WWW.COLLIERS.COM/RESEARCH | P. 1
ON THE ROAD AGAIN
|WHITE PAPER|MAY 2012
COLLIERS INTERNATIONAL
| WHITE PAPER
The retail sector’s uneven recovery equates well to stop-and-go driving: Ultimately, you getwhere you want to go, but it takes longer and can be incredibly rustrating. Despite recentsurges in consumer spending, the pace o retail’s rebalancing lags other property types. Manyactors have contributed to retail’s struggles, among them high debt levels or households andbusinesses, high structural unemployment, and slow (or negative) ater-tax income growth.Each o these has constrained consumer spending, particularly on discretionary items. Theprimary impediment to a more rapid recovery, however, has been the oversupply created bythe retail industry’s misreading o housing demand during 2004-2007. Building too muchretail in locations where population growth did not materialize has let many propertiesscrambling to backll vacant spaces and their owners struggling to cover their debt service.Retail’s dependence on a healthy economy and a ckle consumer makes it vulnerable, butas an investment category retail real estate presents attractive opportunities. For propertyowners, municipalities, and investors committed to the sector, opportunistic investmentscan materialize by thinking dierently rom the herd. This type o orward-thinking analysisinvolves digging beneath the top-line numbers to understand the actors and conditionsnecessary or asset perormance and values to recover urther, and how those elements willavor certain retailers and markets. This white paper aims to identiy and analyze successulinvestment and branding strategies, and the retailers ahead o their peers in executing them.We’ll also look at evolving macroeconomic conditions and inrastructure networks torecognize U.S. states and metropolitan areas that are poised to outperorm.
MAY 2012
On the Road Again:
WHAT’S DRIVING RETAIL REAL ESTATE’S RECOVERY ANDWHO’S GETTING THERE FIRST
ANN T. NATUNEWICZ
Manager, Retail Research | USA
K.C. CONWAY
Executive Managing Director, Market Analytics | USA
COLLIERS’ PICKS TO OUTPERFORM
East Coast and Gulf Coast U.S. portsEnergy corridorsManufacturing sectorKnowledge-gateway citiesPublicly traded REITsHousewaresQuick-serve restaurantsAuto parts retailers
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ON THE ROAD AGAIN
|WHITE PAPER|MAY 2012
FACTORS DRIVING RETAILER SUCCESS
Much has already been made o the Great Recession’s eect on consumer preerences andresulting outperormance by both discounters and luxury brands. Low-price chains such asRoss, T.J. Maxx, and the dollar stores benetted rom shoppers’ newly rugal mindsetsdictated by personal debt levels and employment concerns. On the high end, luxury goodsshoppers led a “ight to quality” that spiked revenues at Burberry, Hermes, and Chanel, toname a ew. Yet, while this biurcation trend highlights the troubles or brands caught in themiddle, it doesn’t explain why some high-end retailers and some discounters have struggled.Looking ahead to suggest which retailers are poised to outperorm, we argue that corporatesuccess now hinges ar less on absolute price than it does on corporate strategies or rein-vesting in technology, elevating the in-store experience, and rening the service aspects othe retailer’s oering.
ABILITY AND WILLINGNESS TO REINVEST IN THEIR BUSINESS
When the recession hit, many companies—not just those in retail—had weak balance sheetsand subsequently spent the last couple o years rebuilding their reserves. Moody’s InvestorService recently reported that U.S. nonnancial corporate cash holdings were $1.24 trillionat the end o 2011, matching what they were in 2010, up rom $1.11 trillion at end o 2009.As their competitors operated in “survival mode,” retail companies with more liquidity seizedthe opportunity to invest in corporate inrastructure. Nordstrom and Macy’s, two prominentexamples, ocused real estate expansion on their o-price store concepts (Nordstrom Rackand Bloomingdale’s Outlet, respectively), expanded their programs to promote customerloyalty and enhance in-store ulllment, and established multichannel inventory systems.Eective cost containment and revenue optimization have generated enough executivecondence to loosen the purse strings on capital expenditures (CapEx) or both technologyand real estate. Technology investment takes the orm o channel diversication: improvingand integrating brick-and-mortar, online, mobile, and catalog operations. Real estate invest-ments include opening new stores, experimenting with smaller prototypes, and upgrading
0
Enhanced Web Ratings TrackingMore Eective CRMBetter Website Search ToolsAdvanced Web AnalyticsBetter Order ManagementMore Social MediaMobile Commerce (General)Better E-commerce Platform
40105020
(% of Respondents)
Investment
59.8%45.4%41.2%33%32%29.9%22.7%21.6%60
* Percentages do not total 100% because respondents were allowed to select more than one answer.
Source:
Internet Retailer
, “2012 Complete Guide to E-Commerce Technology
”
HIGHEST-PRIORITY* 2012 CAPITAL EXPENDITURES IN TECHNOLOGY
9. Yum! Brands $1,00010. Safeway $9007. Home Depot (tie) $1,3007. Lowe’s (tie) $1,3006. Costco $1,400 - $1,6005. Walgreens $1,6004. CVS $1,9003. Kroger $1,900 - $2,0002. McDonald’s $2,9001. Walmart $13,500 - $14,000Fiscal 2012, in millions
LARGEST RETAILER 2012 CAPEX BUDGETS
Source: Bloomberg, company reports
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ON THE ROAD AGAIN
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/remodeling existing locations. Unortunately, relatively ew companies disclosed specicdollar amounts allocated to each category, so we can’t yet make any comparisons betweenprograms or draw additional conclusions.Within Colliers’ 105-retailer sample set, 78 companies (74% o the total) increased theirCapEx budgets in 2012. Nine companies estimate that they will spend more than $1 billion,including the leaders in each merchandise category: big boxes Walmart, Costco, and HomeDepot; drugstores CVS and Walgreens; Kroger and Saeway in grocery, and McDonald’s andYum! Brands in quick-serve restaurants (QSRs). Building on their strong 2011 perormance,16 companies have increased their 2012 CapEx budgets by more than 50% over last year.This group includes The Buckle (+132%), Cost Plus (+91%), Family Dollar (+74%), BrinkerInternational (+71%), Starbucks (+69%), and Williams-Sonoma (+61%). As these companieseectively demonstrate, having the means to reinvest in their businesses is the result obeing good at what they do, which leads directly into the next success strategy: reworkingphysical locations to better showcase the brand.
ENHANCING THE IN-STORE EXPERIENCE
As e-commerce has expanded in the past decade, it exposed the vulnerabilities o certainbrick-and-mortar retail chains: those selling products that were content-related (and couldbe digitized) and those that relied on volume sales rather than margin (competing on price)to generate revenues. Doing business in a commodity-driven marketplace relegates thephysical store to merely a distribution acility versus a place that plays up brand identityand creates a space where customers can interact with it. The dizzying pace o technologyadvancement, combined with the sticky process by which retailers and landlords allocateremodeling capital, means that most existing brick-and-mortar stores don’t yet oer theexperiential components sought by today’s shoppers.Retailers “ahead o the curve” in reinventing their physical spaces elevate the shoppingexperience to ocus on every aspect o their business that matters to their customer.They seek to create spaces that are not only integrated with their online business but oersomething special that on-line can’t deliver: a multisensory marketing blitz plus a personaltouch. Apple distributes its product through multiple retail channels, none more successulthan its 300+ company stores worldwide. There, shoppers have unrestricted access to createtheir own experience; to try out anything in the product line, conduct their own researchin-store, ag down an iPad-toting sales associate or chat with other customers to answerquestions, and check out quickly. All this takes place within a physical space that perectlyreects Apple’s corporate branding.It’s a sae bet that much o the 2012 technology CapEx mentioned earlier will be spent byretailers trying to apply Apple’s execution to their own platorms. Looking ahead, it will beinteresting to see how other successul retailers with a less specialized product line (e.g.,CVS, Saeway, Staples) evolve their branding programs. By oering time-pressed customersa shopping option that’s more than just shopping, outperorming retailers will cement thevalue o their brick-and-mortar locations and maintain the vibrancy o their brand.
THE RISE OF THE SERVICE COMPONENT
Recent improvements, however slight, in the U.S. economy have allowed retailers thatadapted promotional programs during the recession to return to their core pricing strategies.
14%12%45%13%16%
Retailers with Cap Ex growth > 50%Retailers with CapEx growth 25-49%Retailers with CapEx growth 0-25%Retailers with Flat 2012 CapExRetailers with Lower 2012 CapEx
CHANGES TO RETAILER 2012 CAPEX BUDGETS
Source: Company reports
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