CCIM Q&A

Retail Forecaster

The dynamic intersection of online and in-store sales is changing many dimensions of the retail marketplace, according to Gary M. Ralston, CCIM, CRE, SIOR, a managing partner of Coldwell Banker Commercial Saunders Ralston Dantzler Realty LLC in Lakeland, Fla. He contends the high cost of the last mile in retail limits the expansion of online sales but also forces in-store retailers to discover new ways of conducting business that maximize efficiency. Ralston shares his retail expertise with Commercial Investment Real Estate.

CIRE: Will online retail sales ever surpass those in brick-and-mortar stores?

Ralston: Under current conditions, that outcome is unlikely. In 2013, e-commerce was slightly less than 6.5 percent of retail sales (retail and food services sales, excluding automotive sales). It is important to recognize that retailing is the final step in distributing merchandise to consumers. In other words, retail is a logistics-based business.

In the retail logistics model, the “last mile” from the store to the consumer’s home is the most inefficient link. For example, about one-third of Amazon’s sales are purchases that do not need to be delivered. Sales of Internet-delivered products and services will continue to favor e-commerce. Sales of physical products (merchandise also found on the shelves of stores), however, will probably not reach very far into double digits due to constraints associated with the cost of the last mile. Store pick-up of online purchases, however, will grow exponentially.

CIRE: How are showrooming (seeing products in brick-and-mortar stores and ordering them online), easy price comparisons, and informed consumers transforming the retail industry?

Ralston: More than anything else, the Internet has created informed consumers in the retail sector. In effect, power has shifted from the retailer to the consumer. Consumers can search for comparative pricing from their computers at their homes or offices, as well as easily use their mobile devices while in the store to research products and search for the lowest price. This activity forces the retailer to price match. As a result, the consumer gets the lowest available price, and the retailer immediately captures the sale.

CIRE: How do these new retailing trends relate to how retailers lease space today?

Ralston: Price matching puts pressure on the retailer’s gross margin. CCIMs understand that financially feasible rent for a retailer is a function of sales at the subject location (demand at the point of local supply), coupled with the retailer’s gross margin. That translates into retailers seeking lower rent.

Retailers are also offsetting the pressure on gross margin by seeking to increase sales per square foot. Retailers are using technology tools to create more-efficient inventories, eliminating products that account for lower sales and promoting in-store pickup of online purchases. This translates into smaller stores, which generate higher sales psf to offset the financial impact of lower gross margins and maintain financially feasible occupancy costs.

CIRE: How does a feasibility analysis figure into retail projects today?

Ralston: CCIMs use the financially feasible rent model to target retailers with higher sales psf and/or higher gross margins. There is also a trend toward a higher percentage of shopping center space being occupied by non-retail businesses. Using geographic information system tools to analyze demand within a defined trade area allows for targeting retailers and other users that would be the most productive at a specific location. The feasibility analysis model is important in consideration of both acquisitions and development.

CIRE: How does the trend toward smaller, more productive retail space play out during the next round of new retail development?

Ralston: Several impacts are apparent. For example, retailers expanding their number of stores will likely reduce the footprint (square footage) of their prototype store. Also, there will be more redevelopment and reconfiguring space to meet the needs of retailers who are seeking smaller footprints. This is particularly true when retailers merge or downsize, and landlords are left with boxes, which require subdivision into smaller units. Another key trend will be providing space for nonretail tenants, especially health care.

CIRE: How has the designation and your affiliation with CCIM improved your ability to analyze the market dynamics of the retail industry?

Ralston: My CCIM training and my commitment to continuous learning have allowed me to find more investment opportunities. For example, the misinformation in retail real estate sector creates opportunities for well-informed, astute investors and operators to outperform the overall commercial real estate market.

Sara S. Patterson is senior editor at Commercial Investment Real Estate.

Sara S. Patterson

Sara S. Patterson is former executive editor of Commercial Investment Real Estate.

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