01/02/2022, 15:11 Why retailers need to revisit their real estate strategies | Retail Dive

OPINION

Why retailers need to revisit

their real estate strategies
The longstanding formula for ramping up real estate
needs an update, write A&G Realty Partners' Peter Lynch
and Jon Graub.
Published Aug. 8, 2019

By Jon Graub and Peter Lynch

Peter Lynch and Jon Graub are Principals at A&G Realty

Partners. The Melville, N.Y.-based firm assists healthy and
distressed retailers with dispositions, lease restructurings,
valuations, acquisitions and other services. Views are the authors'
own.

The longstanding formula for ramping up real estate — running a

competitor analysis once a year, shuttering the worst of your stores
and trying to win some concessions from landlords — needs an
update.

No, Amazon is not destroying all of brick-and-mortar retail in one

fell swoop. The truth is that stores that fail to resonate with today's
customers are the likeliest to run into trouble. Nevertheless, the
market is changing in ways that call for new approaches to retail
portfolios — especially among chains that expanded aggressively
during the go-go years. Below are four steps toward ramping up
real estate productivity.

Stop delaying tough decisions

The practice of delaying tough real estate decisions is common to

publicly traded giants, regional retailers and mom-and-pop

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operators alike. The reason is simple enough: Maximizing real

estate always comes with upfront costs, whether the task is
shrinking footprints, getting out of bad leases, moving to new
locations or revamping top stores. Naturally, cost-conscious
retailers can be reluctant to set aside funds for these types of
moves. Among the larger operators, shuttering stores can also
trigger alarm bells on Wall Street — never a pleasing prospect for
decision-makers at these companies. Our firm recently worked
with a struggling chain that waited far too long to close 300
underperforming stores. The delayed decision caused this operator
to hemorrhage money on low-volume locations that should have
been axed years ago. To stay competitive, retailers of all types and
sizes need to be proactive and do what is best for the long-term
health of the business.

Make portfolio reviews a top priority

Not so long ago, chains could make do with annual portfolio

reviews focused on the performance metrics of individual stores
and the latest site-selection decisions of their direct competitors.
Blockbuster Video, in other words, would take a market-by-market
look at real estate decisions by Hollywood Video. Today, the rapid
pace of change means that portfolio reviews should be conducted
at least twice a year. Are you paying above-market rents at
properties with declining prospects due to anchor vacancies caused
by recent bankruptcy filings? How fast are the demos changing in
the different markets and submarkets in which you operate?
Portfolio reviews have a long-term dimension (the multiyear
histories and performance of individual locations) but they
increasingly have a more urgent imperative as well — the need to
grapple with change as it occurs. So far this year, the likes of
Payless ShoeSource, Charlotte Russe, Shopko and Gymboree, to
name a few, have filed for bankruptcy. What names will be added
to this list six months hence? In a marketplace that tends to

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brutally punish those that wait too long to respond to change,

portfolio reviews can help retail chains stay nimble.

Carefully consider the mobile customer

Targeting the bottom 10% of underperforming stores continues to

be a sound strategy. Let's say a 1,000-store chain should eliminate
about 50 lackluster stores per year. If it fails to act, within just
three years 15% of its portfolio qualifies as dead weight. Still, there
are some caveats. In today's marketplace, metrics like sales per
square foot and comp-store sales no longer tell the entire story.
These days, the ZIP codes of your online customers are a critical
consideration. A moderately performing store might double as a
fulfillment center for online orders, playing an important role in
your e-commerce strategy. Another store might support your
online strategy by giving nearby customers an easy way to make in-
person returns. Performance-based categories — "top," "middle"
and "poor" —need to be considered in full context, including the
ways in which those locations interact with your loyalty program.

The growth of Starbucks' loyalty program is off the charts, for

example, not only because the chain's app is so easy to use, but also
because the proximity of Starbucks' stores makes using that app
fast, too. What would happen if, due to multiple store closures in a
marketplace, Starbucks were to add minutes to the average drive
times of its best customers? If store closures mean your online
orders in a high-volume e-commerce ZIP code will now take three
days to arrive instead of one, this is no small consideration.

Revisit your leases

In negotiating with landlords, today's expanding, in-demand

retailers — names like Ross Dress for Less, Five Below, T.J. Maxx
and Ulta Beauty — drive a hard bargain. However, older retail
chains that expanded aggressively in earlier eras continue to pay
above-market rents in some locations. Many also signed long-term

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leases of 10 or 15 years. Now the trend is to renegotiate kick-out

clauses and term length with a view toward maximum flexibility.
Having more options, after all, enables you to execute on
relocation strategies designed to bolster productivity. One retailer
CEO, for example, is doing nothing but one-year deals right now,
reasoning that an economic downturn and lower rents are right
around the corner. In general, we agree with the conventional
wisdom here. However, retailers with great and favorable lease
terms should consider locking in those situations by signing longer
leases of three years or more. Hedging too much can be a mistake.
What if those terms are not available the next time the two parties
sit down at the negotiating table?

Yes, rapid change is creating challenges in retail, but new

opportunities are arising as well. Older ways of thinking about real
estate may not take into account new factors, such as the benefits
of proximity to non-retail tenants like co-working franchises or
medical office buildings, or landlords' increasing willingness to
partner with retailers in constructive ways. The latter shift is an
important one: When owners and retailers collaborate rather than
lock horns, they stand a better chance of finding mutually
beneficial solutions.

Nor is following the conventional wisdom in real estate always the

best way to go: Shrinking store footprints could be the best
response to present-day dynamics, but more creative options
might work, too. RH (formerly Restoration Hardware) has scored a
big hit, counterintuitive as it might sound, by "going big" with its
40,000-square-foot gallery store inside a former natural history
museum in Boston. Today's customers are responding to novel and
rewarding environments. Creative use of real estate can be the key
to giving your customers the in-store experiences they crave.

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