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Retail Market Challenges Abound in Face of eCommerce Revolution

by Ian Ritter 10.05.2017

A significant shift in the way consumers shop is creating significant retail market challenges for commercial real estate investors, and online shopping looks like the culprit. Online retail sales are growing exponentially every year. E-commerce transactions rose 14.8 percent year-over-year during the first quarter from 2016 to 2017, according to the U.S. Department of Commerce, accounting for 8.5 percent of all retail purchases. In contrast, a decade ago, online sales only made up about 3.5 percent of the total.

Online Retailers Take the Lead

Amazon.com Inc. is the undisputed leader of internet retailing, as noted by Women's Wear Daily (WWD), with $94.7 billion in sales last year. Its revenues exceeded the combined sales of its 20 largest competitors combined. "The total online sales of Amazon outweigh the 49 other retailers combined ($88.3 billion to Amazon's $94.7 billion)," reports WWD.

There's no question that online retailers like Amazon play a major role in the swath of store closings and retail bankruptcies taking place today. There are plenty of products on the market that consumers can easily order online from anywhere, as long as they can wait for delivery — which is getting increasingly faster. Online shopping may disrupt the grocery business next, with the announcement that Amazon is purchasing Whole Foods Market Inc. for a whopping $13.2 billion. This could lead to fewer physical stores operated by the chain if more consumers choose a delivery option.

Bankruptcies Abound for Brick-and-Mortar Retailers

The rise of online shopping has helped create an environment of severe retail market challenges. As of mid-June 2017, about 10 major retailers, mostly mall apparel chains such as Rue21 and Payless, have sought bankruptcy protection, according to USA Today. That's more than the total number of bankruptcies filed in all of 2016, and gaining on the record of 18 in 2009.

Bankruptcies aside, there are plenty of major retailers closing stores at a rapid rate, after experiencing poor financial results. Sears Holdings Corp. might be the poster child for a chain getting killed by e-commerce, among other factors. According to Philly.com, the company reported it is closing 49 Kmarts and 17 Sears locations in June 2017. That's on top of 150 earlier in the spring. Sears' store count has gone from about 4,010 units in 2011 to around 1,275 at the end of April 2017.

Sears isn't alone, though. Macy's Inc, J.C. Penney Co. and Staples Inc. are closing dozens of locations each, reports Clark Howard. There are also many smaller stores, like RadioShack and GameStop, that are paring back significantly.

The Fallout and Overbuilding of Malls

Obviously, these retail market challenges are hurting shopping centers of all types. As a result, the Los Angeles Times reports that up 25 percent of malls in the United States could close within the next five years. The explosion of online shopping isn't the only thing to blame for today's struggles. There has been overbuilding in retail, both by store owners and developers. Several busy street corners in suburban locales have more than one national drug store, for example.

Not All Retail Endeavors Are Hurting

Still, there are some interesting retail real estate statistics out there that can give one pause. Simon Property Group, the country's largest mall owner, boasts a 95.6 percent occupancy rate, according to IndyStar. Certain metro areas have very low retail vacancy, such as Denver, Colorado, which was at only 5.1 percent in the second quarter, according to Marcus & Millichap. Plus, several major chain stores have announced opening new locations this year, including grocers ALDI and Costco Wholesale Corp., reports CNBC.

Experiential Retail Could Save Stores

Some retailers and landlords are getting better at adjusting to this changing environment and understand the importance of giving a customer more reason to visit a store or shopping center. Many facilities are now restaurant-heavy, providing a product and experience that can't be found online. High-end and specialty grocers are a similar scenario. Shopping centers are holding more community events, which can increase traffic throughout the day and give retailers a boost. It's also becoming easier for people to order an item online, for example, and pick it up or return it at a store after running their other errands. Plus, Apple stores have the highest sales per square foot of any major chain, at $5,546, notes TIME — even though every product sold in those locations can be bought online.

Currently, investors in retail real estate are playing catch up to major retail market challenges. But if brick-and-mortar stores and shopping centers are able to find a strong mix of experience and convenience, plenty of shopping environments won't be disappearing any time soon.

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