The high inflationary environment has caused many middle-class shoppers to tighten their belts, meaning shopping centers and retailers must be on their game to get them on property.
A dollar is a dollar, but not every dollar is created equal. A purchase made by an out-of-state visitor who is just passing through the area isn’t necessarily worth as much as that same purchase made by a resident who lives one block over. That’s because the shopping center has the potential to nab this neighbor’s spending in the long-term, or as long as they live in close proximity.
The value of that dollar is also changing. It’s worth 5 percent less than it was a year ago, according to the consumer-price index. This is somehow good news, as the cost of goods and services was up 6 percent in February. Though prices don’t vary by person, the impact of that 5 percent increase isn’t felt equally, either.
“Consumers who are wealthy aren’t impacted in their day-today spending, even on discretionary purchases,” says David Greensfelder, managing principal at Greensfelder Commercial Real Estate in the Bay Area. “Lower-income consumers have already focused spending on non-discretionary items and employed cost-saving measures.”
That only leaves one group that has both supplemental income and concerns about increasing inflation.
“It’s really the consumer in the middle whose behavior changes the most during an economic event,” Greensfelder continues. “It’s the consumer in the middle who spends on daily needs items but also has some discretionary spending ability who ends up shifting habits the most: the discretionary spending gets cut back and the daily needs spending shifts to maximizing value where possible. Retailers who cater to the consumer in the middle-income ranges will feel these shifts the most.”
STAVING OFF ONLINE
It’s no secret that value-oriented shoppers tend to hit the internet. A February 2023 survey from SaaS solution provider Mirakl noted that 89 percent of global consumers said inflation has caused them to look for better value when they shop. Unfortunately, 53 percent of respondents said online shopping has delivered better value in these high-inflationary times, with 75 percent planning to spend more online over the next 12 months.
There are, of course, ways shopping centers and physical retailers can combat the online threat. Shopping centers can win on quality, for one. Cameron Baird, senior vice president and Bay Area retail lead at Avison Young, notes products that require a tactile experience before shoppers can make a purchase decision — such as clothing, soft goods, eyewear, footwear, and others that require touch and feel or a specific fit — are less threatened by online competitors.
Tom Real, vice president of pre-construction at OTL, a design-build specialty construction company in Anaheim, believes appealing to the five sense is the key to physical retail differentiating itself from online competition.
“At stores today, consumers are interested in interacting with products using all their senses: sampling food, trying on clothing, test driving a car and asking a knowledgeable sales representative specific questions about an item,” he says.
This not only results in a confident purchase, but a pleasant experience. Sandy Sigal, president and CEO of NewMark Merrill in Calabasas, notes that online shopping can lose some of its appeal when consumers skip that tactile experience in favor of the easy click.
“Price is important, but once you load up various costs associated with online delivery and the risk of not getting what you want, that value proposition isn’t necessarily there,” he says. “If you feel like you’re being treated fairly at a retailer, buying in person scratches two important itches: the one of being socially connected, and the instant gratification from a purchase you know you want.”
Plus, who said brick-and-mortar doesn’t offer convenience?
“Shopping centers can differentiate themselves from online retailers by offering convenient services, such as curbside pickup, in-store pickup and same-day delivery,” says Wayne Williams, director of retail marketing at Lewis Retail Centers in Upland. “By emphasizing the speed and ease of shopping in person, customers may be more likely to choose the convenience of in-person shopping over the wait time and shipping fees associated with online shopping.”
Just like online, however, shopping center owners and retailers have to ensure they’re providing a convenient, positive experience or the customer will go elsewhere. For Baird, this starts with trained, knowledgeable and helpful staff. Empowered employees not only provide helpful services to customers, such as directing them to certain stores or merchandise or fulfilling pick-up orders, but they also offer an opportunity to build rapport and establish a long-term relationship with the center or brand.
Of course, there’s also the obvious strategy to combat online shopping.
“If all else fails, provide price matching for online competitors,” Baird adds.
ATTRACTING THE VALUE-CONSCIOUS
There are plenty of ways to make goods and services look enticing in this high inflationary environment. Baird is a fan of free samples, buy-one-get-one (BOGO) deals, discounts from cash back, percentage off or volume pricing, and loyalty or targeted consumer discounts.
“Harbor Freight is famous for its use of ‘20 percent off one item’ coupons, which it broadcasts weekly to ensure repeat customer business,” Baird says. “They typically also run weekly promotions for discounted merchandise, as well as free products with the purchase of a certain sales volume.” Williams likes the deal approach for consumers, but warns it must be done intentionally for it to resonate.
“When it comes to running a sale or promotion, it always comes down to the offer — the offer has to be meaningful,” he says. “We’ve found that the best practice for a promotion is to offer a discount of 20 percent or more. If the offer includes the word ‘free,’ that is ideal and generally receives the best response rate. However, we like the BOGO strategy best so that tenants can retain more margin per order. We always advise our tenants to use this type of discount as a way to get customers in the door so they can ultimately get them into their loyalty program.”
Speaking of warnings, Greensfelder cautions that promotions can be good and bad.
“Promotions can be a double-edged sword,” he says. “On the one hand, they can generate foot traffic, but on the other hand, they can train consumers to ‘shop the coupon.’”
When promotions do run, Williams tends to utilize direct mailers. Greensfelder advises shopping centers with promotional budgets to partner with their tenants to maximize the amount of eyes that might see a retailer’s promotion.
Since the customers are there anyway, a good promotional strategy should also involve an online component.
“Letting the customer know about everything a center has to offer through targeted marketing strategies that include social media and omnichannel methods demonstrates that center’s value,” Real says. “They can serve to inform them that retail centers are becoming increasingly innovative and accommodating to the needs and desires of today’s consumers.”
Sigal adds that consistency is what allows a shopping center owner to create a comfortable, familiar relationship with its consumers through avenues as impersonal as online or direct mail.
“We reach out to our customers several times a month through email and social channels,” he says. “They know what we are about and who the merchants are — not just tenant names but also the people who work there. We have our ‘Fostering the American Dream’ series that shares why our merchants are special and what the community means to them. So when we do direct mail or online specials, they have trust in what we are offering. They know our relationship is personal and relational, not transactional, and that makes a difference.”
That difference can be palpable.
“Our sales have been up through this cycle,” Sigal continues. Middle-class dollars might be the ones that require extra attention in this market, but Greensfelder believes a shopping center should always maintain a varied mix to draw the largest crowd.
“Shopping center positioning and leasing strategies are, by necessity, long-term endeavors that need to differentiate short-term economic phenomenon from long-term trends,” he says. “The best way to compete for consumer dollars is to offer a tenant mix that represents a diversified offering that is tailored to the demographic profile and tastes of the people living in the shopping center’s catchment.”
For Williams, this starts with knowing who your customer is.
“In a volatile or uncertain economy, it’s important to double down on your core customer,” he says. “Take time to learn who your best customers are, and then focus on acquiring more of them. Or focus on getting your core customer back more often.”
You can’t draw a customer back to a center if you don’t know why they’re there in the first place, Greensfelder asserts. That’s why he believes that, to know your core customer, you must know their motivation for shopping.
“Shopping center owners need to understand that their tenant merchandising mixes evoke an emotion: ‘Do I get to go, or do I have to go?’” he says. “You have to answer why consumers are coming to your center and why you’re filling your centers with the retailers you are.”
This should involve some introspection on the part of the shopping center owner as they weigh their lease renewals, prospective tenants, and current or upcoming vacancies.
“You want to ask, ‘why would the consumer want a ‘super store’ version of the same tenant they’ve been shopping at for the past 25 years as opposed to something new?” Greensfelder continues. “Why would refreshed common areas sway consumers when the store offering is stale? Why are owners filling space with ‘who cares’ tenants rather than looking for fewer and better ones — and recognizing that less supply will generate higher rents and smaller operating costs? Why would a given tenant decision add value to the consumer’s overall shopping experience?”
ELONGATING THE EXPERIENCE
A dynamic tenant mix that speaks to your core customers is one way to get shoppers with money in their pockets on property. Unfortunately, shopping sprees aren’t what they used to be, especially among the middle class.
That means patrons need more reasons to stay — and more reasons to spend.
“The current trend in shopping centers is to encourage loyalty by creating and providing gathering places for consumers to spend more time at the centers,” Baird says. “Landlords have found a direct correlation between the amount of time a consumer spends at a center and the amount of revenue they spend there.”
In other words, time equals money.
“In the past, customers may have come with a shopping purpose and left,” Baird continues. “But now, with amenities like food halls, outdoor dining areas, kids play areas, outdoor bocce courts and gathering hubs, consumers tend to linger, which results in additional purchases.”
Real believes shoppers need this downtime — also known as a break from spending — to recharge. Elongated timeframes at a center can make them feel they got their money’s worth if the visit can incorporate more than just shopping.
“Shopping centers used to be simply about places to go to purchase products or services,” he says. “Now, they are about so much more. Visitors can do other fun, interesting and rejuvenating things in between browsing and buying, such as stopping for a bite to eat or drink at the latest dining spot or resting by a stunning water feature.”
That’s just what CenterCal Properties had in mind when it tapped OTL to create a water feature at 2nd & PCH, its 11-acre lifestyle center in Long Beach. The fountain includes a spherical sculpture centerpiece, while the feature’s exterior showcases a glass mosaic that plays to Southern California’s sunny environment.
Baird believes these types of amenities can pay off for shopping centers and tenants, but owners must be willing to spend the money. This is not an easy decision in an elevated-price atmosphere.
“The current trend of providing gathering areas and the landlord’s ability and willingness to build these, as well as work on retail and food-and-beverage cross promotions and events, will help F&B retailers return to prior revenue numbers,” he says. “Consumers now expect a full-service shopping experience, and the landlord’s willingness to embrace this will encourage spending and F&B success.”
Real notes these features aren’t done in vain. Instead, they can produce tangible ROIs for shopping center owners and tenants.
“Restaurant owners are recognizing the value of outdoor attractions like water features to enhance the dining ambiance and draw in customers,” he says. “In fact, at some of the shopping centers where our team has installed fountains, restaurant owners are willing to pay higher rental rates in order to be located near these water features.”
Special additions like this can be pivotal as restaurant and bar owners try to maintain their revenues in the face of soaring food costs. This is one of the reasons Real believes temporary dining areas created for the pandemic should be allowed to stay. They enhance the ambiance and the owner’s bottom line.
“These arrangements have persisted, providing owners with potential additional rental income, restaurant tenants with extra seating and patrons with less crowded, pleasant outdoor dining experiences,” he adds.
If a restaurant or retailer is feeling the squeeze from inflation, this should be no surprise to the landlord, Greensfelder contends. That’s because the line of communication should be so open that there’s no opportunity for surprises.
“Owners who are intimately familiar with their tenant bases, who monitor not only receivables but tenant sales, who are actively speaking with tenants, and who identify and proactively react and adjust to tenant realities are the owners who will weather economic cycles successfully,” he says. “You want to offer expertise and assistance before tenant issues become severe.”
Between landlords, retailers and restauranteurs and consumers, it’s evident everyone’s feeling the pinch from inflation. Sigal doesn’t believe this is what we should focus on, though. As Greensfelder noted, every economic environment is temporary. And spending hasn’t stopped completely — for any socioeconomic class. Even if it had, Sigal’s goal to keep the relationship meaningful and not transactional means money is the commodity, not the necessity.
So, what is the necessity for consumers of all income classes in today’s environment? The same as it is in any other environment.
“Whether it is a center with a value market and a dollar store, or a Whole Foods center, people want to feel respected, acknowledged and treated well,” Sigal says. “There is still money being spent, it’s just that each dollar seems more precious. We want the customer to understand that we respect their decision to shop with us.”
By Nellie Day for California Centers Magazine
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