The Incredible Shrinking Store

Page 2 of 2, founded out of the retailer’s Union Square store in 1996, has been expanding its San Francisco workforce, from about 300 in early 2011 to more than 500 today. The fast-growing online division, with headquarters in both San Francisco and New York, plans to move workers in early 2014 into nearly 250,000 square feet of offices in a newly redeveloped building in downtown San Francisco. “San Francisco is a vibrant and attractive place where very diverse and talented people, especially in tech-related fields, want to live and work,” said a Macy’s spokesman.

[contextly_sidebar id=”ced48c50774256d8455bd9e5a3de7f3f”]From creating innovations in digital commerce to coping with dislocation in offline retailing, it’s safe to say that the Internet is forcing retailers to up their game. “It’s making retailers be much sharper at what they do—to the advantage of consumers ultimately,” said Matthew Kircher, managing partner of Terranomics Retail Services in Burlingame, a retail brokerage firm in Northern California. Kircher (pictured on previous page) has represented retailers including Target, Hollywood Video, T-Mobile and Smart & Final in leasing space in the Bay Area and Central Valley. Kircher recently sat down with The Registry to offer his perspective on the outlook for retailers.

What does the continued growth of online commerce mean in the long run for physical stores?  

It probably means fewer of them, and it probably means that they will be located in very strong locations. Our studies have shown that while retail store [sales] in the U.S. might grow 2 percent to 4 percent annually, depending on category, online retailing is growing 10 percent to 15 percent in sales annually. For those in the brick-and-mortar world, it can be a little alarming. But there will be opportunity in understanding where all this is going and how they work together. There’s a right amount of retail balanced with online shopping that exists. Retailers are moving toward that balance.

I don’t ever see us not needing retail brick and mortar. Listen, people love socializing, going out, touching the merchandise and trying it on. It gets you out of the house. We’ll see a concentration of retailers that [are] easy to get to, fun, entertaining, interactive—in addition to being online. Stores need to be more responsive to their immediate guests while they’re in the store. It means a huge emphasis on customer service and providing value when you have them in the store. It needs to be a really positive social experience.

Does the expansion of e-commerce suggest that the brick-and-mortar store is dead or endangered?

I’m hesitant to say we need less [space]. It’s getting backfilled by other retailers. As the Borders Books, Circuit Cities go out of business, in the Bay Are almost all the space has been backfilled by other retailers. Maybe a Nordstrom Rack, a grocery store, maybe a drugstore, a large dollar store, maybe a local party store. The space [is being used] to meet demographics and market demands in a different way. 

In the grocery market, we have seen Sprouts, Whole Foods, Safeway, Fresh Market, Wal-Mart’s food concept grow into these kinds of opportunities. We have seen dollar stores move into some of these types of opportunities. We have seen Orchard Supply be purchased away from Sears and grow into some of these opportunities. We have seen Target grow into some of these opportunities.

Are stores becoming mere showrooms?

Yes, that’s definitely happening. Yes, it’s hurting certain categories of physical world stores. Obviously shoes, electronics, books. But there’s still value in bricks and mortar. There’s still going to be a balance between the two. Stores could be smaller. [They might] downsize what they carry—not the low-margin items. Stores in some instances can be used more like [warehouses]. You’ve basically got a warehouse right in there with a customer base, so why not use it? You’ve got the customer in the store. Nobody wants to buy a TV [and hear], ‘We keep it in the warehouse in Stockton; you’ll have it in five days.’ I can go online and have it in two days.

I see retailers getting into online shopping and making it interact with stores. I see online retailers like Amazon opening up brick-and-mortar stores [someday]. In many ways, they’re coming together.

What areas are likely to grow despite competition from online retailing?  

Look at Union Square—vacancies are as low and rents as high as they’ve ever been. It’s hard to say online retailing is hurting it. Why is that? There’s the specialty nature of it and having it all there in a great atmosphere. There will probably be fewer new stores, and the stores that do open are going to have to be really good. Maybe they don’t go into areas that don’t have certain characteristics of quality. If we see it anywhere, the slowdown will be more in the strip mall side of the world.

What is the significance of Target rolling out a new, more compact CityTarget format in San Francisco and several other large cities?

Most retailers are seeing their sales remain strong and steady in high-density markets. Suburban markets can be expensive and their sales may not justify their expansion right now. Many retailers are looking to where they can grow their business, which is going to be in urban markets. This is forcing them to look at being smaller.

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