Power centers’ role in the omnichannel model
As the retail industry begins to offer shoppers the omnichannel experience they demand, brick-and-mortar stores have never been more important.
This is especially true as it relates to power centers, broadly defined as open-air shopping centers that feature multiple national anchors such as discount department stores, off-price stores, warehouse clubs and other retailers that tend to offer a wide selection in a particular merchandise category at value prices.
Power centers are integral to the omnichannel model due to a combination of attributes that are highly desired by retailers and their customers in the digital age.
For example, in today’s fast-paced environment, power centers provide retailers and shoppers with the highest level of visibility and convenience by featuring easy drive-up access to each store, resulting in an efficient shopping experience. Retailers realize the value of power center locations, as evidenced by their increased demand for power center space and the recent operating results of our portfolio. At DDR, we’ve realized significant growth in our portfolio due to this demand and increased our portfolio leased rate from 91.2% to 95.1% over the past four years, and also leased over 10 million square feet per year within that timeframe.
As retailers invest in omnichannel initiatives to provide consumers with fulfilling shopping experiences, their brick-and-mortar locations will continue to be the lifeblood of their platforms. A truly successful omnichannel model allows for the fulfillment of any demand a consumer could have, and this begins with a flexible supply chain that allows retailers the ability to leverage brick-and-mortar stores and efficiently manage inventory and distribution.
Retailers have found that utilizing their real estate as an integrated part of the supply chain allows for increased operational efficiency as well as the flexibility to satisfy the full range of shopping options that customers demand - in-store, online or any combination of the two. For example, retailers are in the process of efficiently integrating the following services with their brick-and-mortar locations:
- Buy online, pick up in-store
- Buy online, return in-store
- Buy online, ship from store
- Ship from store to home
- See in-store, buy online
- Ship from store to store
Many of our retail partners have begun to utilize their physical stores in an effort to add these services to their omnichannel models. There is no better example of this than Walmart, the nation’s largest retailer and DDR’s largest tenant.
Walmart is continuously investing in its omnichannel model by leveraging its more than 4,000 brick-and-mortar stores located throughout the U.S. One of the company’s biggest advantages is that two-thirds of the U.S. population lives within five miles of a Walmart store, which enables the company to offer access and convenience that its competitors can’t match. The integration of its brick-and-mortar stores with its distribution centers is allowing Walmart to create a seamless and flexible supply chain. This allows Walmart to efficiently manage its inventory at every store and distribution center location. Over the past two years, the company has reduced delivery times by a reported 15%, while reducing costs by 10% by using an algorithm developed by its Silicon Valley tech shop @Walmart Labs.
Furthermore, Walmart is currently piloting its Walmart To Go initiative within markets throughout the U.S. Walmart To Go offers customers the ability to conveniently purchase general merchandise or grocery products online and either pick up a final purchase at a local Walmart store or utilize same-day delivery provided by Walmart for a small fee. During the initial rollout of this service, the company has found that more than half of its customers prefer to pick up their purchases at a physical location, because doing so offers customers the ability to enter the store to purchase products they may have forgotten at the initial point of online sale. Today’s consumer demands choice, and Walmart is investing to fulfill this demand.
Another power center anchor that is proactively developing an omnichannel strategy is Best Buy, as the retailer recently expanded its ship-from-store program to all of its 1,400 stores, up from 400 during the holiday season. Company executives have called the program “transformational,” noting that it enables faster delivery of online orders at a lower price. Best Buy has credited the initiative with driving significant online growth, improving online conversion and increasing same-store sales. Best Buy has indicated that this initiative has enhanced the customer experience by increasing inventory availability and improving speed of delivery to the customer. Additionally, the lower shipping costs associated with ship-from-store have enhanced the company’s margins and profitability.
Best Buy has also benefitted from its buy online, pick up in-store program, which has generated a significant competitive advantage for the company over its online rivals. The company has recently reported that nearly half of its online purchases are picked up in brick-and-mortar stores, which further illustrates the value of its real estate and consumers’ preference for physical locations.
Finally, the success Gap has experienced in gaining efficiencies from its ship-from-store program enabled the clothing retailer to close two distribution centers last year. In addition to reducing costs, Gap’s move towards shipping merchandise from stores has helped the company deliver orders to customers more quickly and leverage inventory more efficiently. The company has stated that ship-from-store has had a positive impact on earnings. Additionally, Gap CEO Glenn Murphy recently drew a sharp contrast between his company’s in-store distribution capabilities versus Amazon’s more limited network of fulfillment centers, noting that Gap has 2,600 “distribution centers” to Amazon’s 100.
These anecdotes show that, by leveraging real estate and investing in cutting-edge e-commerce technology, brick-and-mortar retailers are in a prime position to grow and prosper through fulfillment of the physical and virtual demands of today’s consumer. With over 90% of consumers classifying the in-store shopping experience as “easy,” and a 2013 Accenture study finding that 82% of Millennial consumers prefer to shop at brick-and-mortar locations versus other alternatives, our retail partners are in an opportunistic position to leverage their existing infrastructure relative to online-only retailers lacking a physical retail presence.
Omnichannel implementation will not be an easy task to achieve, but retailers are investing heavily in strategies to offer all consumers the consistent and convenient shopping experiences they deeply desire. While it is clear that we are in the very early stages of a true omnichannel shopping environment, retailers across the board believe that prime brick-and-mortar locations will continue to be an essential element of their business models. Increasingly, they are turning to power centers to acquire those prime locations.
Joe Tichar is SVP of corporate operations for DDR Corp., an owner and manager of 416 value-oriented shopping centers representing 116 million square feet in 39 states, Puerto Rico and Brazil. The Company's assets are concentrated in high barrier-to-entry markets with stable populations and high growth potential and its portfolio is actively managed to create long-term shareholder value. DDR is a self-administered and self-managed REIT operating as a fully integrated real estate company, and is publicly traded on the New York Stock Exchange under the ticker symbol DDR. Additional information about the company is available at www.ddr.com, as well as on Twitter, LinkedIn and Facebook.