The Experience-to-Stuff Ratio
Economists at Northwestern, Stanford, and the University of Chicago have a novel method for predicting job growth. They track the number and size of tax code provisions expected to change, scan reports from the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters, and monitor the frequency of keywords used in 10 major newspapers. The result is the Economic Policy Uncertainty (EPU) index, and it’s proved quite accurate. In 2009, when the EPU rose 60%, job growth fell 4%. In 2015, the EPU declined nearly 40% and jobs increased by 2%.
Real estate investors check indicators like these to gauge the timing of their sales and purchases. More jobs mean more home and retail purchases. Fewer jobs mean less. In a report called “A New Dawn in Retail,” MetLife Investment Management saw a 7% rise in uncertainty doubling to 15% in 2019 and predicted a job slowdown on the horizon.
MetLife researchers didn’t see this affecting the office and apartment real estate sectors, since the construction pipeline for 2020 and 2021 is running slow. Retail, meanwhile, they proclaimed too hard to call due to the winds of change roiling the sector.
The two big wild cards in retail are the growth of experience-based retailers and the future effect that e-com food sellers might have on grocery-anchored centers.
It’s no secret that a successful retail center of any kind in 2019 — be it an outdoor center or an enclosed mall — must re-jigger its mix to include a wide variety of food, beverage, and entertainment-based tenants. In 2016, MetLife established a metric called the “experience-to-stuff ratio” that it calculated at 1.3x — that is, for every dollar shoppers spent on merchandise, they spent $1.30 on experiences like eating, bowling, movie-going, drinking, and Legolanding.
Just three years later, the experience-to-stuff ratio has climbed to $1.5x, meaning that visitors to retail centers spend 50% more on experiences than they do on merchandise in stores. MetLife credits this trend for a move by retailers toward smaller store sizes. The report noted that that the median store footprint decreased by 1.2% between 2017 and 2018.
One percent doesn’t sound like much, but the decrease is coming from a segment of leading edge of sellers of stuff that are “right-sizing” their footprints by 20% or even 40%.
MetLife researchers wrote that “we believe many goods-based retailers are increasingly using their stores as showrooms, to help boost their online sales. The result is less need for inventory, and less need for a large format space.”
They counted grocers to be chief among those shrinking their footprints, led by international grocers such as Aldi and Trader Joe’s that have employed technology to trim their inventories by customizing the shelves with products known to sell best in each location.
Online food merchants like Instacart, Amazon, and Peapod now claim just 2.5% of market share, but MetLife predicts that their portion will more than double to 7% in just the next four years.
A well-known brick-and-mortar grocer with one of the biggest store footprints in the land is listening. Sam’s Club has introduced Sam’s Now, a “mobile first” store that takes most of its orders online and has the goods ready for customers to pick up. The average Sam’s Club is 134,000 sq. ft. Sam’s Now stores are under 30,000 sq. ft.