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CRE Finance World, Summer 2014

Power Centers Power centers were built in the late 1980s and early 1990s and include big box “category killers”. These are large stores, which offer a very large selection at low prices. They are situated near each other to create a convenient shopping experience. Since these large stores dominated their category, they became known as category killers. Examples of include big box “category killers” include Toys R Us, Staples, Barnes and Noble, Bed Bath & Beyond, Best Buy, Michaels, Sports Authority and Home Depot. E-Commerce is a potential power center killer. The selection available via the internet dwarfs even the biggest retail store and the prices are usually significantly less. The convenience of ordering merchandise while sitting on one’s couch and having it delivered to the front door within two days or less is unmatched by power centers. The threat is not only from Amazon or another exclusively online retailer but also from the online versions of big box retailers themselves. Many of the big box retailers will thrive, but power centers may not. A publication of Summer issue 2014 sponsored by CRE Finance World Summer 2014 33 Other categories being impacted by e-commerce include home stores and pet stores. For example, showroomers are 27% more likely to visit Bed, Bath & Beyond than the average consumer36. Even home improvement and construction products retailers such as Home Depot are focusing on e-commerce. Home Depot online sales were up 50% year over year in 2013. Internet sales currently represent less than 5% of total sales; however, the company hopes to grow sales via capital investment in “interconnected retail.” This investment would constitute 40% of its capital expenditures. They are building same-day delivery capability37. Clothing and Shoe Retailers E-commerce has moved in to the clothing and shoe sectors. It was once believed that people would always want to enter a store and try on and touch clothing before purchase, all the more so for shoes. However, liberal return policies, convenience, selection, free shipping, free return shipping and showrooming have driven a significant part of fashion sales online. Online retailer Zappos38 adopted these policies and revolutionized shoe sales. Although Amazon has a fashion presence, it is traditional mall tenants themselves that are driving e-commerce sales. Nordstrom and Macys have made e-commerce a priority and have reaped the benefits. Indeed, struggling retailers like JC Penney and Sears have logged growth in e-commerce sales despite lackluster in-store sales. For example, JCP.com sales grew 26.3% over the past year (2013). Wal-Mart reported a 30% year over year increase in E-Commerce sales or 2% of total sales. Abercrombie & Fitch is closing more than 30% of its U.S. stores (1,000 stores at the peak) and focusing more on e-commerce. Abercrombie’s is hoping that Internet sales will constitute 25% of sales from its 2013 level of 17%39. Some internet based fashion retailers have a physical store presence as well. Bonobos, an Internet based men’s fashion retailer, has “guideshops” where customers can be fitted and touch the merchandise. Warby Parker, an internet based purveyor of eyeglasses, has shops in which customers can try on frames and also receive an eye test. Amazon, the largest internet retailer, is now benefitting from its competitors’ stores that are effectively being used as showrooms; however, it is possible that at a future date Amazon will have their own showrooms. Traditional mail order retailers such as Landsend and LL Bean also have physical stores (Landsend in Sears stores). Having both a physical and online presence can be an advantage to retailers. Nevertheless, the overall effect will be a smaller number of stores and smaller store sizes. E-Commerce Future Growth We are only in the beginning stages of realizing e-commerce’s full impact on retail. E-commerce has already made a significant impact on whole categories of retail such as books, electronics, office supplies, and housewares. It will expand further and reorient additional sectors of physical retail to the internet while impacting most others to some degree. High-end retailers with a corresponding level of personal service will be more resistant to the negative ramifications of e-commerce. As e-commerce expands deeper into fashion and grocery shopping, its impact on US malls and community shopping centers will become much more significant. Challenges Confronting US Retail Properties


CRE Finance World, Summer 2014
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