The retail crisis is now a landlord crisis

Author Mark Pilkington explains why retail is struggling in cities — and how landlords and retailers could, together, develop a solution.

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Mark Pilkington lives on a busy shopping street in London. Each day, as he walks home past this prime urban real estate, he counts about seven or eight ground-floor vacancies. This experience is all too common in growing cities around the world; as we’ve written and talked about before, retail is in crisis.

But why? After decades in the retail business, Pilkington was driven to find out the answer to this question. He has written a new book, Retail Therapy, Why the Retail Industry’s Broken and What Can Be Done to Fix it, that explores the current crisis in retailing, its often misunderstood causes, and some potential solutions.

Pilkington spoke with Sidewalk Talk to explain what’s going on in cities when it comes to retail, why landlords are integral to urban retail’s success, and what path forwards exist for retailers and businesses to thrive on the high streets of the future.

When most people think about what’s happening with the retail crisis, they assume it’s Amazon’s fault. Can you go through the different factors that contributed to the “retail apocalypse”?

Absolutely. I think if one just thinks of it as being e-commerce, then one misses a lot of the richness of the causes. Then you don’t necessarily come up with the right solutions.

To my mind, e-commerce is only part of a huge upheaval that’s disrupting the supply chain that’s existed since the Industrial Revolution. Factories pumped out large quantities of goods at a low cost. Brands created trust in those products, did a lot of marketing and sold to retailers. Retailers had to have spaces to put all these products so that consumers could come and pick them up. That’s the system we’ve had.

What’s driving it is the need of the factories to continually pump out lots and lots of standardized product. You’re not really trying to individually serve consumers. You’re trying to persuade consumers to buy the same thing.

That structure also added a lot of cost into the system. If your factory could produce something at $10, the brand would buy it at $10, and then by the time they’d done all their marketing and covered the cost of their sales force, they sold it for $30 to the retailer. Then the retailer would put it in their stores, and to cover the cost of their stores, it would end up being $90.

That system has got a lot of middlemen; it’s quite inefficient. It’s not even that convenient for the consumer, because the consumer’s got to go to the store, use their transport and their time, to pick it up. They go on doing this because they’ve got no choice. Up until 20 or 30 years ago, your choice was two or three stores near where you lived. You were dependent on that supply chain. What’s happened now is that technology is changing almost everything about that supply chain.

In the book you say that, by the 2000s, all retail companies were technology companies, they just didn’t know that yet. What was happening?

I was there in the first wave of the e-commerce revolution. I had my own dot-com and we thought we were going to destroy retailers back in 2000, 2001. Then a lot of e-commerce companies went bust, because in those days, the internet just wasn’t that good. I think the retailers then thought, “Well, this is not that big a deal. We can deal with this, we’ll have our own websites and we’ll continue to trade through stores.” They relied on that for the next 20 years, and over that period so many things changed.

The internet got much better, and the development of the smartphone and social media really turbo charged the e-commerce revolution. After about 2008, ’09, you get a dramatic uptick in the amount of e-commerce that’s happening. By that stage, retailers still had 95 percent of their business going through their stores, and only about 5 percent on average of their business going through their e-commerce channels.

In the United States, Amazon now has nearly half the e-commerce market, which is extraordinary. I think the top six retailers have got about 11 percent between them. They gave away that channel. They thought e-commerce was just a little thing on the side, whereas the e-commerce companies were technology companies. They had a different culture. They were fast moving. They started getting extraordinary, powerful, predictive data, which enabled them to market to consumers on a much more personalized basis.

Direct to consumer brands like Warby Parker or Everlane can get products from the factory to people much, much cheaper. They can personalize the service. They’re more interactive. A lot of them are using user-generated content. In other words, the whole marketing is done by the users.

Companies like Warby Parker and Everlane have stores now. Have they been able to transition their business models in such a way that they can enter brick and mortar and be sustainable?

Well, the jury’s out on that. It’s all quite new. The one thing I would say is that they use their stores in a very different way.

What you’ve got here with the Warbys and the Everlanes and the Bonoboses is very small stores in very high traffic, cool locations. But they don’t have a lot of stock. They’re using the stores as customer recruitment points, almost.They’re trying to provide more of an experience, rather than tons and tons of stock in the classic retail mode. Bonobos gives people one hour appointments, and their store staff are very high level. When you sit down with them, it’s like having a personal consultant to restyle you. But most of their operation is online. When you go into Bonobos stores, you don’t pick up the stock from the store. They ship it to you. You walk out hands free, and they ship it to you from their e-commerce operation.

What about the death of the mall? Are these two sides of the same problem??

There’s a much bigger underlying problem with the malls: where they are. In the ’60s and ’70s, the city centers were dangerous, and all the better off people moved out of town. So you had this big growth of suburbia, and that’s where they built the malls. And malls were a big part of people’s lives, that’s what you did socially. And that way of life is passing away now.

The economics of America have changed, and a lot of the areas that are really suffering, they’re in areas where the manufacturing has declined, and they’re becoming depopulated. A lot of malls are in those areas, so that’s a big cause of the decline of the malls.

What’s happening now is that younger people are staying in the city because city centers are safer now. So people are postponing that move out of town. And so there’s more vibrancy in certain areas of the city, and retailers now, particularly the bigger retailers, are starting to look at smaller formats so that they can push into those areas, which is where the consumer demand is.

However, the retail crisis is now so severe in some cities, in some areas, that even in the city centers, you’re getting some depopulation of the stores.

How could it be that you have so much foot traffic, people returning to the city — what’s going on that these stores are going vacant?

Retailing is a very, very, very difficult business. It’s a high-fixed-cost business model. You’ve got your stores, rent, people, stock, all sitting there. And if you don’t do a certain level of turnover, it’s gonna start killing you very, very quickly. If you look at most retailers’ accounts, you only have to lose 10 or 15 percent of the sales in most stores to become unprofitable. So you don’t have to lose all the business, you just have to lose the top slice of the business. And that top slice of business has started to evaporate. They can go bankrupt really, really easily, they just run out of cash.

And during the period of 2010 to 2015, a lot of the big retailers over-expanded. A lot of them were owned by venture capital companies who wanted them to expand very fast, and they took on a lot of debt to do that. So they were sitting with a lot of debt, they built a lot of stores, and then suddenly, boom, the top part of their business disappears, and they’re high and dry. I think it was the speed with which it happened, it caught a lot of them short, and a lot of them just went bankrupt for that reason.

What kinds of retail are surviving?

There’s a lot more service businesses. And that seems to be really what is holding up the main street outlets. If you see yourself essentially as a seller of goods, then people can get goods more cheaply on the internet any day of the week. But what you can’t get on the internet yet is that experience. And I don’t believe that people are that anti-social that they’re going to do everything on their mobile phones. I think people still want to have engaging experiences, and go out and meet other people.

My recommendation is that retailers essentially turn their businesses into service businesses and use their internet channels to supply the goods. It’s a change in the balance.

What’s the relationship between retailers and landlords? Are the landlords not incentivized to turn these places over quickly?

The crisis has now moved from the retailers to the landlords. With the big retail players, the landlords’ business model was to borrow money long-term against these very regular, reliable, five-to-ten-year leases. And the income was pretty sure. With retailers going bust, it’s really disrupted their business model, and a lot of them are starting to run out of money, and starting to suffer, because they can’t fill the spaces.

They really need to find a different operating model in order to continue to lease their spaces. They’re not going to be able to get people to take huge spaces on long leases anymore. It’s just not going to work.

There are solutions out there. They have to move to a much more flexible type of situation. There’s a lot of brands out there, there’s a lot of new entrepreneurial brands who want to take spaces, but they don’t want to enter into the very expensive, fixed relationship that used to exist.

When you build a store, it takes you two to three months, and it costs you a huge amount of money. And actually you don’t need that anymore. A store these days can be made up of technology screens, largely. And then people could come in for a month, or two months or three months, however long they want, without spending a lot of money setting up the store. All they have to do is bring their product with them, and they put their chip into the electronic system, and suddenly the windows are running their ads, and the interior of the store is demonstrating their products.

It could open the door for smaller businesses or new businesses, if landlords move towards that more flexible, short-term model.

Yes. And if you think of those markups that I talked about earlier on — people have been paying eight or nine times the factory costs. You’ve got a new mechanism where that could be three or four times factory cost instead. That value will fall to consumers over the next 20 or 30 years, and that’s a very exciting prospect.

I think, unfortunately, the victim of the whole thing is the big incumbents, the big mall groups, the big retailers, the big brands.

And another potential loser is the employees.

Yes, retail in most countries is the biggest employer in the economy. In the U.S., retail directly employs 15 million people. And there’s another 15 million or so in the companies that support them. So you’ve got upwards of 30 million people that depend on that business. And there isn’t another business of that size that exists, in terms of employment.

They are often entry type jobs. So it’s a godsend to people who haven’t necessarily got the advantage of having a lot of qualifications. But a lot of those jobs are going to get automated, and internet businesses don’t require anything like the same number of people. A lot of the basic functions of store staff will disappear. In sheer employment numbers terms, it’s quite scary.

If they move to this model that I’m suggesting, where they ship the product from their e-commerce operation and just use the stores for marketing purposes, that changes the model regarding employees. You need much more sophisticated sales people. So the good news is that that retail job could become a more interesting and more challenging job, as opposed to just moving stock around, operating the till, etc., which are fairly dull and very physically hard jobs.

So I think I now understand the different factors that contributed to the crisis. Is there anything that we didn’t cover?

The one thing that we didn’t cover is the problems faced by millennials and Generation Z.

A lot of retail categories are very heavily supported by younger people: fashion, beauty, home stores. Younger people are the people who, historically, went and shopped.

But income is so badly distributed between older people and younger people now. In the United States, 85 percent of the wealth is owned by people over 45. And only 15 percent of the wealth is owned by people under 45. That is a very striking statistic. And the main reason for that is this enormous asset boom. So shares and property have gone up like, eight, 10 times, whereas incomes haven’t. If you were lucky enough to own assets before the boom, then you’re sitting on a huge windfall. And that was typically older people.

Younger people are not able to buy property or get started. And it’s extraordinary, but they’re delaying getting married, having children. In the U.K., there’s more people in their twenties living with their parents now than at any time since 1940.

How are stores shifting to respond to this new reality?

So we talked earlier about these supply-side revolutions, in terms of direct-to-consumer brands being able to get luxurious products to people at lower prices. And at the same time you’ve got a young consumer that wants to have nice things, but really can’t afford it. And they are also very tech savvy. So it’s very easy for them, and they’ve been driven to search out and adopt these new brands. And they’ve actively supported them and promoted them to their friends. So that’s why Warby Parker and Everlane and Bonobos have gone viral really, really quickly. It’s that people go, “Suddenly I can get a fantastic quality piece of clothing or eyeglasses at a fraction of the price that the retailers were charging me.”

What do you think is going to happen in cities when it comes to retail?

If I look at it in a positive way, if the landlords help, we’re going to see much more of a vibrant city center scene with a lot of new brands, a lot of quirky brands, popping up, maybe only for a month or two. The landlords need to make their spaces much more easy come, easy go. And I’ve talked about how they can use technology to do that. It needs to be plug and play.

See, a lot of these brands, they’re not retailers. They’re online people. They have no idea how to set up an incentive scheme for shop staff, for example. So the landlords could even provide trained retail staff, and incentive structures and systems for what you do with the cash — that’s all stuff the landlords can know how to do. I think the landlords have got to become the retailers. And they need to think of their customers, if you like, as brands. And the brand just comes in and they get given the staff and do a training course. “Here’s our product, this is what we do.” Off you go.

What these brands are going to say is, “You know, I can just go on day one, put my products in there, light up the screens, and then at the end of three months I’m going to pack my stuff up and go. And then I’ll supply these customers online until I get some more cash to do another wave.” That’s the way it’s going to work. The stores are basically marketing. They’re service businesses.

The upside of that is consumers won’t know from one day to the next which brands they’re going to see. And that could make a really, vibrant, fun experience for consumers. Which in essence they haven’t had.

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May 31, 2019