There was a minor disruption in The Force a few weeks ago in my little town. Several acres of undeveloped land were cleared for a new shopping center to be anchored by a Safeway “lifestyle grocery ” store. In the process, several old oak trees (some that were estimated to be about 200 years old) were felled. The truth is that the property has been owned by Safeway as far back as I can remember. But it had been left undeveloped just as long, and thus was perceived by the neighborhood as a welcome break from endless strip malls and small office parks. But Safeway is just doing what companies that own land usually do, that is, build something on it.

Beyond the loss of some beautiful old oaks, what got my attention was how it was covered in the local paper, the business-friendly Contra Costa Times:

“There are 12 grocery-anchored shopping centers in Walnut Creek, not enough for the many retailers who want to come to the city but can’t find space, Walnut Creek real estate broker John Cumbelich said earlier this year. People leave Walnut Creek to go to these other stores in nearby cities, he said. ‘What does that mean? People clog up the roads,’ he said. ‘Statistically speaking it’s clear that there is an undersupply of centers.’ “

‘Time to call “foul “! That seems like hogwash to me. You know when a lot of the existing retail centers fill their space with tanning and nail salons, taekwondo gyms, and independent tax specialists, that there is too much of the wrong kind of retail real estate in town. My city has a population of 65,500 (that has grown only 2% since 2000), and it’s served by 12 grocery stores (including 3 Safeways, with one that will be vacated for the new “lifestyle grocery ” store and subsequently be replaced by a 2^nd Whole Foods – so make it 13). And, just to be clear, the reason that there’s traffic in our town is because it has one of the main thoroughfares to the freeway into San Francisco, Oakland, and San Jose from two other towns with an aggregate population of about 136,000. Add to that the obvious: it’s suburbia. Most people drive cars – everywhere. Duh!

What the development is obviously about is growth. Publicly traded corporations are like sharks: they have to keep moving to stay alive. They must grow to satisfy stockholder demands for more revenue and earnings (which hopefully lead to a high stock price). The old Safeway that is being replaced by a shining new one is tired, small, and old fashioned. The new one will be bigger, cleaner, and have better parking and more room for lifestyle selections that Safeway wants to feature. In other words, it will sell more stuff in a market it already dominates.

This brings to mind one of those retail truisms; there are four “levers ” that a retailer can exercise to grow. First, it can sell more stuff (affecting top-line performance). Second, it can deliver a greater percentage of the top-line to the income line, by buying better and operating more efficiently. Third, it can better manage cashflow-return-on-investment, and lastly, it can develop new value creating opportunities. From time immemorial, retailers have addressed that 4^th lever by building new stores in new markets. And that of course is why we see so many U.S. retailers look abroad for growth opportunities.

Contraction-Expansion Dichotomy – With a Touch of Digital

RSR is currently conducting a study on how retail growth strategies are being fueled by technologies associated with servicing consumers’ omni-channel shopping behaviors. Underlying the study is an assumption that growth is now not merely a function of running more stores, but also a function of reaching more consumers via the digital domain. One of the findings that surprised me a little is that the U.S. is still perceived as the top opportunity for growth by retailers. Here are the findings:

• About 48% of the survey respondents come from the U.S. Most of the rest are European;
• 60% of those surveyed view the U.S. as the top opportunity for growth;
• So, even non-U.S. retailers see this country as a good growth target;
• The next target economy is perceived as an opportunity by only 34% of respondents.

In other words, it isn’t even close – the U.S. is still fertile ground for retail growth.

But that seems to run at odds with the popular wisdom that the U.S. is “over-retailed “, and that notion is backed up by facts. None other than the U.S. Census Bureau shows that physical retail space is contracting, not growing. Here’s some data from the U.S. Department of Commerce’s website:

What the Census data shows is that over the ten-year period 2002-2012 there are less stores servicing more people, which are really cranking out the sales per door. What’s interesting about that time frame is that it spans both the Great Recession and the emergence of “smart mobile ” technologies as the driving force in enabling consumers’ new shopping behaviors.

Cushman & Wakefield, Inc., a large international real estate firm, noted in its most recent (2Q2014) retail snapshot the apparent dichotomy between the obvious fact that existing retail stores are contracting even while the U.S. retail business is expanding:

“Year-to-date (YTD) store closing announcements have already exceeded the 2013 total and are on pace to match the 2008 and 2009 volumes of 6,800+ closings… However, contrary to popular belief, retailers are not closing stores en masse; far from it. Some traditional retailers… remain in expansion mode, albeit focused primarily on new segments (i.e. off-price outlet offerings). Also, many online-only retailers… are venturing into the bricks and mortar realm to better market their brand. This contraction-expansion dichotomy is not reducing the demand for retail space, but rather transforming it. During the first half of 2014, overall vacancy declined and by mid-year dropped to 6.5%, its lowest level since 2007. Nationally, new retail construction deliveries remain at historic lows, with YTD completions totaling 20.3 million square feet (msf), slightly off the pace set in 2013. At mid-year, 45.2 msf of retail space was under construction in major U.S. markets, down from 51.0 msf twelve months prior. “

Good-bye Oak Trees

What this means in simple terms is that the U.S. is experiencing a “refresh ” of it’s mature physical retail environment, not pure expansion into virgin territory. And “consumers’ new digitally empowered shopping behaviors play a big part in it. According to the Cushman & Wakefield 2Q2014 report:

“Consumer spending, which accounts for roughly two thirds of the demand in the U.S., has increased at the slowest pace of any recovery. This cautiousness, coupled with societal shifts (i.e. re-urbanization) and the growing e-commerce surge is having a transformational impact on the retail landscape. Retailers, both traditional and online, are now realizing the importance of bricks and mortar in a seamless, comprehensive omni-channel strategy <RSR emphasis> and are reassessing everything from store layouts and distribution networks to overall footprint and strategy. Within this environment, competition has intensified, forcing many to consider consolidations, mergers and acquisitions or expanding beyond their original concepts. “

Consumers’ new digitally empowered behaviors are forcing a change that’s so fundamental to the retail industry that it’s even causing us to re-think our physical store locations and designs.

So we’re getting a new Safeway to support our new lifestyles – hopefully supported by a good dose of omni-channel empowerment. Ironically the development is called “The Orchards ” project; ironic because there will certainly be no orchards there, and only a couple of those big beautiful oaks that survived the purge. I’m going to miss that bucolic scene in the midst of all this suburban sprawl, but at least I understand.