Perfect Storm – Retail is Changing, and Fast

The pandemic, e-commerce, labor shortages, and supply chain issues are further igniting the transformation of the retail industry.
38
Illustration by James Yang
Illustration by James Yang

For the past two decades, the retail industry has undergone a metamorphosis as consumer spending habits have shifted with the growth of online shopping, the decline of department stores and suburban malls, and the proliferation of discount retailers.

And when the COVID-19 pandemic changed the world two years ago, with stores and restaurants temporarily closing and office staff working from home, the reeling retail world was upended with labor shortages and supply chain challenges.

While 2019 saw a record number (9,302) of permanent store closures in the U.S., 2020 broke that record with 12,200 store closures. Labeled a “retail apocalypse” by some, one third of the closures were department stores, clothing chains, large chain retailers, and mall-oriented companies, according to CoStar Group, a commercial real estate firm. That same year, more than two dozen major retailers filed for bankruptcy, including Nieman Marcus, J. Crew, Pier 1, and the parent companies of Ann Taylor and Men’s Warehouse.

Locally, a number of stores and restaurants closed their doors, including Love’s Furniture (formerly Art Van Furniture), Manus Power Mowers, multiple Fitness 19 locations, the Hi-Hat in Ferndale, the Bucharest Grill, Rosie O’Grady’s, Town Tavern, the Detroit Institute of Bagels, Andiamo’s Dearborn, and more.

Thankfully, a savings buffer of nearly $2.5 trillion, boosted by federal subsidies and higher wages, was accumulated by consumers. After largely living and working in place for several months, as stay-at-home orders and mask mandates were lifted, pent-up demand created a return to brick-and-mortar stores while online sales continued to grow.

According to the National Retail Federation, through the first nine months of 2021, spending continued at a brisk pace — up 14.5 percent year over year — and has returned to pre-pandemic levels. However, the NRF’s chief economist, Jack Kleinhenz, warned in November that “COVID-19 remains a significant factor, and should there be an increase in infections, (it) could cause a pullback in spending.”

According to Katie Rizzo, a research analyst for Collier’s International, retail is on the road to a slow recovery. “Restaurants and small businesses were hit the hardest when we were closed for some time, and we lost a lot of retailers, but some of those spaces have now been replaced by secondary users and there’s active absorption,” Rizzo says.

As a result of the temporary closing of stores and restaurants, many businesses scrambled to survive by creating a greater online sales and social media presence while offering services such as curbside pickup, increased delivery services, and online delivery at service centers. 

At the same time, stay-at-home mandates and social distancing requirements caused many consumers, some for the first time, to rely on buying products online. According to the NRF, nearly 45 percent of baby boomers who were surveyed said they’re now shopping more online.

“The pandemic accelerated consumers to e-commerce by a lot, and probably by three to five years,” says Jaime Ward, the head of retail finance for Citizens Bank in Southfield. “In addition, consumer options have multiplied considerably, like curbside pickup, and they’re taking advantage of it.”

The retail sector in Michigan and the U.S. has continued to be transformed by e-commerce, particularly amid the pandemic. National digital sales have increased from 8.8 percent of total retail sales in 2017 to 13.6 percent in 2020, according to the U.S. Census Bureau.

A report prepared by Public Sector Consultants for the Michigan Retailers Association estimated that out-of-state e-commerce and remote purchases totaled $26.7 billion in 2020, while 16.8 percent of Michigan’s total retail sales were with e-commerce and other remote purchases.

As a counterweight, the MRA has instituted a “Buy Nearby” campaign to encourage Michigan consumers to divert some of their purchases to in-state options. “We found that if all Michigan purchasers redirected just one in 10 of the out-of-state purchases to an in-state retailer, it would generate 14,000 new jobs and $1.9 billion in gross economic output for the state,” says William Hallan, president and CEO of the Michigan Retailers Association.

Last April, a UBS analysis stated “the U.S. could lose 81,000 retail locations over the next five years assuming e-commerce sales rise to represent 27 percent of total retail sales by that time, with the most dire scenario of about 150,000 closing.” The report said office supply, sporting goods, clothing retailers, and consumer electronics would be hit the hardest.

Still, not everyone predicts doom and gloom for retail stores, which are increasingly pivoting to include more online shopping for their customers.

“This so-called ‘retail apocalypse’ term is an example of bad news selling stories,” says Jim Bieri, principal of Stokas Bieri Real Estate in Detroit. “Retail stores aren’t going away. Over 85 percent of sales are still done in person, and although e-commerce will continue to grow because of the convenience, it’s not a panacea. Often you buy online, and then you have to send things back. People still like to go and shop in nice stores,” he says.

Patricia Huddleston, professor of retailing in the Department of Advertising and Public Relations at Michigan State University in East Lansing, agrees. “E-commerce is the shifting of modality going through a different channel, but this year the number of store openings is almost double the number of closures,” she says.

“The state of brick and mortar isn’t as dire as some people portray it. The vast majority (of consumers) do like the in-store shopping experience, and it’s been borne out by the pandemic that people really did miss the in-store experience. What we’re finding is that consumers can have the best of both worlds because retailers have really ramped up their efforts to ‘click and collect’ by buying online and picking things up at the store. But there has been some displacement of retailers, and it’s sector-specific.” 

Department stores and suburban malls, except for the upscale Somerset Collection in Troy, continue to struggle — largely because of the failure of department stores, Bieri says. In recent years, area malls that have closed include Summit Place Mall in Waterford Township, Northland Center in Southfield, and Eastland in Harper Woods. The latter is set to be demolished this year and replaced by three large warehouse buildings.

In 2021, Green Street analysts warned that the pandemic was speeding up the disappearance of department store anchors in malls, and estimated that more than half of mall-based department stores would close by the end of 2021. In turn, that’s chased some specialty stores away from malls, since there’s less foot traffic.

“The biggest trend in the last couple of years has been freestanding street-front specialty stores,” Bieri says. “Just go on Big Beaver Road from the Somerset Collection to Rochester Road, and you’ll see what I mean. It’s more targeted to consumers’ needs. They pull in and get what they want.”

Meanwhile, value shoppers continue to gravitate to discount retailers such as Marshalls, Burlington, and Dollar General — the latter of which operates 18,000 stores in the U.S., with plans to open 1,000 more of its Popshelf stores by the end of fiscal year 2025.

The ebb and flow of store openings and closings continues. At the same time the Dollar General announcement was made, CVS revealed that it’s planning to close 900 stores over the next three years.

Phil Cody, a retail broker for 40 years who’s based in downtown Milford, has seen the retail industry and spending patterns change over time. “Retailers who are good retailers are still in business, and retailers who aren’t good retailers are going out of business,” says Cody, pointing to the demise of Sears, Montgomery Wards, and Kmart as examples.

“Department stores didn’t adjust to the new world of retailing, and the off-price industry has put enormous pressure on department stores because of their pricing, availability, and people’s changing buying habits. Today’s consumer has no allegiance to a retailer, because if they find something cheaper and better, they go there.”

He adds brick-and-mortar stores that were slow to catch on to the internet are hanging on by their fingernails. “Retailers are downsizing their stores and renegotiating their rents because they’re doing less volume,” Cody notes. “Landlords are providing concessions because there’s such a high cost to replace tenants today with downtime, renovations, and commissions, which could be the equivalent of a year’s rent that you never recover. (Which) stores are opening and closing these days is based on category. Home improvement stores have soared but soft goods, clothing, and cleaners are going out of business left and right.”

Determining the winners and losers in the retail industry comes down to who can best attract and retain customers.

“Consumers have shown that they want all kinds of options on how to buy a product, so you have to take an omni channel approach. That includes a brick-and-mortar store; a robust website you can use on your mobile phone, since most e-commerce sales are off of mobile phones; efficient curbside pickup; and free shipping and free returns, (which is) almost universal now,” Ward says.

In turn, retailers need to have the products people want. “If you don’t buy and stock the right merchandise, then it doesn’t matter how good your digital strategy is or where you’re located; you aren’t going to survive,” Huddleston says. “Also, younger consumers, particularly the millennials and Gen Z, are looking for experiences and opportunities to be surprised with events and things that engage people, which is also a predictor of success.”

Although supply chain issues have been challenging for many retailers, Rizzo says the bigger problem locally has been the labor shortage. In October 2021, U.S. employers posted 11 million job openings as the number of people quitting their jobs dropped slightly that month to 4.2 million from 4.4 million in September. The result, analysts say, is that businesses are scrambling for new employees who are armed with more bargaining power.

“There are plenty of businesses that want to and are able to expand to meet demand, but they can’t because they’re having trouble staffing their stores,” Rizzo says. “Some have had to reduce their hours and the days they’re open. It’s starting to get a little better, but it’s still a huge problem.”

Across metro Detroit, the effects of the pandemic on retailers and restaurants have been negatively felt, but nowhere more so than within the city of Detroit and its central business district.

Prior to the pandemic, downtown Detroit was staging an impressive comeback led by Dan Gilbert, founder and chairman of Rocket Cos. After moving what was then Quicken Loans downtown a decade ago, the billionaire acquired more than 100 buildings and properties, mostly in the central business district. Many of the properties were developed into office spaces and residential living, while also luring numerous national retail chains and local specialty shops.

“Pre-pandemic, residential and retail units were at a very high occupancy, our hotel occupancy was in the high 70s (percent), and there were about 80,000 office workers in the core downtown,” says Eric Larson, who has more than 30 years of experience in the field of real estate investment and development, and since 2014 has served as CEO of the Downtown Detroit Partnership.

“Now, due to remote work, we have around 20,000 office workers coming into the city on a regular basis and our hotel occupancy is running in the 35 percent to 45 percent range (as of December 2021). As a result, many of our small businesses, restaurants, and retailers have really struggled, and those that have been able to stay open are doing it sort of on fumes.

“Retail is still tough because there’s nothing to replace the pedestrian foot traffic that creates the point-of-purchase engagement,” says Larson, whose organization continues to implement initiatives and events to draw people downtown and to support local businesses. 

“Landlords, the Detroit Economic Growth Corp., the city, and others have been trying to find ways to support small businesses through various programs,” Larson says. The DDP established a gift card program called “Spirit of Detroit” that’s geo-coded and can only be used with businesses in the city.

“I’m optimistic about the business, (and) if we (could) just get a handle on the pandemic, things would be phenomenal.”
– Richard Astrein

“There’s nothing we can do to accelerate the work population that will come back as employers and employees are more comfortable in returning,” Larson says. “However, we continue to activate our public spaces. Fortunately, our visitor count has been pretty stable with pre-pandemic numbers of 3 million visitors, many of whom are Detroiters rediscovering the downtown.”

Felicia Williams-Patrick, who owns Flo Boutique on West Willis in Detroit’s Midtown district, says her women’s fashion store was doing well prior to the pandemic, but she’s struggled trying to get her business back on track. “I was closed for three months and since I’ve reopened, I’ve cut my days from five to three, Thursday through Saturday,” says Williams-Patrick, who was unable to host trunk events and found it difficult to acquire new merchandise due to supply chain issues and her revenue losses.

“It was also tough to find salespeople, but I’ve been very fortunate to have friends who’ve helped me out and loyal customers who’ve continued to support me,” Williams-Patrick says. “I was a little late in implementing online sales and social media, but I’m trying to use it more now. It’s all about survival. Things are a little bit better since people have wanted to come out and shop again. Although it’s been very challenging, I’m still having fun with my passion for fashion and engaging with my customers.”

Away from malls, the Birmingham principal shopping district, which now includes 115 retailers and 64 restaurants, has traditionally been a successful market, in part because the downtown district is surrounded by an affluent community. “Retail is challenging in most downtowns but Birmingham is laid out well, prioritizes the pedestrian, and makes it amenable to shopping at various stores,” says Sean Kammer, executive director of the Birmingham Shopping District.

Yet, like other successful shopping areas across the country, retail stores and restaurants haven’t been immune to the challenges created by the pandemic. Richard Astrein, along with his brother, Gary, have owned and operated Astrein’s Creative Jewelers on Maple Road in Birmingham for more than 45 years.

“Even pre-pandemic we’d been hit a little harder in the jewelry business, and things haven’t quite been like they were in what I call the Roaring Nineties, which were our best years,” Richard says, “but the pandemic has been a whole new learning curve.

“At first, it was pretty devastating to close down for a few months,” he continues. “Since we reopened, we’ve been closed Mondays and Tuesdays, and close at 4:30 instead of 5:30. But our employees really like the new hours. It’s saved us money, it’s easier operating, and we’re doing as much business or more, and customers have gravitated to the new hours.”

Besides owning their own building, the Astrein brothers also own the building next door, which houses two retail tenants. “When the shutdown occurred, we were pretty lenient with our business tenants because we wanted them to survive. So we didn’t have them pay rent, nor back rent,” Richard Astrein says. “We’re all in the same boat. It was like, ‘Why shouldn’t I help them?’ Plus, I’d rather work with someone than have to find someone new.”

Although a handful of retailers and restaurants have closed permanently in the past two years, the French Lady restaurant and the Urban Wick Candle Bar opened in Birmingham during the pandemic.

And there’s more on the way.

In August, the city approved plans for a 50,000-square-foot, four-story Restoration Hardware building, complete with a rooftop restaurant, at the southwest corner of South Old Woodward and E. Brown Street. It’s scheduled to open in 2023. The company plans on investing $25 million in a building being designed by Victor Saroki.

“The foot traffic that will result from the new Restoration Hardware and the other new tenants that want to be near them will bode well for all of the Birmingham retailers and restaurants,” Astrein says. “I’m optimistic about the business, (and) if we (could) just get a handle on the pandemic, things would be phenomenal.”

Kammer says one challenge Birmingham is facing is a lack of retail space. “Some of the few vacancies you see are there because lease terms are being hammered out with new business ventures,” he says.

In February of 2020, just a month before the pandemic shutdown began, Marlene Mansour and her daughter, Elise, signed a five-year lease and opened their first retail establishment, Urban Wick Candle Bar, on Old Woodward Avenue in Birmingham.

“When the pandemic started, we almost had heart attacks. It was sink or swim, but we finally opened to a few customers at a time five months later,” says Marlene Mansour, whose store features a 60-foot bar where customers have the option of making their own, personal candles from more than 90 scents. There are scented hand sanitizers, as well.

“Like any new business, it takes a good three to five years to see any income,” Mansour says. “But we’re paying our bills. We still have to get back our remodel costs and, God willing, we’ll be able to grow the business and be rewarded. We love what we’re doing, the customers enjoy it, and if they can walk out of here feeling better than they (did when they) walked in, it’s mission accomplished.” 

Time will tell what the fallout will be for retailers and restaurants that have been faced with a “perfect storm” of challenges never seen before. But one thing is certain, and it’s never changed: There will always be winners and losers in an ever-evolving marketplace.


State of the Office Market

When the COVID-19 pandemic stay-at-home orders took effect in March 2020, a mass exodus from office buildings began as employees worked remotely and conducted virtual meetings through video calls.

According to a report released by Gallup last September, two-thirds of employees in white collar jobs (67 percent) reported working from home either exclusively (41 percent) or some of the time (26 percent), a trend that continued from the summer.

The office structure as we knew it before the pandemic will never be quite the same, as Gallup found that employees and employers foresee making remote work a permanent offering — at least on a hybrid basis.

For the Detroit-area office market, it’s not as bad as one might assume, according to local experts.

“Across the entire market, the occupancy rate with leases signed for offices prior to the pandemic was 90 percent, and now it’s 87 percent (through 2021), so we didn’t lose a ton of occupancy,” says Katie Rizzo, a research analyst for Collier’s International, which has offices in Southfield and Birmingham.

“Businesses are still paying their rent even if those offices aren’t fully staffed, with more people working remotely. Physical occupancy is very low at this point. Those tenants with a lease expiration within the last two years simply renewed for short terms until they can figure out what their plans will be. We’re doing a ton of showings, but the decision-makers don’t know quite what to do yet. There’s this paralysis in making a decision because of the unknown.”

Andy Gutman, president of the Farbman Group in Southfield, which either owns or manages 200 office buildings in the area, remains optimistic. “We don’t see the gloom and doom that some people are predicting,” he says. “People were expecting everything was going to shrink, but that’s not what we’re seeing. We’ve seen a tremendous amount of activity, with people renewing or entering into new leases.”

Simon Jonna, executive vice president of the Jonna Group in Birmingham, also remains optimistic about the office market. “With COVID-19, office space has undergone a little bit of a stutter step and there’s been a lot of industry rumblings about the office sector undergoing a metamorphosis,” he says. “We’re seeing some reverberation of that, but we’re seeing the sector normalize. The lease-up is still stabilized.

“I think downtown Detroit got hit the hardest. It went from resurgence to resuscitation, and although I do see a rebound, I don’t think we’re going to see the momentum we once had in Detroit. It’s going to take some time.”

The experts also believe that office layouts will ultimately change, as more companies move forward with a hybrid model where employees split time working from home and in the office.

“The only constant you really have is change,” Gutman says. “Post the Great Recession, they were benching people in these 60-square-foot areas where you could feel their breath when they were talking.  It’s going to change dramatically. People want distance and want walls around them, even if it’s cubicle walls with light let in.”

Jonna agrees. “We’re seeing more trending retrofits like WeWork, the collaborative office atmosphere, and not so much the private suite carve-outs that we were used to of old,” he says. “In terms of a company’s inner workings, it’s good to have stepping stones and earn your way. But some of our counterparts have WeWork flexible shared workspaces, and it seems to be working well for them.”

Facebook Comments