The U.S. commercial real estate market is notoriously "over-retailed," saddled with an oversupply of shopping center space, but retailers and e-commerce players are, in an increasing number of cases, balancing the scales without lifting the wrecking ball.
In addition to experimenting with smaller store footprints, retailers are inviting other retailers into their brick-and-mortar domains to make use of excess or underutilized space. These "mash-ups", which at first seemed like harmless indulgences — a record store in a supermarket, a coffee shop in a hairdresser — have evolved into more controversial, eyebrow-raising ventures between ostensible competitors across the online-offline divide.
Last year, the department store chain Kohl's Corp., in a bid to boost its foot traffic, began allowing Amazon.com Inc. customers to return items in its stores. In April of this year, Best Buy cut a deal with Amazon to serve as the brick-and-mortar sales outlet for smart Amazon Fire TVs. Both partnerships, which some interpreted at first as potential "deals with the devil," have since been praised as ingenious, mutually beneficial platform integrations.
"If you're a brick-and-mortar store, and customer traffic or frequency has been elusive, I look at it as a positive," Chuck Grom, a senior analyst and managing director at Gordon Haskett Research Advisors, said of the partnerships. "It gets someone who wouldn't ordinarily come into your store to come in your store. And I don't think there's a trojan horse aspect to it. ... If other department stores were given the opportunity to do that partnership, I presume they would do it."
Bahige El-Rayes, principal of the consumer and retail practice at management consulting firm A.T. Kearney, described the further convergence of brick-and-mortar and online business models as evidence of the "endless aisle" concept gaining traction in retail. New technology will continue to disrupt and expand retail's horizons, but legacy brick-and-mortar retailers still hold significant brand equity, he said.
"Their footprint and existing traffic is a big advantage," El-Rayes said of brick-and-mortar retailers. "The leap is to ... replace existing bureaucratic processes with more nimble and agile business models. In essence, retailers will need to learn from startups and push down decision making to local teams that can adopt a 'test, fail fast and learn' approach."
Deborah Weinswig, founder and CEO of Coresight Research, identified drugstores as a potential site of significant new mash-up activity. "An aging population, the ongoing challenge of managing healthcare costs and new technologies suggest opportunities [to] bring more healthcare services into retail formats," she said. "We could therefore see retailer-consumer tech, retailer-healthcare tech and retailer-service collaborations in the health retail space."
At RECon, the International Council of Shopping Centers' annual retail real estate convention in Las Vegas in May, Weinswig predicted that mash-ups will become a significant theme in the coming quarters.
"I do think we're going to continue to see more of these mash-ups," Weinswig said. "And I think it's going to be good for retail."
Today, speculation is largely focused on Amazon and what brick-and-mortar avenue it may venture down next. But Gordon Haskett's Grom does not expect the e-commerce giant to make another significant real estate move in the near term. He framed Amazon's purchase of Whole Foods in 2017 as an opportunistic play likely set in motion by Whole Foods itself. Beyond some adjustments to price and membership benefits, Amazon has not yet taken a hard strategic turn with the grocer's operations.
"The jury is still out," Grom said of the Whole Foods deal, "and given that, I don't see Amazon doing anything else imminently. But your guess is as good as mine when it comes to something like that."
