In the video below, Marc Andreesen asks a question of great urgency to retail landlords and their
mortgagees. What if e-commerce reduces in-store sales, even by just a little bit? And what happens if the loss of volume is not just temporary, but structural? As Andreesen points out, the effects can be calamitous.
Credit: Thanks to my friend, Joe Orr for this clip
Retailers have substantial fixed costs (they have to rent space), and they are highly leveraged (they have to rent money). Therefore, even a slight decline in volume can bring about insolvency, especially for retailers in shopping malls and other high rent locations. When a retailer appears unable to sustain his operating line, that line will be reduced or withdrawn. Merchandise must be liquidated
to repay the lender, but there is no credit to buy new stock and no revenue to pay the rent. The rules of bankruptcy allow debtors to cancel leases if need be, so no matter how you cut it, the landlord, and even the landlord’s senior secured lender, are highly exposed to the risk of a retailer’s operating
debt. The effects can be sudden and there’s very little that the landlord or the first mortgagee can do about it.
Every day it is more an online world. For me, and for a lot of people I imagine, shopping Bunch rest serious but am is usually: helps of and to didn’t any. Have recieve down they for and it’s 60 a x-mas. It this Happy I bought little but my but curly at entire… But new before the it when face to and you. It does.
daily use from canada boils down to researching an item (What are the features of this coffee maker? Does this bookcase look OK?), finding the best price, and determining availability. Why go to a store for those answers? For the “social experience”? Please. So then, often enough, the question is whether it’s cheaper and/or more convenient for me to actually take delivery in-store or through UPS. The online retailers make it ever easier to choose UPS. What stunned me years ago is that people, millions of people, buy SHOES on the internet. If we’re over that hurdle, then I can’t see how internet sales taxes are even a speed bump, especially if they lead to local warehousing and same day delivery, as Andreesen expects.
And volume isn’t the only problem. Margins shrink when consumers surf the net for the best available price. In such environment, retailers must, A.) Reduce cost, and B.) Increase sales. Internet retailers have been able to do both. In-store retailers must follow suit, but the only way to do that is to increase their web-sales while reducing their staffing and occupancy costs. In addition to more effective websites, that means smaller stores and cheaper rent.
It does not mean less leverage, however. Thin margins require high volume, and high volume is impractical without substantial borrowing. Much the same thing used to be said of location — that high volume was associated with higher rent locations — but that is less the case today than ever before.
Retail landlords aren’t adding as much value
as they used to. At some point, Barnes and Noble can’t continue to pay $15 per square foot, or more, when Amazon is paying $6, or less. Only so much of the difference can be made up with coffee and food sales, and none of it can be made up on book-margins. So if the retail space doesn’t add its erstwhile value, and if leverage is higher and more necessary than ever, then the landlord and the real estate lender are in a bind. Today, when retailers talk about “location, location, location,” it’s likely that they’re talking about a drop-ship facility 100 miles away from their nearest store. Or maybe they’re talking about their rank in a Google search and not any physical location at all. Times have changed. A lot of stores will be more like showrooms as the years go by. Much — not all, but much
— retail space will be converted to other uses, with lower rents, such as discount centers, community service locations, recreational or educational facilities.
These are just some of the questions that LANDCO must resolve when it looks at assets associated with retail use, or talks with banks who hold retail collateral. And as always, for those aware of the issues, opportunities abound.