How Retail’s Identity Crisis Is Reshaping Brick-and-Mortar Stores

As retailers of a certain age scramble to resonate with consumers in 2019, 57-year-old Kohl’s has implemented an interesting tactic: It is downsizing some stores and leasing or selling “underutilized square footage” to brands like discount grocer Aldi and gym chain Planet Fitness. In a January 2019 SEC filing, Kohl’s said it will close four low-performing stores this year and open four smaller format locations, so it will retain a U.S. store count of about 1,160. Its store count has otherwise been fairly stable since 2016, when it closed 18 underperforming locations. These new partnerships theoretically give Kohl’s customers another reason to swing by and stay awhile—and could prevent additional closures—but, like the online grocery industry, it could also be a sign the retailer is grasping at straws to remain competitive. And, if Kohl’s is nervous, you can’t really blame them. (The retailer declined to comment beyond the release.) Despite the back and forth over whether the retail apocalypse is overblown, the threat of store closures is real for many former mall titans like JCPenney, Sears and Macy’s. According to data from commercial real estate company CoStar, more than 5,000 stores announced closures totaling 147 million square feet of retail in the U.S. last year. Not surprisingly, Toys R Us topped the list with more than 40 million square feet. That’s followed by Sears (roughly 35 million), Kmart (about 22 million), Bon-Ton (20 million) and Sam’s Club (10 million). Real estate company Cushman & Wakefield estimates the number of shuttered stores in 2018 is higher—about 7,000—and expects it will increase to 8,500 this year. (That being said, the National Retail Federation’s latest State of Retailing Online report found more than half of respondents will open new stores this year—and 36 percent said they will have a higher store count in 2019 than in 2018.) Playing defense In a release, Kohl’s said its shrink-and-partner plan helps it operate more efficiently and provide a better customer experience for shoppers who can now kill two birds with one stone. The retailer also hopes these partnerships will drive traffic—and noted Kohl’s is open to additional partnerships with “well-capitalized companies” that will spur consumer visits. It’s a slightly different spin on the let’s-open-a-restaurant strategy we’ve seen from retailers like Crate & Barrel, Restoration Hardware, AT&T, Tiffany & Co. and Kroger. In each instance, it’s kind of a lower-risk version of strangers with candy: Stores want to lure customers, convince them to stay awhile and build relationships with them. The strategy is also aligned with the NRF report, which found 38 percent of retailers will experiment in 2019 with flexible formats like pop-ups to generate awareness and to avoid pricey long-term leases. CoStar data backs this up, too: Since 2014, the lease length in malls is down to four and a half years from over six on average. “Retailers are in the driver’s seat for lease negotiations and want more flexible lease terms so they can maintain footprint flexibility in a more dynamic retail marketplace or leave a location if it is not performing well,” the CoStar rep said. “Landlords want to adapt to evolving shopping conditions and fill malls with complementary tenants and some are more willing to think outside the box to fill their shopping centers.” Kohl’s is certainly experimenting Oweise Khazi, senior principal at research firm Gartner, said Aldi speaks to a similar demographic and could boost foot traffic at Kohl's, as well as cross-selling opportunities—and it gives Kohl’s a foothold in a new space. Sort of. Analysts were divided on Planet Fitness—while Khazi said it, too, will drive traffic, Will Margaritis, senior vice president of ecommerce at Dentsu Aegis, was iffy on whether a gym is a good fit. However, if CoStar data is right, there’s a genuine shift toward activities in retail spaces. While 88 percent of the shuttered retail space last year was leased to traditional anchor stores, the rep said non-traditional anchors like movie theaters, fitness centers and bowling alleys are increasingly likely to take on the anchor role in a mall today—and the share of newly leased anchor retail space taken by general retail and apparel stores has fallen from 60 percent in 2011 to 50 percent in 2018. “Non-traditional retail tenants provide complementary uses and diverse roster compositions, may keep shoppers in malls for longer periods of time and attract shoppers during non-working hours,” the rep added. And so perhaps it’s no surprise to see other retailers seek partners with “natural synergies” to test different store formats—like Macy’s and Story or CVS and Aetna, according to Robin Copland, global head of retail at digital agency Huge, who said it’s a reaction to digitally native brands that are building stores of tomorrow unencumbered by debt and outdated modes of operation. “Legacy retailers, on the other hand, have aging fleets of stores that need to be rearchitected, reformatted and rejuvenated with a new sense of purpose for their existence,” Copland added. “This has led to a renewed sense of purpose for stores and retailers are trying to figure out the best way to leverage this asset—especially as technology now allows online capabilities to be operationalized in-store. We will see many retailers experimenting with pop-ups, smaller footprints, hyper experiential flagship stores and more.”