The retail crisis: an opportunity for change

released: 12/12/2014

These last years the retail market has been suffering drawbacks due to the financial and economical crisis. It is my opinion that the current crisis has only revealed and brought to the surface what intrinsically was unsustainable. A crisis is not the beginning of something, but the culmination of something.Something that was initially on a collision course. The pre 2008 circumstances have allowed to mask conceptual faults of the commercial real estate market. Circumstances were ideal to take unmerited credit for success, though that success was entirely circumstantial. The strength of a concept is proven once it stands the stress test. 
 
I remember driving to Madrid in 2007 for a customer for whom I developed the branding of a Factory Outlet Centre. The periphery of Madrid was one large wharf. My common sense told me that what I saw was not growth, but expansion. Like a balloon that expands with each blow, it becomes weaker. Years later I was proven right — unfortunately. 
The perpetual cycle of crises, succeeding each other in a shorter time span, has an even more concerning effect that is much underestimated. The shortening of the recuperation time after each crisis, decreases the power to reach the pre-crisis level. Economies become always more vulnerable and each new crisis turns out worse then the one before. This cycle can only be broken by dealing with each crisis smarter than the one before. It requires an approach of relief instead of exhaustion. This calls for a new paradigm since old thinking cannot generate new solutions. 
 
Conventional versus innovative
We have to admit that the current commercial real estate market is not excelling for its level of innovation. In fact, it is very conventional. When we look closely, two differentiating formats are available. First, we have the shopping centres and second the Factory Outlet Centres (F.O.C). In the Western European countries the market is saturated with these formats. Schemes have become easily exchangeable in the eyes of tenants and visitors. Shopping centres are struggling and a great number of Factory Outlet Centres are struggling too — especially those F.O.C. that have compromised their format.
 
Real estate is the arrival not the departure
The problem with these formats is that they are conceived with a predefined real estate concept in mind. They are real estate projects looking for stakeholders to buy into their business model. This approach is based on the conviction that marketeers should spend their effort to convince the stakeholders about the benefits of a scheme. A scheme that was designed from a point of view aimed at generating shareholders’ value instead of a stakeholders’ value. 
 
The conventional approach of developing retail or leisure projects is seriously outdated. If project investors want to win over stakeholders, then stakeholders should recognise themselves in a project. This can only happen if the different stakeholder groups are involved from the very beginning and acknowledge a project as a stepping stone for the local economic development. By inventorying all the needs and interests of the stakeholders and converting them into a benefit generating concept, a project does not need persuasion. It is already embedded in the minds and hearts of the stakeholders. Real estate should be the final point. It should be the house that facilitates the conversion of needs into benefits.

Sustainability starts with viability
There is absolutely no contradiction in looking at real estate as the materialisation of different stakeholders needs as long as they are convergent. Bottom line is that we should create a viable and sustainable business model. Instead of planting a project and seek ways to attract stakeholders, why not develop projects together with stakeholders? The role of stakeholders is not to design, yet to express what they want to get out of the project — whether a financial profit, social profit or environmental profit. A project that is not profitable, is doomed to fail. Every stakeholder has an interest in a project, though not all stakeholders have the same interest. Only by meeting these interests there will be commitment to the project and willingness to keeping it alive in order to harvest the desired profit.
 
The retail and leisure market needs a radical revision. What has been done in the past is no longer an option. One cannot expect to do business as usual while hoping to get different outcomes. There are viable alternatives to be considered for investors besides the mega malls. It is all a matter of designing a format that plays a crucial role in the local economical development that is strong due to its simplicity and holistic power.  
 
The majority if not all the retail and leisure concepts are not designed from a holistic customer experience. It is a mathematical study of how much rent can be earned per square meter. Often marketing is charged to convert the site into a customer experience. Though when a retail concept is exchangeable, the marketing department is disarmed and can only make the best out of it. It limits in offering incentives to compensate the lack of inspiration and attractiveness. In this case employment is simply the reshuffling of labour from one area to another. This generates a highly vulnerable situation, since the viability of tenants are always on the line.
 
Stakeholders’ interdependance 
Let’s simplify the whole aspect of commercial real estate and narrow it down to a couple of non-refutable principles that will drive the success of any retail leisure scheme. These principles are straight forward and blatant:
 
The profit of the investor depends on the tenants.
The profit of the tenants depends on the visitors.
The more exchangeable a scheme, the lower its value (intrinsic and perceived).
The lower the value, the lower the commitment of visitors.
The lower the commitment of visitors, the higher the insecurity.
 
These simple principles are the foundation of any business. It is a holistic approach to entrepreneurship. In other words; nothing stands on its own. Everything is interrelated. In order for a concept to be viable and sustainable, they have to be viable and sustainable by design.

Complementarity by nature
As mentioned, something is sustainable if it is so by design. A sustainable project must have the natural capacity to merge converging needs of multiple stakeholders in one and the same concept. It is not a hybrid scheme trying to impose an artificial dwelling schedule to the visitor, difficult to combine. It brings together interrelated points of interest that can be combined easily in one visit. Another aspect of complementarity is the capacity to generate multiple cashflow streams for the investor and conversion opportunities for the tenants in a natural way. 
 
The best case is the worst case scenario
Feasibility studies are crucial for the development of any project. Though many times feasibility studies are used to push the agenda of investors. Needless to say that such an approach turns a blind eye to the minimum factors for growth. The result is a costly and discouraging outcome affecting not only the investor, but an entire community. Optimists make lousy strategists. Optimistic feasibility studies based on the best case scenario are a time bomb, ready to explode sooner or later. Not only would such an approach be ridiculed in the light of the current crisis, it is also strategically unreliable and dangerous. I advocate for a feasibility study based on the worst case scenario. 
 
It is all about customer experience
If the DNA of a retail or leisure concept does not have a build-in continuous customer experience and is easily exchangeable, all that is left is an empty box. A leisure retail project must be conceived from a branding point of view. With branding I mean the nourishment of the relationship between what is offered or promised and its stakeholders. In this sense, customer experience is seen as a relational factor and not as a marketing action. It is the brand experience that makes the difference between a concept that is successful or a concept that fails.

Symbiotic Economy 
Only projects that have the innate natural capacity to generate multiple cashflows and unite multiple stakeholders’ benefits, are sustainable. I call this Symbiotic Economy. It is an economy based on the natural capacity of people and their environment to, in their turn, release more values and benefits than mutually invested. When two systems resonate with each other, energy is released. When this is not the case, energy is drained, generating considerable loss. 
 
The development of innovative and sustainable concepts is not only desirable, but vital for the commercial real estate market. 
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