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The Future of Bricks-and-Mortar Retail: Demographics, Millennials, and the Internet

John Bucksbaum, Chief Executive Officer, Bucksbaum Retail Properties, LLC
May 3, 2016

Bucksbaum Retail Properties' John Bucksbaum discusses how retail centers need to evolve to meet changing demographics and the expectations of Millennials

Overview

Executive Summary

Bricks-and-mortar retail needs to adapt to a changing world in order to be successful, John Bucksbaum says, but those changes will create opportunities along with the challenges. With retail malls committed to a location for decades, mall owners have no choice but to respond to evolving demographics in their market areas, Bucksbaum says. Changing demographics often creates opportunities. For example, entire new retail segments arose to cater to ethnic concentrations that resulted from immigration. Owners that observe similar burgeoning demographics around their malls can succeed by using their centers to serve those populations. Some retail centers have seen their market areas evolve over the decades from low-income to high-wealth demographics. Owners of those malls can capitalize by changing their retailers to match the tastes of their new clientele. Conversely, other retail centers are facing challenges due to demographic shifts. Some retail centers that were built 40 or 50 years ago in what were, at the time, considered to be solid neighborhoods have witnessed a long-run decline in their local economies and an emptying-out of their market areas. To survive, owners of these centers need to adapt by providing appropriate retail options, such as grocery stores, to what have become underserved markets. Mall owners also will need to adapt to the growth of the Millennial cohort – which, due to growing purchasing power, will soon become the most important demographic for retail. For Millennials, the internet is not a separate channel, and they expect a seamless experience between online shopping and bricks-and-mortar retail. In order to be successful, retailers will have to integrate the two channels. Internet retail can benefit bricks-and-mortal retail, Bucksbaum says, if retailers take advantage of it to make their retail product stand out. Retailers are learning how to operate in a different way and adapting their bricks-and-mortar product to coexist with online. Movie theaters are adapting by changing the in-theater experience, Bucksbaum notes, and successful sporting goods retailers are learning what they can expect to sell on-line and what draws customers to their stores.

Transcript

Zell/Lurie: We are here with John Bucksbaum, the CEO of Bucksbaum Retail Properties. John, thanks for joining us. John Bucksbaum: Thank you Todd. Zell/Lurie: How has changing demographics altered the retail landscape? Bucksbaum: Changing demographics – there's a lot of positive examples, and there are certainly some more negative examples. But I will start with the positives. Because our country has grown, and so much of our growth has been through immigration as the Hispanic population has grown, it's given opportunity for Hispanic retailers to create stores and create whole centers that are built around Hispanic markets, and that are tenanted with Hispanic restaurants and grocery stores; stores that are catering from a fashion standpoint, to the Hispanic market. The same could be said for the Asian community, for instance, in that we've seen centers that are built around the influence of the demographic of a particular neighborhood and I think that's been a great opportunity for people – not only for a shopping center owner, but for somebody who wants to create a retail concept. You did not see Spanish grocery stores in the U.S. previously. Now, people have an opportunity to do this. Another example of what changing demographics can do: Some of the most productive malls in the United States started out as being very average shopping centers, with South Coast Plaza in Orange County, California, being one of the best examples. When South Coast was built, it was built in the middle of orange groves and not a high demographic. But as Orange County developed over the decades and the people living there became more wealthy and the demographic continued to climb up the ladder, it caused South Coast Plaza to go from a Sears– and JC Penny-anchored shopping center when it was originally built, to being Neiman-Marcus and Nordstrom-anchored today. It is one of the most successful shopping centers in practically all the world. The same could be said for Bellevue Square outside of Seattle, Washington. When Bellevue was built, it was built as a very mid- market, traditional shopping center. As Microsoft came into being and located in Seattle, in Bellevue, and all of their success all of the people who worked there enjoyed and participated in that success. Bellevue then moved up the ladder in terms of the type of center that it was, to again, being one of the most successful shopping centers in America today. But these properties didn't start that way. It's because of the locations that they were built in and the changes in the surrounding demographics that occurred there. Then there are centers that were built in what were considered to be good, strong, solid neighborhoods, but that over the last 40 or 50 years, for whatever the reason, have been on a decline. Generally speaking, those centers have suffered because the customer that originally lived there and shopped there is no longer living there. It may be that nobody is living there any longer. It might not just be that it went from one type of person to another. It could almost be that the neighborhoods now no longer exist. Or, if they do, they've become underserved markets – and that's a challenge that I think our industry needs to face. Because there were once services there and now these services are no longer available this is a big problem. There may not be the grocery stores that used to be in these locations. You have some neighborhoods that have a multitude of groceries, but then there are people who have to drive eight miles to get to the nearest grocery store. So, there are many, many positive examples of changing demographics. But there are also the not-so- positive examples. But it's also an opportunity – a hard one, but one that we as an industry need to respond to. Zell/Lurie: What do you think will be the effect of the Millennial generation? Do they shop differently than us older generations? And if so, is it affecting shopping centers? Bucksbaum: I believe Millennials have already had an impact, and their impact will continue to grow. One of the interesting things I find is, because they're still so young, the buying power, or lack thereof, causes them to not be the most important group today, just from the amount that they consume. But, soon as they mature in their professional careers we will see a continued increase in their purchasing power. This is the first real generation where everything that they have known is online. The mobile phone is just an extension of everything for them. I think that's probably one of the biggest defining factors: They simply want what is available to them online to be available in the store. They see no reason why it should be thought of in two separate aspects. As retailers continue to evolve in the omni-channel aspect of things, that they get better and better at it. But the retailers who aren't able to understand or get it are going to face a much bigger challenge than they have heretofore. Just because there has still been plenty of people who will just strictly continue to shop at the brick-and-mortar store for the time being there is going to be fewer and fewer exclusive brick and mortar shoppers going forward. This is why it's so important that the retailers get the online part of the business working in a seamless sort of a way. I think that it makes for a better shopping experience. The Millennials, they love to shop. They love to go out and eat. So much of what's fueling the food business in this country are young people who are eating out. There's just an expectation as to how the execution of some of those things should be done that is somewhat different than what Baby Boomers would expect, for instance. Zell/Lurie: We hear a lot about how the internet might cannibalize bricks and mortar stores. But the internet encompasses a lot. For example, you can buy things online, but it also makes it easier to search for products in local bricks and mortar stores. How do you see the internet affecting bricks and mortar stores overall? Bucksbaum: I believe that the retailer is recognizing all of the things that they need to do; that it's not the end-all, the demise of them, and that brick-and-mortar is still critically important to them. For all retailers, 90% of their business — generally speaking, if they're brick and mortar retailers — still occurs in the store. I think the trick is for the retailer to take advantage of the internet. Everybody has become more knowledgeable, and information is one of the things that the internet has made so accessible to everyone. So the research that's going to be done on your product is much more extensive. Price comparison– shopping: people expect to be able to do it immediately. They're going to be in your store, they're going to be looking at their phone, and they're going to be comparing the price. So you have to understand that all of that is going to be occurring. But, at the same time, it allows you — if you're good — to take advantage of that and make your product stand out even more. Now, there are certain product types: We've pretty much seen bookstores go by the wayside. Same holds true with music. But other sectors of the retail industry... Sporting goods is an interesting one because a tremendous amount of sales are done online and there are certain sporting goods stores that, just as of late, have announced bankruptcies and/or closings, going out of business. But, at the same time, the strong players are still doing well. And so, I think that they are understanding what they could expect to sell online and why people like to come into the store. The same could be said for movies, for instance. Everybody thought that theaters were done. It's had an impact — there's no question about it. But, at the same time, the number or the gross revenue in the industry is at all-time highs. The number of visitors is down somewhat, so some of that is compensated in a higher ticket price. But, at the end of the day, the blockbuster movies — Star Wars, which set all sorts of records — people still want to see in the theater. The theater is giving you better food, they are giving you drinks, they are giving you different options of seating, and reserving your seat. All of these different things are now responding to what consumers expect. So, I certainly don't think that e-commerce is the end of brick-and-mortar retail but I do believe it makes the retailer operate in a different way. The amount of sales that are done online, there's no question that it's going to continue to grow. So you have to continually be reassessing, if you are a retailer, how it is that you're going about your business, and what your offerings might be. You may have to make some changes in some of that. But the two certainly can coexist. The customer is going to expect that both be there, but that both will work pretty much seamlessly with one another. (Not an exact transcription of video.)

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