Intalytics Commentary: The Real Estate “Do-Over”
When I was a child (more years ago than I care to remember), the concept of the “do-over” was sacrosanct when playing sports. Most of our games were played without the benefit of adult supervision, and we were forced to reconcile any differences of opinion concerning a certain play among ourselves. (“I was safe! You were not – you were out!”) When we couldn’t agree on the outcome, we resorted to a “do-over” – ignoring the at-bat or football snap that had just taken place and doing the play over again.
Most retailers, restaurants, and other tenants (banks, healthcare providers, etc.) in the U.S. have a unique opportunity to conduct a “do-over” with their real estate portfolios. As a rule, retailers have done an effective job of synchronizing their store deployments with localized supply and demand – opening new stores when the opportunity presents itself, and closing stores that are no longer generating a profit or acceptable financial return. Over the past 10 years (following the Great Recession of the late 2000s), most retailers made store deployment changes on an incremental basis, slowly opening and closing stores as appropriate.
Our current pandemic-induced recession* will force most retailers to make immediate and far-reaching changes to their portfolio. There are several factors contributing to these changes:
E-commerce’s proportion of total retail sales has skyrocketed during the pandemic, due to a combination of state-ordered store closures and an increased unwillingness of consumers to shop in open brick and mortar stores. This sudden acceleration of the proportion of total retail sales represented by e-commerce may see retailers catapulted into a brick and mortar vs. e-commerce environment that otherwise may not have been reached until 2023 or 2024. Experiencing an annual average ~1% erosion of brick and mortar retail sales requires a regular fine-tuning of a store portfolio – a massive acceleration of that erosion is a shock wave.
The impact of these factors will force a significant shift in the store portfolio for most tenants in the U.S. A majority of operators will need to downsize (and in certain instances, significantly reduce their brick and mortar footprint), while certain operators will be able to maintain or even expand their current footprint – think grocers and food delivery operators. How can retailers determine what store deployment will help to ensure a profitable future?
There are several key variables that each operator will need to consider when determining their optimal store portfolio going forward:
How can retailers determine the most appropriate store deployment scenario for the future? Intalytics has been conducting sensitivity analysis for operators, typically generating 3 alternate optimal store deployment scenarios (Best Case, Expected Case, and Worst Case). Intalytics works closely with each operator to review the impact that the aforementioned factors are likely to have on store performance, and then generates an optimal brick and mortar strategy that maximizes the number of profitable stores that can be supported. As part of this exercise, Intalytics identifies the following specific recommendations:
The resulting recommendations include annual sales projections for each location, including the sales recapture impact of store closures, the store transfer/cannibalization impact of new store openings, and the impact that store openings or closures have on e-commerce sales. Furthermore, new store recommendations include the specific recommended location (such as shopping center or urban street location). The entire analysis is conducted from a bottom-up, granular level, to ensure that it accurately accounts for localized consumer shopping behaviors.
Leveraging the results of the Best Case / Expected Case / Worst Case brick and mortar scenarios, management teams are positioned to make more informed decisions concerning real estate disposition and acquisition over the next 1-2 years. Some operators may take a more risk-averse approach – assume a Worst Case scenario, and then be prepared to pivot if comp store sales growth is more akin to an Expected Case or Best Case scenario. Others may follow the Expected Case path, while still others may follow the Best Case scenario in an effort to gain market share and emerge as a dominant player. In any case, the management team is in a position to make strategic decisions concerning their overall real estate deployment and capital investment, while tactically knowing which specific locations to pursue.
For more information on how Intalytics can support your organization’s efforts to inform brick and mortar strategy, please contact us to schedule an initial discussion.
* While we are not technically in a recession as yet given the requirement of two consecutive quarters of significant decline in economic activity, there is no doubt that will soon officially be the case.