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Welcome to the Great Retail Reinvention

Ching-Ting Wang • 2/26/2020
Innovative new retail experiences are appearing across the U.S., and Texas is no exception.

Retail

This column originally appeared in the December issue of Texas Real Estate Business.

Innovative new retail experiences are appearing across the U.S., and Texas is no exception. We started with food halls and “experiential” outings like escape rooms. But now, we are seeing even more retail creativity: from axe-throwing bars and esports arenas to Instagram-worthy art installations like Candytopia and experience-driven restaurants and bars such as Pinewood Social.

Throughout the country, there is a preferential trend toward experiential retail—businesses that provide consumers with a unique, unforgettable experience. This latest retail evolution is simply a response to changing consumer tastes.

Typically, a shopper visits a particular store for one of three reasons: convenience, value or experience. Today, we enjoy greater shopping convenience than ever before. In many areas of the country, we can get nearly everything we need from internet retailers—often with same-day or two-day shipping. In PwC’s Global Consumer Insights Survey 2018, 41% of consumers are willing to pay extra in order to get same-day delivery with 23% of people willing to pay for delivery within 3 hours. 
Meanwhile, companies that provide exceptional value are showing growth compared to their peers. For example, the parent company of TJ Maxx and Marshall’s showed steadily positive increases in annual sales growth from 6% in 2015 to 8.7% in 2019 in the company’s 2019 Proxy Statement report.

Of course, not all retailers have the bandwidth to compete on a value scale, leaving the third option of experience to help drive consumer traffic.

A Focus on Experience

Build-a-Bear is one example of a retailer that embraced experiential retail since its inception in 1997. Their main premise is walking consumers through the experience of making an individualized stuffed animal. Drilling down, this is hardly a diversification of assets, yet more than 20 years later, the retailer is still a success.

The idea is difficult to comprehend at first given that Toys R Us sold similar products as Build-a-Bear, but also offered a wider array of toys and electronics. However, Toys R Us recently went bankrupt and closed all stores. Why? Consumers are looking for more than just a warehouse full of toys. They are looking for a shopping experience as unique as themselves. When retailers focus on experiences, then the buying potential is endless. We are not merely just buying a product anymore; we are buying the experience and journey involved in purchasing the product.

Our craving for experiences has been heightened, thanks in part to our frenetic, tech-driven world, our longer work hours and the fact that many goods have increasingly become commoditized online or via discounters. This is particularly true for millennials. Eventbrite’s The Experience Movement report states that 75% of millennials prefer to spend money on experiences over material items. This shift is becoming even more apparent as millennials account for close to a quarter of the U.S. population.

Retail Reinvents Itself

Many articles reference the “retail apocalypse,” often coupled with a list of newly announced store closures, but in truth the phrase does not depict the bigger picture. We are simply in another round of retail reinvention. Many retailers facing bankruptcy are in trouble because of unsustainable debt loads and outdated financial growth models that led retailers to over-expand and underinvest at a time when a formidable challenge was brewing. As an example, since 2010 nearly 60% of all major U.S. retail bankruptcies have been by retailers that were shouldering leveraged buyout debt, according to a recent Cushman & Wakefield report.

The rise of experiential retail, and the renewed focus on consumer experience, is one of the solutions to the current bricks-and-mortar malaise. In Texas, embracing new retail ideas should come as no surprise, given that retail here is big. San Antonio leads major metros with retail constituting almost 40% of commercial property inventory. Austin came in fifth at 34%, followed by Houston at 29% and DFW at 25%. The four Texas metros all had more than 50 square feet (sf) of retail space per person, with DFW leading the pack at 56.5 sf of retail space per person. Houston followed at 55.5 sf, San Antonio at 53.5 sf and Austin at 50.3 sf. Chicago is the only populous city with over 7 million people that ranked above DFW in retail sf/person, at 59.4 sf.

Retail Inventory SF Chart

Retail has continued to grow alongside the major Texas markets in recent years. According to Moody’s Analytics, out of the 20 most populous states in the U.S., retail jobs account for 11% of total Texas employment and 15.7% of new positions added over the past year. Texas is ranked fourth in total job growth over the past year at 2.4%, with retail employment surpassing the state’s already strong employment growth at 3.5%. The continued growth in retail employment is bolstered by a growing population and healthy retail sales volume in the state. Currently, retail sales are at an all-time high in Texas at $550 billion, a $190-billion increase since 2010 and a 3.6% increase over 2018.

Employee Growth Chart

Despite worries about a retail “apocalypse,” the data shows otherwise: Retail is still a significant slice of the commercial real estate market in Texas’ metropolitan areas, and retail sales continue to grow. We expect these areas to be prime locations for new, creative retail for years to come. There is no doubt it will be fascinating to see the evolutionary results for this great retail reinvention. Until then, we will prepare our wallets to purchase our next big retail experience.

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