% of total U.S. retail sales and are projected by Forrester Research to reach 8% by 2014.
Average U.S. household inflation-adjusted spending for food at home, apparel and footwear has decreased 10% from 1997 to pre-recession 2007. It dropped from 13.3% of average total household expenditures in 1997 to 10.8% in 2007. Even with spending on electronics and other forms of entertainment goods added, inflation-adjusted spending still dropped, as well as its share of all household spending. During the same period, average household inflation-adjusted spending on experiences for out-of-home entertainment and food away-from-home increased 7.6%.
Americans cut their credit-card use in June for the 21st straight month. A recent Federal Reserve Board study found that median household net worth has plunged 30%, with 47% of households seeing their net worth shrink by 20% or more, and 12% of homeowners are upside-down on their home mortgages. Consumers have increased their savings rate from none to 6.2% in the 2nd quarter of 2010. A Rockefeller Foundation study found that one in five Americans suffered a household income loss or 25% or more over the previous year.
Prior to the Great Recession we saw a building frenzy of stores and shopping centers fueled by retailer expansions and easily available real estate financing. Now we have too many stores, malls and shopping centers for the population they are meant to serve; by some estimates in excess of 25% too much space. During the 2nd quarter of 2010, overall strip shopping center vacancy rates were 10.9% and malls were at 9.0%, with asking rents down significantly from pre-recession levels. The Urban Land Institute reports that the overall retail vacancy rate was 19.2% in the 2nd quarter.
The Great Recession has had a dramatic impact on US consumers and their spending. Consumers are no longer living beyond their means by tapping credit cards and home equity, which for most part has vanished. When consumers do spend, they have shifted how they shop, what they buy and even where they shop. Frugality and value are the new determinants. Consumers are spending on their needs, not their wants. A recent survey by Ogilvy found that 78% of people believe the recession has changed their spending habits for the better. According to the ICSC, consumers are going shopping less often, spending less time shopping and visiting fewer stores.
Is this the new normal or will we ever see a return to the pre-recession spending model? Research shows that the recession was not the cause of this significant behavior shift by consumers. The trend of people de-cluttering, living simpler and spending less started around a decade ago and those that didn't start then had intentions to do so. The recession only caused the trend to accelerate and become mainstream. A July Deloitte study found that 93% of consumers expect to continue spending cautiously even when the economy grows. Most interesting is that 55% of those cutting back suffered no decline in income during the recession.
These new behaviors are becoming ingrained and reshaping consumer consumption patterns in ways that will persist for many years, even after the economy rebounds. Basically, consumers have reset their spending behaviors.
Context-Based Research Group, an ethnographic firm, explains the shift as people coming to age, experiencing a major epiphany of how life works, which triggers a rite of passage, resulting in a major life transition that leads to new attitudes and new ways of acting in the world. The recession's transformative effect is evidenced by their research that found that 43% of people who have been negatively impacted by the recession say that their lives have been changed for the better.
What constitutes value in peoples' lives now has a whole new definition. Consumers have transitioned to a more purposeful and emotional perspective of value in their purchasing. They are less impulsive and more disciplined and purposeful in how they spend. Rather than purely seeking instant gratification with stuff, they are evaluating how their purchases align with their values, fit into their lives and affect society and the environment. They now understand that the frenzied shopping behavior of the past was in pursuit of a false dream and that most possessions do not bring lasting happiness. Consumers have become more socially conscious and responsible, placing higher value on family, relationships, community and the world as a whole. They are looking for a more meaningful life. Welcome to the new normal of the grounded consumer.
There is one more dimension of the attack on the traditional world of bricks-and-mortar shopping: the virtual world. We are seeing a migration of peoples' experiences from the real to the virtual world. The fascination with the imaginary, especially through electronics and its virtual worlds, is now capturing an increasing share of both peoples' leisure time and their disposable income. We are seeing a trend of increasing purchases of virtual goods on video gaming sites. Total virtual goods sales this year are expected to reach $1.7 billion in the U.S., a six-fold increase from 2008 according to ThinkEquity LLC, a research firm.
Conspicuous consumption of stuff, the foundation for traditional shopping centers, is dead. What Gilmore and Pine predicted over a decade ago in their book, The Experience Economy, has finally arrived in full force. Welcome to the experience economy.
So what does this mean for shopping centers? With shopping for stuff now less of a priority in people's lives, the good old days for shopping centers are history. Competition between shopping centers is greater now than at any other time in history. To prosper in the future, shopping centers will need to embrace change and reinvent themselves to have relevance to the grounded consumer.
The very term shopping center is obsolete and no longer appropriate for all but smaller strip convenience shopping centers. Centers can no longer prosper by being only shopping destinations. They need to be experience centers, offering not only enhanced retail experiences, but also many other types of experiences such as entertainment, education, sports and dining. The names lifestyle center or mixed-use center are a much better fit.
Success for retail is now about much more than stocking a store with stuff. It has to be about an experience superior to shopping on the Internet. It has to be entertainment rather than simply commerce. Retailers who have successfully embraced the concept of experiential retail include Apple, American Girl Place, REI, Bass Pro Shops, Cabela's, Scheels and Build-A-Bear, to just name a few. Their stores engage shoppers' senses, allow them to participate and try out goods, and to be entertained.
However, experiential retail alone is not enough to drive traffic to shopping centers. In order to get people to buy, you have to get them there.
When asked what different attributes were important in determining where they shopped for things like apparel, home good and gifts, 52% of respondents to a October 2009 ICSC survey answered dining options and 49% answered nearby entertainment options. The survey also found that 40% of mall shoppers attended special events at shopping centers during the past year. A 2003 study in Australia found almost two-thirds (64%) of shopping center customers consider the entertainment and social attributes of a shopping center to be very important to them. A 2004 study of shoppers in three areas of the U.S. found that shoppers expect malls to not only provide merchandise, but also entertainment and fun. Studies have also generally found that:
The majority of these studies took place before the recession, which has placed an even greater importance on experiences versus buying stuff.
People visit malls, lifestyle centers and town centers for many types of experiences including entertainment, people watching, the communal experience of hanging out with family and friends and what some describe as a mindless vacation. To achieve this entertainment value, shopping centers need to have a sense of place, which deals with the design, ambience, authenticity and tenant mix. Paco Underhill of Envirosell has summed it up this way, “In order to get people to buy, you have to get them there, and the entertainment coefficient is something that builds traffic... It has to be ‘place making...’ Developers need to migrate from being landlords to being 'placemakers.' They need to give their customers a reason other than shopping to come to their stores.”
What many developers are starting to understand is that place making is more complicated than just building retail spaces, leasing them and managing the common areas with special events such as Santa Claus and fashion shows. Entertainment venues such as bowling lounges, family entertainment centers (FECs), aquariums, family pizza buffet-entertainment centers, children's edutainment centers, adult eatertainment concepts, children's play areas and even sports venues and dedicated space for rotating museum-quality exhibits are becoming the new anchors for both lifestyle centers and enclosed malls. Just as department stores once brought in the majority of traffic and in return received deals from developers, entertainment venues also require lower rents and/or developer financial assistance to be financially viable.
One of the greatest challenges American shopping centers now face is finding entertainment anchors and amenities that will differentiate them from the competition. Cinemas alone are no longer enough; there needs to be multiple entertainment options and there is a very limited number of chain entertainment tenants to choose from.
Where no tenant options are available, some American developers are now taking an active role to ensure the destination status of their centers by developing and operating their own entertainment venues.
One of the American pioneers in owning and operating their entertainment destination attraction is Mall of America in Minneapolis, Minnesota. The 4.2-million-square-foot mall features Nickelodeon Universe, an indoor theme park located within the common area, not in a store. The mall reports that in 2009, 30% of the mall's visitors came specifically to visit the park, not to shop. In addition to the draw of Nickelodeon Universe, the mall held 400 special events during the year, including celebrity appearances, cooking demonstrations, book signings and even a cheerleading competition. In 2009 in the heart of the recession, Mall of America's customer traffic rose 3.5% and sales rose 1.5%.
Other developers who have vertically integrated to create their own unique entertainment or dining destinations include RED Development who is partners in Schussler Creative, Inc., Cordish Company with their affiliate Entertainment Concept Investors, Inc. and the owners of Newport on the Levee with their recent opening of Star Lanes, a bowling lounge.
It is amazing how in around a decade, what used to be the dominant formula for retail and shopping in North America has become obsolete. Now, if bricks-and-mortar retail shopping centers and malls are to succeed, they have to evolve into a new experiential model. The consumer has become the grounded consumer, and with that, shopping destinations need to change to continue to attract consumers. For retail stores, it's retail as entertainment rather than simply as commerce. For shopping centers and malls, entertainment, eatertainment, dining and other leisure destination venues, once of minor significance, are now essential parts of the mix to create a unique and appealing sense-of-place and create traffic. Today, shopping centers and malls are in the out-of-home entertainment, dining and destination leisure business as much as in the store leasing business. The successful malls and shopping centers of the 21st Century will be run by placemakers, not landlords.