What to Do with Real Estate: Retail Mulls Options

Amazon and Zappos have saved money by only taking up space on shopper’s computers and mobile devices. Even though the former opened one flagship bookstore, investors have seen the amount of square footage held by retailers like Macy’s, Sears and others as a millstone around their proverbial necks. That is not necessarily a valid concern, and if the brick and mortar retailers handle their market position correctly, they could rebut concerns about expected dips in Black Friday sales.

The Macy’s Story: Mistakes down the Top Retailer

Amazon and Zappos have saved money by only taking up space on shopper’s computers and mobile devices. Even though the former opened one flagship bookstore, investors have seen the amount of square footage held by retailers like Macy’s, Sears and others as a millstone around their proverbial necks. That is not necessarily a valid concern, and if the brick and mortar retailers handle their market position correctly, they could rebut concerns about expected dips in Black Friday sales.

The Macy’s Story: Mistakes down the Top Retailer

Macy’s stock took a massive stumble when it announced lower than expected earnings for the next quarter. The retailer blamed warmer-than-average weather that kept consumers inside and travelers being less likely to shop because of unfavorable exchange rates with the dollar.

However, there is also an excessive amount of inventory still on the shelves for this reason. Financial analysts are commenting on retail, in general, having noted companies can stock wares based on good weather models. In fact, one study showed the sales of a single item were nearly one-third higher in one store compared to another.

Plan of Attack: Some Real Estate, More Collaboration

Many have made calls upon the company to spin off its properties into a real estate investment trust (REIT). Officials nixed that idea but agreed to work with Tishman Speyer to figure out next steps. It already has sold properties in New York City, Seattle, Pittsburgh and Silicon Valley. Macy’s has also discussed ideas to re-work flagship properties in Chicago and Minneapolis, among others. Executives dismissed the REIT because of the potential hit to shareholders.

Other plans include co-branding a consumer electronics section with Best Buy, similar to companies that combine advertisements with movie trailers. Finally, Macy’s is considering off-price sections in its stores and rolling out satellite stores offering the same items. It would make sense in areas where there are younger people who are deal-driven and could improve the value of those properties.

What would make more sense is to focus on the buyer persona. Retailers like Target have used big data to figure out what customers want and when, down to forecasting when a woman might become pregnant. However, the most important option for a Macy’s or Lord and Taylor’s is targeting older consumers in areas where they live. Locations in more suburban environments are not only cheaper; it is also, where their best customers are. Anchor stores give them a leg up at malls, but the lack of targeting is troubling.

Non-Real-Estate Moves for Retailers

TJ Maxx, Marshalls, and other off-price stores benefit from mistakes like the one Macy’s made. Buying up surplus inventory at discounted rates ups their bottom line and they have seen better growth as a result. That will continue through Black Friday, numerous analysts say, as shoppers continue to look for non-Black-Friday deals.

There are two ways major retailers can combat this. One is better inventory management, perhaps from using the Internet. A better understanding of customer demand by region and connecting the purchasing with the actual sales would limit the access that fuels competitor revenue is next. It is a tactic the e-commerce giants have been doing for years, but brick and mortar stores have not caught up.

Kohl’s is one of the few B&M stocks where people have a positive outlook moving forward. The company says it is expecting better sales for Black Friday and the holiday season. That is due in part to the more than 30 million customers enrolled in its reward program. By enticing them with off-season sales, company officials say customers have earned points and will be more likely to keep shopping at Kohl’s over the next couple of months.

Retailers Will Continue to Struggle

Each of these companies has a different plan of attack, and a big part of it is going to be based on real estate. It continues to be the only effective portion of these firms’ asset portfolios. At a point where the tangible element of being able to hold products is one of the key benefits of the brick-and-mortar stores; so, too, are the locations.

One issue that Macy’s is trying to address is separating out the valuable assets while still maintaining the valuation of the existing stock. It is one thing for Rupert Murdoch to spin off the deadwood of his newspapers because of the strength of the rest of his media empire. Until retailers can prove they can create viable strategies to go up against the online giants, the industry is going to continue to struggle with what to do with the assets they do have.

Macy’s best option, as it is for its competitors, is to take advantage of the space it does have for off-price alternatives so it can recycle its inventory that isn’t coming off the shelves in other locations. The Best Buy collaboration could also bear fruit, especially given the retailer’s more stodgy reputation.

For other retailers who are struggling in the space, real estate may be one option, but the other is using reward programs like Kohl’s and website-to-store programs. One alternative to the latter that would improve traction is to tie the pickups to in-store coupons that would entice customers to return to the actual physical locations and to move the pickup location somewhat further into each store.