The rise of the digital marketplace—propelled by online giants like Amazon and Alibaba and carried by a slate of popular brands operating primarily as direct-to-consumer—has been heralded by many analysts as a death-knoll for physical retail. By these forecasts, luxury-good storefronts should be among the first casualties. But is the brick-and-mortar shop really on life support?
Certainly, there is compelling evidence to indicate that traditional retail is undergoing a reformation. A rash of recent store closings and bankruptcies among major chains like Toys ‘R Us, Sears and Rite Aid has sent a shiver down the spine of investors. That wasn’t helped any by lackluster Q4 reports from the likes of Kohls, JCPenny and Macy’s—whose over-zealous bet on a blowout holiday season helped wipe out $34 billion in market value from the sector.
The fever seems to have hit mid-market outlets that depended heavily on a physical presence to drive sales particularly hard. From Victoria’s Secret (which announced in February it will shutter 53 locations in addition to 30 last year) to ShopKo (which is closing 38 stores and selling off its pharmacy), the wave of businesses on the doorstep of Chapter 11 points to the challenges facing traditional retail. To be sure, much of that owes to the emergence of newcomers who outperformed the old-guard, particularly in the online space—which only further drives home the point.
In the luxury-goods market, vacancies along Fifth and Madison Avenues suggest a similar trend, and there are plenty of brands that have gone the way of their blue-collar counterparts. In April, Italian fashion-house Roberto Cavalli filed for Chapter 7 bankruptcy as it liquidated its U.S. arm. Fashion retailer Pretty Green was placed into administration in March, and last year J.Mendel filed for Chapter 11 protection.
According to CNBC, major retailers have closed more than 4,800 stores through March of this year. That’s compared to just over 5,500 through all of 2018, which was down more than 30 percent from a record 8,139 closures announced in 2017.
Yet, for all the hype behind online retail and the anecdotal evidence against physical retail, the data still indicates that brick-and-mortar hasn’t given up the ghost just yet—nor is it likely to do so soon. Over 90 percent of retail transactions were made in a physical location last year, and more than 80 percent of sales are expected to still be made in-store by 2025. That reality, many experts caution, recasts the outlook.
“The so-called ‘retail apocalypse’ is not ubiquitous. It does not apply uniformly to all retailers, nor to all types of retail, nor to all geographic markets,” Jim Dillavou of Paragon Commercial Group says. “Indeed, the retail that is dying is the retail that should die. E-commerce is actually doing something important and healthy for retail: it is forcing investment, improvement and innovation in a marketplace that has not changed in decades.”
What about the dip in leases along luxury corridors in places like Manhattan? As Gene Spiegelman, vice chairman and principal at Ripco Real Estate, tells Real Estate Weekly, it is more of a sea change than an emptying river.
“Disruption of the traditional retail model exacerbated a real estate market that was already overheating. Not unlike other financial bubbles, the micro-bubble of high-value urban retail real estate burst by the end of 2016,” Spiegelman says.
He points to the spate of luxury brands migrating to Hudson Yards, the new mixed-use development on the far west side of Manhattan, which is also the most expensive real-estate development in U.S. history. The development has attracted a bevy of luxury names, including Balenciaga, Hermès, Cartier and Dior. Flexible lease options have also drawn in e-commerce brands like Mack Weldon and LovePop to test run brick-and-mortar operations.
The health of physical retail depends largely on who you ask. The reality is probably somewhere in the middle. Brands that have failed to create a strong digital presence have suffered the consequences and forfeited their market share to savvier newcomers. At the same time, online behemoths including Apple and Amazon are investing heavily in retail locations.
What’s clear for retail in an otherwise murky market outlook is this: Successful businesses need both a strong online capacity, an extraordinary experience for customers in-store and the ability to evolve with consumer preferences.