This holiday season, growing consumer trends have given the brick-and-mortar retail industry plenty to be merry about. America’s malls and department stores may enjoy an uptick in foot traffic with preliminary studies, which hinted that consumers are not only willing to spend more money, but are actually prepared to visit retail locations. E-commerce is still a strong sell for many U.S. holiday shoppers; however, traditional store-to-store shopping appears to be here to stay with help from the growing “order online, pick up in store” trend, which is also driving consumers to physical retail spaces. There are many factors strengthening the performance of traditional retail options, the largest of which is a strong market cycle. In this article, DBRS looks at U.S. consumers’ intentions and spending behaviors for the holiday season to assess their potential impact on retailers and department stores from a commercial real estate perspective.
Growing Shopping Lists and Budgets
With a stronger economy and lower unemployment rate in the United States, more Americans are getting into the holiday spirit this year. According to the National Retail Federation’s (NRF) 2018 Holiday Spending Survey, consumers plan to spend about $506 on gifts for family in 2018, up from $478 in 2017. Shoppers also reported that they would likely spend approximately $75 on friends, $31 on co-workers and $31 on other gifts this year, all of which exceed or remain consistent with spending patterns in previous years (see Exhibit 1). The NRF’s main takeaway is that consumers plan to spend 4.1% more in the 2018 holiday season than in 2017.
Shoppers’ Go-To Destinations
With all the enthusiasm about holiday spending, where are consumers planning to shop? In its 2017 holiday retail report, The E-Commerce Takeover: Why Department Stores Are Struggling This Holiday Season, DBRS reported declining interest in physical retail stores in favor of e-commerce options as well as declining sales among rated properties anchored by a big-box retail store, such as Macy’s and Sears. But, in 2018, online and department-store shopping seem to be neck and neck with 55.0% of shoppers going online and 55.0% making the trip to the store (see Exhibit 2), demonstrating that there is a balanced desire to shop online and offline. While e-commerce has been outpacing traditional retail, shoppers are not ignoring malls. Consumers appear willing to diversify their shopping channels and the overlap in the shopping-channel data suggests that the hybrid shopping model — ordering online and picking up in store — is gaining popularity as 50% of online shoppers stated that they will choose this option, according to the NRF. Retailers like Walmart Inc. (rated AA with a Stable trend by DBRS) that invest in infrastructure to make ordering online and retrieving the product at a pickup location will likely find the most success. A dramatic mass migration to the online shopping realm does not appear to be taking place any time soon.
Forbes described that the trend of consumers doing all shopping in the store is declining, but also that the “line between physical and online sales is more blurred than ever” as consumers picking up online orders in stores saw a record 50.0% year-over-year increase and retailers with physical stores had 28.0% higher online-to-physical conversions. It is still important to address that not all retailers are created equal as many report severely declining sales. In its commentary, The Fall of an Icon — Sears and the Evolution of the Great American Shopping Mall, DBRS found that Sears attempted to leverage an online presence, but did not put enough effort or thought into making physical locations more attractive to modern consumers. Retailers that work with e-commerce strategies while upkeeping physical locations instead of against the online realm will perform more effectively than retailers that cannot keep up with the times. Also, strip malls and regional malls that have less attractive features and a higher concentration of struggling retailers will underperform.
Impact on Retailers and Mall Operators
These shopping intentions and trends are good news for retailers and mall owners. Perhaps surprisingly, the NRF report revealed that department stores are as popular as online shopping, despite e-commerce’s growing popularity. Furthermore, half of online shoppers surveyed by the NRF will be visiting a retail store to pick up their purchases, which increases store and mall foot traffic and encourages consumers to make additional in-store purchases, enabling retailers to capitalize on both their online and offline presence. The added convenience of returning a product to a physical store also incentivizes this option and drives more traffic to the retail space, which could help retailers report stronger fourth-quarter numbers and bring in more revenue for the malls themselves. As well, the first quarter in the next year will see improved numbers when people return and exchange gifts.
Headline figures are promising as eMarketer predicted that sales in the 2018 holiday season will surpass $1.0 trillion for the first time — an impressive level for malls when a percentage of that high amount goes to physical retail spaces. eMarketer’s sales predictions for traditional retail options are even more optimistic with brick-and-mortar options representing 87.7% of holiday sales, a quarterly jump of 4.4% amounting to approximately $878.4 billion (see Exhibit 3).
Online Competition Remains a Factor
Retailers will still have to compete against the e-commerce giant, Amazon, for prominence in the online market. Retail companies that are able to leverage an online presence in the most effective way, such as ensuring website functionality, product selection, customer service convenience and pricing, will likely come out on top this holiday season. While this does not dismiss the importance of a physical retail space, e-commerce plays an integral role in capturing available revenue in today’s retail environment. According to Statista, e-commerce sales made up 14.8% of the total U.S. retail trade in 2017.
Peak Periods and Rising Consumerism
According to Adobe Analytics, Cyber Monday was the largest online sales day in history with $6.59 billion in revenue, the largest contributor to which was mobile shopping through apps and company websites, many of which have been used to drive foot traffic into stores with the “order online, pick up in store” option. Adobe also reported that Black Friday raked in $5.03 billion and Thanksgiving Day saw $2.87 billion in revenue. While these figures represent continued strong online growth, consumerism across channels is on the rise, given the stronger U.S. economy and resulting consumer confidence.
Many shoppers expressed interest in visiting department stores this holiday season, which may materialize in December with Christmas and Boxing Day quickly approaching. Department-store owners that survived the e-commerce apocalypse could be reporting strong fourth-quarter results and mall owners may have stronger sales revenue and fewer vacancies on their properties this year. In an economic downturn, retailers seizing this hybrid strategy to make the most of their performing physical spaces and make them more attractive to consumers while leveraging the online angle will likely be the most successful. Sales are not fully migrating to e-commerce anytime soon and malls that withstood a wave of closures will enjoy a larger population of shoppers willing to spend more. Top retailers and strong mall owners across America will likely not find any lumps of coal on their bottom lines by the end of 2018.
For a copy of the report, refer to the DBRS website or e-mail info@dbrs.com.
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Stephanie Hughes 