For years, investors wrestled with the idea that online retail would eat brick and mortar retail’s lunch. But is it true? Real estate investment funds (REITs) for open-air shopping centers Kimco Realty (NYSE: KIM) don’t think so. Here’s why.
The effect of the pandemic
As the coronavirus spread around the world in 2020, governments attempted to slow the spread of the disease by effectively shutting down large swathes of their economies. It was devastating for traditional retailers, who could only open their doors if they were “essential” (think grocery stores). And that’s been a huge boost for retailers with a strong online presence or who only operated online, as shoppers migrated to online platforms when they couldn’t physically make it to the store.
Image source: Getty Images.
The big expectation was that the pandemic would be like hitting the fast forward button on the so-called retail apocalypse. It is the hyperbolic term given to the trend of financially weak retailers who were losing ground or going bankrupt for many years because they failed to keep up with changing consumer tastes (including, but not responding to). limit, the desire to buy online). For many, the heavy debt load has made it difficult to reinvest in their business to keep pace with their financially stronger and more agile peers.
But according to REIT Kimco, which owns around 550 outdoor malls, most with major grocery stores, that may not be what really happened. And that’s great news for retail business owners. The truth is, all the pandemic pain being felt in the retail industry may have in fact paved the way for some kind of rebirth.
The silver lining of the cloud
There have been, in fact, many retailers who have finally thrown in the towel because of the pandemic, either in liquidation or by declaring bankruptcy. Even those who have become entangled in often closed places less desirable. So in this regard, the pandemic has accelerated the âretail apocalypseâ. But it has freed the air, if you will, for new concepts and stronger companies to create better business models.
CEO Conor Flynn explained on Kimco’s third quarter 2021 earnings conference call:
And just for the record, the last five to ten years, I would say, we’ve been faced with the narrative of shrinking boxes, shrinking, shrinking, shrinking, and now the question is, hey, is there any extra adjacent space we can take to make the box bigger? So that has changed, I think the narrative to become more flexible in how you use the square footage and to incorporate that last mile distribution inside the box.
The key here is that powerful retailers want to be close to their end customers so that they can quickly and easily get goods of any type into the hands of consumers. It’s about making it easier to buy in the new retail landscape, which clearly includes online sales. But retailers have found that online sales are highest in areas where they have physical locations. Management at once Macy’s (NYSE: M) and Chicos FAS (NYSE: CHS), for example, have explicitly stated.
For Kimco, one of the main groups of tenants looking for additional space is the main food stores. This makes sense, considering they didn’t have to close in 2020 because they were essential businesses and because there is a grocery store in about 80% of Kimco’s centers. But a key piece of the puzzle, even for grocery stores, is making shopping convenient for customers, regardless of how they shop. This means having additional space for products purchased online, with stores essentially serving as distribution centers.
However, this is not the only place where the demand is coming from. Kimco is also seeing an increased need for space on the part of low-cost retailers. This is a category of stores currently in high demand by shoppers, and as a group they are taking advantage of store closures left over from the pandemic to expand into malls that may not have had no place for them before. And small stores are coming back as well.
In other words, demand at all levels has accelerated, with a noticeable online component in the trend. And the pandemic has actually helped bring about a significant amount of change.
It’s time to update your thinking
If Kimco is right – and there is mounting evidence that it is – the retail apocalypse may be over, or at least very close to its nadir. This means investors need to start thinking about retailers and, by extension, retail business owners in a new way – one that takes into account the complex and complementary interactions between online and physical retail. And that probably means paying more attention to the top-ranked names in both industries. Taking a closer look at Kimco’s third quarter results, and maybe even reading Macy’s third quarter conference call transcript, would be a good place to start.
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Reuben Gregg Brewer has no position in the stocks mentioned. The Motley Fool owns and recommends Chicos FAS. The Motley Fool has a disclosure policy.
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