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Retail Law Advisor

Apparel Peril!

Posted in Retail, Retail Sales

Today’s post is guest-authored by Nick Egelanian, a leader in the retail and shopping center industries. 

clothes racks

These are perilous times in the apparel sector. What seems on the surface to be a contradiction–a series of underwhelming sales reports in apparel sales, coinciding with a dramatic and ongoing expansion in many types of apparel retailing – are in fact the byproduct of an evolving retail segment sending up red flags for apparel retailers going forward.

The disconnect is particularly noticeable in discount and budget apparel, which continues to grow at a pace that far exceeds overall sales. Commodity brands like T.J. Maxx, Marshalls, Nordstrom Rack and Ross Stores are opening over 250 stores annually. On the specialty side, familiar names like H&M, Zara and Forever 21 (F21 red) accompanied by newcomer Primark are driving expansion. Outlet center expansion only adds further to the surge in discount apparel.

A race to the bottom

One of the clear trends in apparel right now is a “race to the bottom” on price, which is crowding out full price apparel and producing clear winners and losers in the segment.  Discount brands are gobbling up market share while full price brands and department stores are losing ground. It is no coincidence that iconic names like J. Crew and GAP are focusing their expansion resources almost entirely on off-price stores.

Virtual volume

Online competition is another issue apparel retailers are wrestling with. Online and mobile transactions make up approximately 25 to 30 percent of all apparel sales, a far more significant figure than the 7 to 8 percent overall number for the entire retail industry. This disparity is likely due at least in part to a segment where shoppers are accustomed to exploring omnichannel options for size, color and bargain hunting flexibility. Whatever the reason, the fact remains: brick-and-mortar apparel retailers already trying to adapt to a discount-dominated marketplace now have to face additional competitive pressure from virtual vendors.

What does it mean?

The big question remains: what do these developments mean for apparel’s future? With outlets and discount concepts growing at an eye-opening pace, and these trends showing no signs of slowing, mid-market brands and department stores will continue to struggle to respond. Even discount adaptation success stories like Nordstrom Rack have delivered weak numbers lately, and there isn’t much evidence that other brands can do much better.

As a result, brands like Aéropostale, Abercrombie & Fitch and Gap Inc. will tread water and will likely continue to lose market share. The forecast for department stores is even more dire. Icons like Macy’s and J.C. Penney, already in the midst of decades-long market share slumps, will almost certainly cede even more ground and the ripple effects will be profound as struggling B and C malls are especially hard hit with the loss of hundreds of additional department and full-price apparel retail outlets, leading more and more second tier regional malls into obscurity in the coming years.

As always in retail, however, challenges for some create opportunities for others. Federal Realty’s Assembly Row in Boston has redefined the discount retail venue, successfully combining entertainment and restaurants with outlet style apparel in a mixed-use shopping venue. Assembly Row demonstrates that adapting to new retail realities requires innovation and inspiration. In retail as in life: you evolve or you go extinct.

 

Today’s guest blogger, Nick Egelanian, served as Vice President of Real Estate and New Store Development for Crown Books and FAO Inc./Zany Brainy before forming SiteWorks Retail Real Estate Services in 1992. He pioneered the segmentation of retail into Commodity and Specialty sub-categories as the author of the Retail chapter of the Urban Land Institute’s Professional Real Estate Development: The ULI Guide to the Business, 3rd Edition in 2012.Nick is an active author and speaker on retail trends and the evolution of the retail industry, and has contributed numerous articles and editorials in publications such as the Urban Land Institute’s Urban Land Magazine and Madison Marquette’s PLACES Magazine.

Retail Shopping Outlets in Emerging Markets: A Shopaholic Box of Chocolate

Posted in Retail

Outlet ShoppingDespite its universality, the shopping mall, as we know it, is at a pivotal juncture in its existence. A tsunami of torrential trends – in particular, the rise of floundering malls and underwhelming sales for luxury anchor tenants – has spurred mall owners to abandon the notion of commoditized shopping experiences and steer towards an aggrandized value proposition for consumers. Long gone are the days when going to the mall was simply about shopping; today, consumers seek experiences that go well beyond the traditional shopping excursion. Due in large part to rapid urbanization, rising living standards and spending power abroad, there is a tremendous desire among foreign consumers for open public spaces in which to mingle and rendezvous. To avoid being a retail anachronism, foreign mall operators and developers, retailers and investors have begun to expand their view of what the ideal shopping experience should be, and have embraced the notion that “shoppertainment” is the approach to enhance foreign consumers’ shopping experiences. Nowadays, a memorable shopping and leisure experience influence consumer behavior; therefore, developers and retailers have incorporated value-added elements that recast an outlet center as the new downtown center, replete with leisure, entertainment, and, most importantly, high-end retail. Foreign developers now envision themselves as purveyors and alchemists of “shoppertainment” seeking the appropriate mix of shopping and entertainment to survive in this ever-changing retail industry.

Undeniably, high-end fashion retailers and malls have taken one on the chin due to the struggles of the U.S. economy and yet another financial calamity across Europe. Despite being blindsided by this economic uppercut, foreign developers and retailers have gone back to their respective corners and changed their strategies leading to a proliferation of outlet centers across Europe, Asia and Latin America. As a testament to their economic resilience, outlet centers have outshined shopping malls and big-box retailers over the past decade as penny pinching consumers have turned to outlet stores in hopes of finding top brands at discount prices. This tour de force has even caught the eyes of certain domestic institutional property investors, such as the Simon Property Group and the McArthur Glen Group, who have recognized the allure of foreign outlet centers by investing considerable capital to entice even more foreign consumers to these outlet centers. The proliferation of foreign outlet malls in recent years has also been greatly aided by luxury heavyweights, such as Alexander McQueen and Prada, taking a “can’t beat em’, join em’ approach” and crossing their fingers that the outlet business will not result in brand dilution. Many retail industry cognoscenti believe that outlet centers will multiply on a global level in size and number over the next few decades as more and more high-end retailers embrace the outlet store concept.

The retail industry has always transformed with each new trend and cultural shift. In the here and now, foreign outlet centers are the new trend gaining significant traction as a means of enticing not only deal seekers, but also amusement seekers. Innovative outlet centers, such as Xanadu in Madrid and Bicester Village in the UK, beget big business, and their competitive differentiation from traditional shopping malls is the primary force behind their success. Across emerging countries, such as Brazil, China, and Bangladesh, outlet centers have outperformed traditional shopping malls by offering convenience as well as entertainment. To that end, emerging markets are now establishing themselves as an investors’ golden goose, and the increased spending power of these foreign consumers is a significant factor contributing to investors’ and developers’ eagerness to venture into these untapped markets and open new outlet centers.

Return of the Food Trucks – New Offerings vs. Old Favorites

Posted in Permitting, Real Estate, Restaurants, Retail

bostonfoodtrucklargeIt’s that time of year again: flowers are blooming on the Common, the Red Sox had their opening day, and the best parts about Boston summer have started to reappear. This year, however, many of Boston’s beloved food trucks almost did not. Food trucks began to really take off in Boston in 2011, jumping on the growing national trend. Since then, the number of food trucks in the City has grown from around 25 to more than 70 this year. But such fast growth has not come without pains. The City of Boston has 530 time slots available for food trucks at 21 different sites around the City, not including the spaces available on the Rose Kennedy Greenway, which are allocated under a separate lottery process.

The Boston Office of Food Initiatives, an office under the Mayor of Boston dedicated to the coordination of programs like food trucks, farmers markets, and urban agriculture, held its annual lottery for food truck locations in the middle of March. Returning truck operators, such as Bon Me and Stoked Pizza, were allowed to keep two of their previous lunchtime spaces. This prompted outrage from new food truck operators, and, in response, the City changed its position. Unfortunately, this change came only a few days before the lottery on March 14, prompting further outrage from the returning truck owners- some of whom had turned down alternative spaces in reliance on the promise of a recurring spot. In a fast move, representatives from the City met with all of the food truck operators, and were able to broker a compromise, moments before the lottery was scheduled to begin.

Previously, Boston held its lottery in January to coordinate with the Rose Kennedy Greenway lottery, which will host 33 food trucks this summer at four locations along the Greenway. The later lottery this year has caused many food trucks to snap up available spots outside of the city lottery. The SoWa Open Market, New England Open Market, and various events around the state (not to mention the many food-truck specific festivals planned for this summer) act as alternative venues for many food trucks.

These outside opportunities for the vendors could work against the Boston Office of Food Truck Initiative by leaving less popular trucks to fill in the open slots. Additionally, prices have increased over the past year (for instance, a Zone 1 shift rose from $100 to $125), in a way that disincentives breakfast or dinner slots- the price is based on location, not time of day, so there is no discount for off-peak hours. It is an open question of how well the novel and familiar food trucks will perform this summer, and whether the later lottery will impact the quality of offerings available to Boston workers, tourists, and residents.

Perhaps Boston simply cannot support the number of food trucks currently licensed? Perhaps the new food trucks will flourish this year, and returning trucks will continue to build a loyal customer base? One thing is certain: if the Boston Office of Food Initiatives hopes to change the face of mobile dining in the City, some of the processes in place will need to adapt to the needs of the food truck operators.

Retailers Digitizing Daily Operations: From Mobile Payments to E-Receipts

Posted in Retail, Technology

omnichannelWhen asked last year to name one technology that we rely on today that would no longer be around in 10 years, Microsoft CEO Satya Nadella responded: “fountain pens.”

Some may question Mr. Nadella’s prediction of the imminent demise of pen and paper.  Indeed, such prognostications date back more than 40 years to a 1975 Business Week article, in which analysts first coined the phrase “paperless office” and predicted that use of paper would begin to decline immediately and “by 1990 most record-handling will be electronic.”  Yet our collective reliance on paper has hardly diminished.  In fact, it’s higher than ever, which has led some to dub the thought of going completely paper-free a “pipe dream.”  Others have pointed to scientific and even evolutionary reasons for why a drastic reduction in paper consumption is – at least in the near term – unrealistic.

But when it comes to the retail industry in particular, perhaps Mr. Nadella’s prediction has more credence.  Consider the following ways that retailers are – or are planning on – digitizing traditional paper processes in their day-to-day operations, and the uniquely powerful incentives for implementing such changes:

  • Electronic Receipts:  Instead of printing out paper receipts, many retailers now give customers the option of having their receipt e-mailed to them.  Apple was seen as revolutionary when they introduced this service over ten years ago.  Big box stores like Wal-Mart and Home Depot have followed suit in recent years.  But according to a recent study, still only 10% of retailers offer e-receipts.  However, that percentage is expected to increase to 70% over the next three years.  Digital receipts at the most basic level provide a cost savings to retailers.  Each receipt costs about penny to print, which may not seem like much, until you take into consideration that in the United Kingdom, for instance, over 11 billion receipts are printed annually.  It has been estimated that 9.6 million trees are cut down each year due to the demand for printed receipts in the United States alone.  Transitioning to e-receipts therefore presents a major environmental benefit, an important factor for a customer base that is increasingly “sustainability-conscious.”  But perhaps the strongest incentive for merchants to adopt e-receipts are the marketing opportunities they provide.  As one study found, 83% of retailers who offer e-receipts identified the ability to collect customer e-mail addresses as the primary factor for implementing this technology.  As that same study explained, e-receipts are “an innovative communications vehicle for retailers that offer limitless marketing possibilities, providing deeper insight into consumer shopping habits, which can lead to more targeted advertising mailers, promotions and emails.”
  • Mobile Payment Applications:  Mobile payment apps like Apple Pay and Android Pay continue to evolve at a rapid pace, allowing customers to replace their wallet with their smartphones when they go shopping.  These technologies can make the point-of-sale processes more efficient and convenient, thereby improving the in-store experience for customers.  They also have a cost savings component by reducing the credit card fees paid by merchants.  But as we discussed in a recent post, perhaps the biggest incentive for retailers to replace traditional paper currency with mobile payment apps is the ability to track customer spending habits.  Adoption of mobile payment technology – both by customers and retailers – has been slow.  But many see 2016 as the year when use of these technologies will take off.
  • “Beacon” Devices:  The Wall Street Journal last year discussed how paper circulars and coupons were one of the lone holdouts in today’s increasingly digital world.  But even retail’s reliance on paper coupons may be nearing an end thanks to a technology dubbed by some as the “beacon of hope” sand “savior” for brick-and-mortar stores.  “Beacons” are small, battery-operated wireless devices that transmit messages and offers to nearby smartphones.  When a customer walks by or into a store that has one of these devices installed, their phone might buzz with a welcome message or a targeted coupon.  The hope among retailers is that these low-cost “beacons” will create a more personalized shopping experience and replace newspaper circulars as the most effective means of drawing customers back into their brick-and-mortar locations.  Traditional retailers like Macy’s only began installing these devices on a large scale during the 2014 holiday season, but by the end of 2015 “beacons” were seen in the industry as “on fire.”  And shipping trends as well as widespread roll-out of “beacon” implementation strategies indicate that 2016 will be another big year for this burgeoning technology.

Each of the above technologies represents an example of how the retail sector is uniquely poised to reduce its use of and reliance on traditional paper processes due to the strong incentives for doing so, such as cost savings, improved in-store experience and enhanced opportunities for customer data collection and targeted marketing efforts.

 

Sustainable Retail – Eco-Friendly Shopping at the Mall

Posted in Office, Real Estate, Retail

Globe in SpaceSustainability experts claim that “a good building- efficiency rating is quickly becoming the real estate equivalent of a motor vehicle’s miles-per-gallon rating and helps bring capital to owners and investors.” The National Real Estate Investor reports that investors and tenants alike prefer retail properties with sustainability measures in place. Studies based on the office market indicate that green office buildings trade at a 13% premium, on average, when compared to non-green buildings, and rental rates are 3% higher, on average, at green buildings than non-green buildings. Though the retail sector has been slower to improve the sustainability of malls and other shopping centers, there are some retail property owners who have taken the lead in the movement toward sustainability.

First Capital Realty Inc., a Canadian owner, developer, and manager of over 150 grocery-anchored urban shopping centers has focused on reducing greenhouse gas emissions and energy consumption at its properties  by using the investigative method of re-commissioning to focus on building operations (rather than retrofitting) to identify ways  to reduce gas emissions and consumption. During a re-commissioning process, a building consultant will evaluate the existing electrical and mechanical systems, analyze utility usage, and implement no- and low-cost changes so the building operates at the highest possible level with the existing equipment. Oxford Properties, an international portfolio manager, has used target sustainability thresholds for each of its properties, and since 2010 has achieved a 20% improvement in energy efficiency on a per square foot basis. Tanger Outlet centers have installed electric vehicle charging stations at 50% of its outlets, and they report that customers appreciate the free charging stations and are attracted to the shopping centers because of this new amenity. Many traditionally office-based property owners such as Boston Properties and the Irvine Company have applied sustainability methods learned from their office properties to their retail holdings as well. Boston Properties, a Boston-based REIT, has focused on LEED certification for its entire portfolio of buildings, and the Irvine Company has invested in Tesla Energy battery systems for its office buildings and plans to expand the hybrid-electric building concept to each of its 41 shopping centers. The batteries will be charged during nonpeak hours and will provide energy to the centers during peak daytime hours for energy cost-savings.

City and State governments are also increasingly concerned about the energy usage of commercial properties, and energy benchmarking laws mandating energy scorecards for commercial buildings have been passed in California and Washington state, Montgomery County, MD, Atlanta, GA, Austin, TX. Berkeley, CA, Boston, MA. Boulder, CO, Cambridge, MA, Chicago, IL, Kansas City, MO, Minneapolis, MN, New York City, NY, Philadelphia, PA, Portland, OR, San Francisco, CA, Seattle, WA, and Washington D.C.   In January 2014, the International Council of Shopping Centers established their own property efficiency scorecard to help retail landlords compare property-efficiency in terms of controllable costs (energy, water, and waste consumption) and green operating practices across their portfolios and to identify shopping centers where energy efficiency could result in cost savings. Since the launch of the ICSC property efficiency scorecard, owners and investors are becoming more thoughtful about the efficiency of their shopping centers.

Many single-brand retailers, such as Ikea, Kohl’s, and Walmart, have already embraced sustainability practices to control energy costs and build their brands as eco-conscious retailers. Now, the sustainability push from shopping center owners, investors, and building managers for whom the brand to sustainable building connection is a bit more attenuated points to a growing realization that environmentally sustainable buildings are both good business and the way of the future. If green buildings have lower operating costs, higher tenant occupancy, better re-sale value, and resonate with eco-friendly shoppers; the only question remaining for many property owners is what do they need to do and how soon can they start?

Revamping the Runway-to-Retail Model

Posted in Retail, Retail Sales

runwayWith the increase in digital coverage of Fashion Week, from live streams to Snapchat stories and Instagram postings, designers have put what might be considered the most coveted and exclusive ticket in town directly in the hands of consumers. During the most recent New York Fashion Week (“NYFW”), which took place in February, over 400,000 Fashion Week images were shared on Instagram, generating over 113 million “social engagements,”or likes, comments and shares. The increased digital integration between show and consumer has created an impatient consumer base that sees now and wants to buy now. And the traditional NYFW format – meant for a trade audience with shows in September previewing next year’s spring and summer trends, and shows in February previewing fall and winter trends – is not currently in line with this shift. For the Insta-generation, waiting six months on the traditional runway-to-retail schedule to buy that winter coat that you saw on your feed in February is simply too long.  Fast fashion empires have largely filled the need for instant retail gratification with sweeping success.

In response to the shifts in technology and consumer demand, designers and their brands are being pushed to rethink the traditional Fashion Week format. Earlier this month, the Council of Fashion Designers of America (“CFDA”), the trade organization for American designers and the organizer of the official NYFW schedule, released a report examining the current NYFW format, its challenges and potential solutions. The report cites the idea of “in-season relevancy” as a potential solution to the challenges posed by technology and consumer demand to the traditional Fashion Week format. “In-season relevancy” is the idea that a designer would time fashion events to when collections hit stores to maximize sales, but no uniform approach has emerged as to how to achieve this solution.

Some brands are achieving “in-season relevancy” by showing a parka at the September Fashion Week show (to be delivered in January) and swimwear at the February Fashion Week show (to be delivered in July). Other brands like Burberry and Michael Kors have experimented by showing immediately shoppable apparel during their most recent February 2016 NYFW shows. Taking a more radical approach, designer Tom Ford cancelled his NYFW show in favor of showing his designs in September as they hit stores. Parisian house Vetements is moving its February 2017 show to January, with designs hitting stores the following month. Emerging brands have opted for Instagram-only shows. Still others, like New York-based Jason Wu, and fashion heavyweights Kering (owner of Balenciaga, Gucci and Saint Laurent) and LMVH (owner of Louis Vuitton, Marc Jacobs and Céline), have resisted change and are sticking to the traditional runway-to-retail schedule.

So what does this shake up mean for retailers preparing for the September 2016 Fashion Week season?  Generally, retailers will need to be flexible during the designers’ experimentation phase, as some brands are adhering to the traditional 4-6 month delivery schedule while others are making their collections immediately shoppable. Accordingly, this September, apparel buyers may have to attend traditional runway shows, potentially by appointment-only, as well as look to Instagram and other social media platforms.

Retailers that have customers spanning different climates may benefit from the differences in brand approaches during this experimentation phase. For those retailers, whether a designer is showing a parka at a February show (for retail delivery in July) or an immediately shoppable trench coat in September, the designs will inevitably be “in season” somewhere in the world. Such retailers may want to consider marketing and sales strategies that emphasize their all-season inventory. Even those that serve more limited customer bases should consider developing marketing plans that will capitalize on the perceived novelty of designs as deliveries are timed and marketed closer to consumer need. Where designers have announced immediately shoppable collections, retailers may consider consumer-centered activations that leverage NYFW to increase traffic to their brick & mortar and e-commerce sites.

While it remains to be seen if the quest for “in-season relevancy” will take complete hold of the industry, as long as large fashion conglomerates like Kering and LMVH follow the traditional model, retailers should prepare for a multi-platform and multi-season Fashion Week in September.

The “Sharing Economy” Creeps into Retail

Posted in Retail

Sharing EconomyMillenials are having an increasing impact on the retail industry. Reports estimate that the generation’s, defined as people born between 1982 and 2004, spending will soon account for approximately 30% of all retail sales, as this blog recently discussed. Millenials were hit hard by the financial crisis of 2008 and the ensuing recession by coming of age in a time where wages have been stagnant and job opportunities relatively scarce. Compared to previous generations, Millenials have less spending power, are less likely to form households in their 20s and early 30s – a traditional symbol of success and stability – and are choosing to forego suburban neighborhoods in favor of smaller urban apartments. In part as a result of this drive towards minimalist urbanism, we have seen the birth of the so-called “sharing economy”.

From Uber, to ZipCar, to Airbnb, Millenials are choosing experiences over possessions, and are saving money in the process. Sharing economy services accounted for a staggering $3.5 billion in spending in 2013, and this same dynamic is now creeping into the retail industry. For example, startup Rent The Runway urges customers to question why buy when you can borrow by offering short-term rental options for what might otherwise be prohibitively expensive pieces of formal attire. More traditional retailers such as The Home Depot offer customers the opportunity to rent expensive machinery such as a stump grinder or sod cutter, items that would otherwise often clutter a garage after they are used for a limited project. These offerings hit the same trends: why spend hundreds, if not thousands, when you can share and save valuable space in the process?

But, despite these trends, we believe that the growing prominence of the sharing economy is unlikely to have a major impact on traditional brick and mortar shops. Bulky home improvement machinery typically lends itself to inspection and discussions between consumer and in-store employee, and even if such complex products were offered for rent via an online platform, shipping the goods back and forth may not be practical or economically viable. Big box home improvement stores could expand their application of the sharing economy model by offering customers the opportunity to rent smaller and less expensive, but still rarely used, products such as a paint sprayer or belt sander in-store, where the customer may then also purchase the paint, sandpaper and other products needed to complete the project.

In a similar vein, personal items such as clothing undeniably lend themselves to in-person inspection to ensure proper fit and to assess quality. In fact, Rent The Runway has recognized this need and has rolled out retail locations where potential customers can try on their wears instead of waiting to receive a rental package the day of the event only to be disappointed when the item does not fit or is simply not right for the occasion. Further, the business has started to offer its customers the opportunity to purchase the same “gently loved” merchandise once the clothing is retired from its website – whether the customer has fallen in love with the item after a trial run or wants to buy a designer label that was previously unaffordable – by shopping at its expanding warehouses, which presents customers new buying opportunities that are strengthened via an in-store platform.

Despite the perceived threats to retail, innovative landlords and businesses will see growth opportunities to capitalize on the changing needs and demographics of the day.

Off-Price Retail Therapy for Landlords: New Opportunity in the Age of Millennials

Posted in Bankruptcy, Landlords, Retail, Retail Sales, Tenant

teenshoppingOn March 2nd, after much media speculation, Sports Authority commenced a case under chapter 11 of the United States Bankruptcy Code. In its initial bankruptcy filings, the company’s CFO announced that it will close up to 200 of its 464 stores over the course of the bankruptcy case. Sports Authority has already commenced liquidation sales at 87 of its stores, and may add up to an additional 60 stores within the next few weeks. As a result, we are in the throes of the first large-scale liquidation of a national anchor retail tenant since Borders closed its doors in 2011. Landlords will be searching for unique opportunities to fill any vacancies and enhance existing tenant mixes, and the current Millennial-driven retail market may deliver.

The Millennial generation, defined as people born between 1982 and 2004, is one of the largest generations in history. Millennials love to shop and it’s estimated that the generation’s spending will hit $1.4 trillion per year, or about 30% of all retail sales, by 2020. Most Millennials came of age in a post-recession economy with a smartphone in hand. The confluence of these two factors means that Millennials place a greater importance on price than on certain other traditionally important factors when shopping (including brand and service), and they use technology to compare prices in real time to ensure they are getting the best deals. To thrive in today’s economy, retailers must capture the attention of these savvy consumers, who are now driving market trends.

Enter the off-price segment. Traditional off-price stores, such as TJ Maxx, Ross and Burlington Coat Factory, have maintained strong sales subsequent to the economic downturn. Other retailers are following suit. Department-store spinoffs such as Nordstrom Rack, Macy’s Backstage, Saks Fifth Avenue OFF 5TH and, most recently, Find @ Lord & Taylor are rapidly increasing their market presence. In the six years between 2009 and 2015, Nordstrom added 109 Nordstrom Rack locations and Saks brought 28 OFF 5TH stores to market, while during the same period drastically reduced the number of full-line stores opened.

Perhaps more than good deals, Millennials love – and demand – convenience and an enhanced shopping experience. Off-price retailers are attracting Millennials by increasing in-store technology, offering high quality merchandise at reduced costs and customizing the in-person shopping experience. To improve the in-store shopping experience, the prototypical footprint for an off-price spinoff store is significantly smaller and more flexible than that of its big sister store. For instance, a typical Macy’s Backstage is approximately 30,000 square feet and a typical Nordstrom Rack is between 30,000 and 40,000 square feet, each approximately one-fifth the size of its full-line counterpart. Since a full-line Sports Authority store is typically approximately 40,000 square feet, those spaces would be suitable for off-price replacement tenants. In contrast to the aftermath of the 2011 Borders liquidation, which left many big box spaces vacant for years to follow, today’s market offers Sports Authority’s landlords greater opportunities. The continued growth of the Millennial-driven, off-price retail market will be critical to those landlords’ success.

New Lease Accounting Rules Are Final: Retailers and, Ultimately, Landlords Can Expect Changes

Posted in Landlords, Leasing, Real Estate, Retail, Tax

calculator-639x423We recently wrote about expected changes to the rules governing the way leases are accounted for on balance sheets and suggested the changes would have major implications for retailer tenants and longer term implications for landlords.

Late last week, as expected, the Financial Accounting Standards Board (“FASB”) issued a suite of now final rule changes related to lease accounting. FASB is the private, non-profit organization that establishes the rules governing generally accepted accounting principles (“GAAP”) used in the United States.

Under the new accounting rules, the former distinction between (a) capitalized or financing leases, which generally are reported as assets and liabilities on the tenant’s balance sheet, and (b) operating leases, which have not historically been so treated, will be eliminated. After these new rules become effective, a tenant under a real estate lease must now include the lease on its balance sheet, even where the lease was treated as an operating lease under prior GAAP rules.

The most significant FASB change would require all tenants to include any lease greater than one year as a liability and an asset on their balances sheet. The amount of the liability would be the present value of the total rent remaining due under the lease, however, there may be some unexpected consequences as the new rules are fully implemented.

Although the content of the rule changes is final, the new rules do not go into effect right away. Instead, most publicly traded companies will have to begin to adopt the new accounting rules for fiscal years beginning after December 15, 2018. All other entities will have to begin to adopt the new accounting rules for fiscal years beginning after December 15, 2019.

The new rules are the subject of some controversy. For example, some tenants could face concerns with respect to corporate financing under the new rules because newly-disclosed lease liabilities could cause violations of existing lending covenants regarding balance sheet ratios.  (Some lenders, cognizant that these proposed changes have been in progress for many years and could be adopted at any time, have been willing to “grandfather” in the existing GAAP rules into loan covenants. This practice allows a borrower to keep its leases off-balance sheet for the limited (though important) purposes of its loan covenants even after the rules change.) The rule changes could also change some of the dynamics of lease negotiations in the future as tenants will generally be able to continue to keep variable payments off balance sheet.

Despite some dissent, in general the new rules are generally understood to increase transparency in financial reporting.

Designed for Convenience: Three Ways Technology Can Enhance the Shopping Experience

Posted in Retail, Technology

omnichannelSpending a weekend or a Black Friday waiting in long checkout lines can drive many consumers to make their purchases with online retailers, which offer convenient and fast shopping.  As competition with online retailers continues, retailers with brick and mortar locations are examining ways in which they can use technology to offer customers the same convenient and efficient shopping experience provided online.

One aspect of the shopping experience ripe for increased efficiency and convenience is the checkout process.  Several new technologies are in the works which would allow customers to avoid the long checkout process at the end of a shopping trip. For example, Toshiba’s TCxAmplify technology allows customers to use their phones to scan items at the grocery store as they shop, and checkout quickly, as the list of items is stored on the phone and can be easily transferred to the checkout system for fast payment.  Other retailers, such as Starbucks and Panera Bread, allow users to order and pay in advance for their food and beverages using a mobile app, enabling customers to quickly pick up their order in the store.  The CVS mobile app offers a preordering and pickup option for prescriptions.

Retailers are increasingly relying on mobile location analytics, which use customers’ mobile phones, tablets, and other devices to gather data about an individual’s location.  This data can provide insight into customer shopping patterns and allow retailers to offer targeted discounts and promotions.  A new technology called Shelfbucks is taking this practice a step further by using beacon technology to connect mobile phones with a store’s point of purchase display.  When a customer who subscribes to the store’s mobile app moves his or her mobile phone near a product display, Shelfbucks will offer detailed information, reviews, and often discounts for the specific product on the customer’s phone.

In addition to using technology to create a more convenient in-store atmosphere, shopping centers and retailers can use technology to make parking more efficient, enhancing the overall shopping experience.  The parking garage at the Valley Fair Mall in California allows customers who have forgotten where they parked their cars to enter their license plate numbers into a kiosk to locate their cars within the garage.  Similarly, the parking garage at the Assembly Square development in Somerville, Massachusetts uses signage and lights to indicate open spots and prevent customers from helplessly circling the garage.  Multiple mobile apps offer parking information to users, and apps like SpotHero allow users to reserve and prepay for spaces.

The harnessing of technology to create a more convenient and appealing customer experience must also be balanced against the personal and face-to-face service that distinguishes brick and mortar stores from online retailers.  The increase in automation resulting from convenience-oriented technologies may reduce the amount of contact retail employees have with customers and undermine the atmosphere of personal service that some customers seek in shopping at a brick and mortar store.  On the other hand, the increased efficiency introduced by new technologies may allow store employees to devote the time that would have formerly been spent stocking or taking inventory to more directly serving customers, enhancing the shopping experience.  Thus, new technologies may enable brick and mortar stores to offer the best of both worlds – personalized service and convenient and efficient shopping.