Survival of the Fittest: How Niche Retailers Dominate
Despite claims that e-commerce will overtake traditional retail space, physical store locations are still attractive to retailers. In fact, they plan to open over 76,000 stores in the next 24 months, according to RBC Capital Markets data. And while several major retail closings have been announced this year, other retailers are stepping up expansion plans for new stores and concepts.
Growing retailers are all about the niche lifestyle — fast fashion, food, fitness and pharmacy — and focus on what consumers care about most, including value, quality, health and the environment. They promote how they’re different; reward loyal customers; create a sense of urgency; and are savvy when it comes to social media, technology and marketing. Shopping or eating at their stores is an exciting event.
A sampling of new concepts growing rapidly includes clicks-to-bricks innovator Rent the Runway, H&M offshoot COS, women’s athletic clothier Lorna Jane, interval training franchise Orangetheory Fitness and millennial brewery hotspot World of Beer. We also continue to see an increasing number of pop-up stores; mobile stores; food trucks; and small, high-tech retailers that utilize iPads, QR codes, beacons and other interactive technology.
The retailers who aren’t doing as well: Middle market, legacy brands that aren’t adapting their business models to the wants and needs of today’s consumers as quickly as others. Instead, shoppers are more attracted to stores on either end of the retail spectrum, creating a polarized market.
Fashion-minded and budget-conscious shoppers are heading to T.J. Maxx, H&M, or Zara to save money on the latest trends, knowing the runway-to-Main Street fashions will only be on the shelves for 30 days. Aspirational shoppers are being lured into luxury stores by branded products at introductory pricing that invite them to haute names at a more affordable price. The luxury retailers know that once they attract customers with $300 shoes, they’ll soon look at $600 pairs.
ANCHORS DE-EMPHASIZED: As mid-market store closings escalate, we’ll see a de-emphasis on anchors being a shopping center’s main draw. Instead, centers will reposition themselves with a fresh mix of niche tenants that cater to consumers’ shopping and lifestyle needs, offering the quality and value they seek. Think more high-end department stores like Neiman Marcus and Nordstrom, fast fashion like H&M and Forever 21, fast casual dining like Chipotle and Smashburger, and luxury theaters like iPic.
We’re also beginning to see real growth in international retailers outside of the luxury space, attracted to the United States’ diverse consumer base, buoyant income growth and resilient economy. A recent JLL report shows that 175 international brands have taken root in the top 19 retail markets here, first growing on the coasts, then filling in the middle. Among newer retailers growing here are Japanese housewares purveyor Muji, German grocer Lidl and Irish clothier Primark. Fast fashion is the quickest-growing international concept.
While retail expansion is always welcome, we need to pay attention to potential overheating in gateway cities. In the first quarter of 2015, most cities saw an increase in rental rates and a decrease in vacancy across all retail product types. In places like Chicago, San Francisco and New York City, many retailers are have difficulty sustaining lease agreements — especially those signed in 2012 and 2013 — because sales aren’t keeping up with the higher rents. The expected closing of Toys “R” Us’ Times Square store is an example, and we suspect that a number of retailers will close this year in major retail hotspots like Fifth Avenue, Michigan Avenue and Beverly Hills.
We will likely see a correction in which retailers curb growth plans and landlords start notching down rents again. Fortunately, most retailers are being tactical when it comes to opening locations these days. No longer are they opening dozens of stores in a retail onslaught — as they did a few years ago — but are focused on two or three stores per year and letting their brands grow organically.
Naveen Jaggi is president retail brokerage, JLL.