Retail Services | May 2017 SPOTLIGHT REPORT In collaboration with

Why Online Isn’t the End of the Physical Retail StoreMyths, misconceptions and opportunities

Source: GlobalData

Note: “Other” includes books, news, stationery, crafting, hobby, jewelry and watches, entertainment and leisure products, sports and leisure equipment and a number of smaller categories.

One of the most exciting elements of retail is that the industry is ever-evolving. Shifts in consumer preferences, the rise of new technologies and the constant battle to stay ahead of competitors create a dynamic environment in which retailers need to adapt — or risk becoming irrelevant.

Such an environment drives innovation, but it also creates confusion. It can be hard to understand the real causes of change and easy to misinterpret the implications. A perfect example is the rise of online shopping and the consequences for bricks-and-mortar stores. The headline-grabbing view is that e-commerce is the driving force behind the store closures and declining customer traffic some retailers are witnessing. There is partial truth in this belief, but the full picture is much more complex and invites us to ask why.

In this report, we have collaborated with GlobalData to explore the next chapter for U.S. retail, the demands based on consumer habits and the facts and figures that should make you ask: How can you find the right new opportunities?

Retail on the Rise

From a growth perspective, U.S. retail as a whole is performing reasonably well. Over the next five years, spending in all major sectors is projected to increase, although the pace of growth likely won’t be even.

Forecasts from GlobalData predict that beauty will top the list in terms of growth over the next five years, with a projected spending increase of almost 32%. This rise will be driven by several factors, including an aging population determined to stay youthful, an increase in the number of men buying personal care products and continued product and format innovation by both manufacturers and retailers.

Home retail — which includes furniture, housewares and home improvement — is also expected to see above-average growth. A robust housing market and the willingness of consumers to invest in products for their homes are both beneficial drivers of expansion.

Apparel is likely to remain a laggard in growth terms, however. Quick-changing consumer preferences, price deflation from continued discounting and a lack of product innovation are all contributing to relatively lackluster performance.

Projected U.S. Retail Spending Growth: 2017–2021

HOME19.8%

OTHER15.6%

ELECTRICALS16.2% APPAREL

12.8%

BEAUTY31.7%

GROCERY15%

2 Retail Services Spotlight Report | Colliers International & GlobalData

3Retail Services Spotlight Report | Colliers International & GlobalData

Source: GlobalData

Notes: All figures are for full calendar year 2016. Retail spending excludes foodservice, gasoline and automotive sales. There is duplication between some of the factors (i.e., consumers may have been inspired by a store before buying online and then subsequently collected the product in a store).

The True Value of A Physical Store Value of sales where consumers have browsed items in a store before buying them online$119.6 billion

Value of sales whereconsumers have collectedonline purchases in store$81.7 billion

Value of sales where consumers have bought

online while in a store using mobiles/kiosks, etc.

$10.2 billion

Direct sales throughstores 2016:$3.2 trillion

Far from painting a gloomy outlook for stores, this perspective underlines how vital physical space will remain for retail. However, looking at these raw splits between online and physical only provides a partial view of the real role of the store.

Today, many consumers shop seamlessly across the various touchpoints offered to them, using a combination of stores and online channels to complete their purchases. In essence, this means that physical stores are driving significantly more than the $3.2 trillion of spend that went directly through them in 2016.

In 2016, consumers spent $119.6 billion online on products they first browsed or researched in a physical store. Some $81.7 billion spent online was on products picked up from a physical shop. And consumers spent $10.2 billion online while actually standing in physical stores, using their mobile devices or in-store ordering points.

Stripping out the duplication between these three components shows that physical stores supported $132.4 billion of online sales in 2016. In combination with in-store purchases, this means stores played a role in 95% of all U.S. retail sales in 2016.

Source: GlobalData

Notes: All figures relate to full calendar years. Retail excludes foodservice, gasoline and automotive sales. Other remote channels like mail order or TV shopping are excluded from the analysis.

Historic and Forecasted U.S. Retail Spending

94.2% 93.7% 93.1%92.5% 91.7% 90.8% 89.9% 88.9% 88.1% 87.4%86.7%

5.8% 6.3% 6.9% 7.5% 8.3% 9.2% 10.1% 11.1% 11.9% 12.6% 13.3%

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

OnlinePhysical

As E-Commerce Grows, Stores Remain Vital

Although all sectors of retail are growing, it is often the growth of e-commerce that grabs the headlines — something that leads to gloomy conclusions about the future of bricks-and- mortar stores.

It is certainly true that online is growing at a faster clip than physical stores, which also means that e-commerce’s share of retail is steadily increasing. For the first time, online retail is forecast to account for more than $1 out of every $10 spent in 2017 (approximately 10%). By 2021, online’s proportion is forecast to be 13%.

The flip side is that in five years’ time, physical stores will still account for the vast majority of retail spending. Online will likely penetrate more heavily in certain categories like electricals and media, but in others — like home and grocery — its influence is expected to be more muted.

Some Retailers Innovate While Others Struggle

Although physical stores will remain of vital importance for consumers, the type of stores consumers frequent is shifting. This is giving rise to new retail formats and ways of shopping.

One of the more notable trends playing out is the rise of the value sector — those retailers that help shoppers save money without asking them to make too many sacrifices in areas like service, quality and convenience. The interesting thing to note about the rise of these value players is that their business models are predominantly physical and the vast majority of their sales are made through stores.

The apparel segment is where off-price retailers have really boomed. This sector has experienced 43% growth in the past five years and is expected to see almost 40% growth over the next five, based on the forecasts from GlobalData.

Source: GlobalData

Notes: Off-price includes all off-price stores and includes off-price divisions of full-price stores. Total retail excludes foodservice, gasoline and automotive sales. All figures are U.S. only.

Historic and Forecasted Growth Rates

U.S. Retail Segment

Off-price

Dollar stores

Discount grocers

Growth Rate2012–2016

43.2%

34.9%

18.7%

Forecasted Growth Rate2017-2021

39.8%

22.1%

26.2%

Total retail 15.1% 18%

The off-price sector has also been particularly successful in driving traffic to stores. Some three-quarters of regular off-price shoppers say they like visiting stores because the constantly changing assortment is interesting and fun to shop. This compares favorably to mainstream clothing stores, which an increasing number of consumers say are homogenous with ranges that rarely change — something that reduces visit frequency.

* Premium brands include standalone higher-end brand stores like Coach, Michael Kors, Ralph Lauren, etc.

Source: GlobalData’s U.S. consumer survey of lapsed shoppers from different retailers, conducted in February 2017. Macy’s sub-sample size was 2,454.

Notes: Diagram shows only the top eight retailers. Numbers sum to more than 100% as respondents could mention more than one retailer to which they had switched.

Where Have Macy’s Customers Defected To?

As this chart shows, online has certainly played a role in customer erosion, but not as big a role as is often made out. Of those that have gained customers who defected from Macy’s, Amazon sits just outside of the top five. Other online specialists, like Wayfair, are even further down the list.

TJMAXX25.6%

NORDSTROM RACK22.5%

PREMIUM BRANDS*19.4%

KOHL’S18.9%

JC PENNEY18.8%

AMAZON18.7%

DILLARD’S15.0%

ULTA14.8%

MACY’SHAS LOST 3.4 MILLION

CUSTOMERS OVER THE PAST 3 YEARS. HERE’S WHERE

THEY NOW SHOP INSTEAD…

The success of these value formats has come largely at the expense of more traditional middle-market operators, which have recorded significant declines in in-store customer traffic and purchases. However, this is not typically the narrative you see in the headlines — rather, online commerce (and Amazon in particular) is often held up as the culprit of the traditional retail decline.

The reality is more complex. Amazon has certainly had an impact but, as the example of Macy’s shows, the underlying drivers are more widespread. These factors include the value players plus a range of other physical and multichannel retailers.

6 Retail Services Spotlight Report | Colliers International & GlobalData

Source: GlobalData’s general U.S. consumer survey of shopping habits, conducted March 2017. Sub-sample size for shoppers visiting physical stores less is 2,182.

Notes: Consumers who have reduced visits to physical shops in the past three years were asked to select the most important reason from each pair. Those who said, “Don’t know” or “Neither factor” in each pair have been excluded from the calculations.

This sends a clear message to physical retailers that they can still drive success — if they deliver interesting and engaging experiences that pull in shoppers.

Reasons for Reduced Visits to Physical Stores

EASY TO SHOP ONLINE35.4%

HARD TO SHOP STORES64.6%

ONLINE IS INSPIRING29.3%

STORES ARE UNINSPIRING70.7%

OFTEN NEW PRODUCTS ONLINE38.9%

SELDOM NEW PRODUCTS IN STORE61.1%

ONLINE IS CONVENIENT56.7%

PHYSICAL IS INCONVENIENT43.3%

ONLINE IS CHEAPER58.2%

PHYSICAL IS MORE EXPENSIVE41.8%

ONLINE SERVICE IS GOOD40.6%

PHYSICAL STORE SERVICE IS POOR59.4%

ONLINE IS A FUN EXPERIENCE27.9%

STORES ARE A DULL EXPERIENCE72.1%

FACTORS THAT HAVE PULLEDCONSUMERS AWAY FROM STORES

FACTORS THAT HAVE PUSHEDCONSUMERS AWAY FROM STORES

Physical Stores Must Adapt (Faster) To Change

The rise of online commerce and new shopping formats requires retailers to rethink the role of the physical store and the in-store experience. Many traditional players have been slow to adapt, which has left them with stores unsuited to the needs of modern shoppers.

The chart below shows that rather than e-commerce pulling people away from physical shops, physical stores have actually pushed people toward online. The most common complaints from consumers who have reduced their visits to shops are that stores are dull, uninspiring, hard to shop, rarely have new things to look at and offer poor customer experience.

Summary and Outlook

The retail industry continues to evolve at a breakneck pace. But when it comes down to it, consumer behaviors have always driven change in retail. It wasn’t so long ago that haute couture was only available to the wealthiest — until one designer decided to create everyday, affordable designs that could be replicated quickly for a broader audience. This drove a consumer-focused surge that led to the proliferation of stores, catalogues and now online shopping.

But retail today is not just about e-commerce. In this report, we have highlighted some of the myths and misconceptions about where, how and why consumers are shopping. In particular, there is value in the realization that disappointing in-store experiences have been a meaningful driver of consumers’ shift to clicks over bricks and from tired department stores to more dynamic and value-driven retailers.

This suggests that at least some of the challenges facing retailers can be stemmed, if not reversed, with more appealing experiences that give shoppers a reason to spend more time — and dollars — in physical stores. In this way, the key drivers of retail are the same as ever — it’s still all about engaging the consumer and addressing their needs to drive brand strength and sales.

The time is now for retailers and landlords to think critically about what the future holds and how to innovate to stay one step ahead.

For more retail insights and opportunities, visit:colliers.com/us/retail

7Retail Services Spotlight Report | Colliers International & GlobalData

Anjee SolankiNational Director, Retail Services | USAColliers International+1 415 288 7871anjee.solanki@colliers.com

Copyright © 2017 Colliers International.The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.

Andrew NelsonChief Economist | USAColliers International+1 415 288 7864andrew.nelson@colliers.com

Neil SaundersManaging Director and Retail AnalystGlobalData Retail+1 718 708 1476neil.saunders@globaldata.com

About GlobalDataGlobalData is one of the largest data and insights providers in the world, delivering unique data, expert analysis and innovative solutions to more than 4,000 companies across the globe.