No one can deny that the landscape of retail in Canada is undergoing a major shift. With high-profile closures such as Target and Sears, the expansion of online retailing, and the densification of urban centres with their accompanying retail establishments, the industry is evolving beyond the big box store and shopping mall dominance of the early 21st century. At their annual Hot Topics event on Wednesday evening entitled Retail//Impact, Quadrangle hosted a panel discussion exploring the topic of disruption in the retail industry, and what impacts this may have on the future of urban real estate and development.
The panel consisted of distinguished individuals from a wide spectrum of the retail and real estate industry. Moderating the panel was Tony Hernandez, Director and Eaton Chair in Retailing at the Centre for the Study of Commercial Activity at Ryerson University. Joining him on the panel was Adam Bent, Co-Founder and COO of thisopenspace.com; Derek Goring, Vice-President of Development at First Gulf Corporation; Arlin Markowitz, Senior Vice-President of the Urban Retail Team at CBRE Limited; Vanessa Oliver, Principal and Broker of Record at Regent Street Commercial Corporation; Carmine Francella, Senior Vice President, Leasing of First Capital; and Emily Robin, Senior Director of Store Design and Construction at Saje Natural Wellness.
Hernandez introduced the discussion by explaining that disruption isn't necessarily a new concept for retail, but has in fact been a staple of the industry for over a century. He recalled a publication from the early 20th century focusing on the "retail innovations" of the Eaton's department stores, who revolutionized shopping in Canada by introducing the catalogue—which consumers purchased from in higher proportions than online retailing today—along with incorporating technological innovations such as elevators, which were a new experience for shoppers, and even phone lines from which one could order groceries. Indoor shopping malls and big box centres subsequently created disruptions to the market of their own. Every new set of retail innovations brings with them their own challenges of how to meet the demands of consumers, and what impact these will have on physical space in the city.
In describing what today's disruptors are, online retailing inevitably became a focus of discussion, but not in the way that one might think. "There's this perception that online retailing is the big threat to brick-and-mortar retail," Oliver said, "but if you look at the statistics, I think today 94% of Canadian retail sales are taking place in stores". This number is expected to decrease in the coming years, but only by a few percentage points, meaning that physical retail stores aren't going anywhere anytime soon. Oliver added, "I think the biggest threat is relevance. When you look at the retailers that are going under - on the department store side it's Macy's, it's JC Penney, it's Sears - how have they kept up to date with what consumers want?"
Online retailing is certainly having an impact on the industry, particularly when it comes to store design. "It is pushing design to be better, because each interaction is so special and so unique," Robin explained. "It's pushing [retailers] to do better finishes, its pushing us to invest in environments that are memorable. That interaction might convert into an online guest for us for 10 years who may never visit a store after. I think it pushes the environments to be more memorable, more successful, and more thoughtful; it's a better design challenge."
The focus of newer retail is less on quantity and more on quality. "If convenience is taken care of, and fulfillment is getting faster and faster, then what's left?" Robin stated. "So then the challenge is that it has to be an immersive lifestyle experience". More and more, retailers are investing greater amounts of money in design for fewer locations, and focusing more on creating an experience than simply selling a product. "It's about reducing the retail footprint and being more strategic about the placement of these stores," Bent explained. "It's no longer about having a hundred stores across the country, but about having one major location in the city."
But, as Bent argues, online retailing certainly doesn't spell the end of physical stores. "Online retailers need brick-and-mortar as well," he said. "The most successful online brands out there are dividing their resources between online and offline quite strategically". The difference is that nowadays, new retailers will typically begin as online brands before establishing a physical location, rather than the other way around.
A side-effect of this move to experiential retail is a shift in lease terms away from longer-term tenant agreements toward shorter-term leases, ranging from 2-5 years to pop-up shops lasting 2-6 months. Pop-up stores are a way for online retailers to establish a physical presence and expand their consumer base, and the fact that it is temporary contributes to the creation of a memorable experience. Online retailers still need an offline presence, they are just putting their money into shorter-term experiences rather than longer-term stores.
Seasonality also has a heavy impact on lease length, Halloween stores being an obvious example. "Our business is really focused on gift-giving, so the amount of our business that is done in two months, it's crazy," Robin said. "It's thinking we can double our store count right now for six weeks and do great, and so that seasonal short-term pop-up is really attractive to us to show up on game day for those six weeks".
When it comes to choosing the location of where to open a store in this environment, context is everything. "We are a country of micro-markets," Markowitz stated, "and if you're going to have a development you need to know what's surrounding your building, you need to make sure that you have the right tenants in that market to service those customers." Doing your homework is also key to avoiding negative repercussions, as moving into a development that the local community does not support can reflect poorly on your brand.
Retail spaces are certainly becoming a larger focus in today's booming development industry, particularly when it comes to where to put them and how to design them. "More developers are realizing that retail is more than an afterthought, even condo developers are really recognizing that if you design and build a retail space properly it actually can be a profitable venture," Goring explained. "It really depends on where you are, what your densities are, what the street environment is like, what the public realm around the centre is like, access to transit, access to parking, all those things are really important in terms of driving demand."
Density is a big driver of integrating retail into urban centres, but density is also changing the physical shape and space of retail establishments. Vertical retail is becoming more common, with multi-level stores occupying below- and above-grade levels in new developments. For many retailers trying to break into high-rental locations, a small entrance on the ground level of a building leading up to a large space on the second or third floor can lead to significant cost savings in rent. Which floor a retailer chooses to locate themselves in a building is also a function of the product provided, the anticipated foot traffic, and the local population density.
Density is also leading to more flexibility being built into retail spaces. Where developers propose large retail footprints, retail consultants are recommending that they install extra sets of doors and mechanical equipment to allow for the space to be broken into smaller units in the future if need be. As well, shared retail establishments - which Bent refers to as the next generation of department stores - allows brands to split costs, build duration into the space, and create exposure to different clientele. By occupying the same space, brands can feed off each other and build up their networks, while cutting down on costs.
An audience question brought forth an issue that many people are worried about these days: many new condo developments fill their retail spaces with large franchises, such as Starbucks, Shoppers Drug Mart, banks, and so on, which is creating bland and repetitive streetscapes, and is pushing out mom-and-pop businesses from urban centres. The panel, unfortunately, did not have a solution to this. "It's a free market, so if people want to rent it, they can rent it," Markowitz stated. Oliver added that, "It's the pricing that's driving the smaller guys out. Because of the land and development costs today, they need to achieve a certain rent to make sense of the whole development, and unfortunately, unless you've got a boutique-type retailer that can support those rents, they are being driven out and I don't see a solution."
Goring added, however, that some types of developments lend themselves to including smaller retail establishments more easily than others. "From a landlord's perspective, if you're doing a one-off space in a condo tower, there really is no motivation other than to [include larger retailers], but I think if you're working on a larger scale with a centre, and you want to be relevant in the long-term, you do need to create an interesting mix of tenants."
In other words, master-planned communities will achieve greater retail success by having a diverse portfolio of retail spaces. They still need to have larger retailers to survive, but they have the capacity to support smaller mom-and-pop stores within their development to create a more complete community and retail experience, something that is more frequently being encouraged in both the public and private spheres. Singular towers, on the other hand, prefer larger tenants. This bodes well for upcoming master-planned communities such as The Well, Mirvish Village, and East Harbour, but may not spell out good news for places like Yonge or Church Streets, which are conglomerations of individual developments that may not be able to support smaller retailers.
The panel discussion offered a glimpse into current trends and disruptions in the retail industry, and how these translate into built form, and there is no question that the future looks bright for retail in Canada. These new urban spaces have been and will continue to be gradually integrating into our cities, and it remains to be seen how the long-lasting effects of this will play out. In the meantime, keep checking back for news of the next big retail developments in the GTA, and let us know what you think by checking out the associated Forum threads, or by leaving a comment in the space provided on this page!