The smart strategy for retail and partnerships that amaze. Interview with Ann Natunewicz

Ann Natunewicz is a speaker who will have interesting and useful insights for everyone, whether you’re in retail, manage an investment portfolio or real estate projects, which makes hers one of the talks we’re looking forward to most.

Ann comes from a broad retail real estate and financial markets advisory background with 20+ years of development and leasing transactions experience worldwide. That includes developing multi-year asset management strategy for a $6.4 billion, 43-asset regional mall portfolio held as a joint venture. 

Ann agreed for a brief interview with us ahead of her talk at the BREL Forum on 8 November, which turned out to be even more interesting than expected.

You have an extensive international experience, working on projects from San Francisco to Puerto Rico and co-chairing the International retail practice group in the U.S. for Colliers International. What are the latest developments in retail you’ve observed; which retail segments are booming right now? 

Personal services and entertainment for one. People are spending a lot on apparel and increasingly, on accessories, shoes and cosmetics. 

Companies are producing a lot of clothes as we’re continuing to buy them, but – because it’s gotten relatively less expensive to make clothes – clothing takes up a much smaller percentage of our budget than it used to. 

We’re spending a higher percentage on other things, particularly cosmetics and beauty which are very, very hot right now globally, and there are a lot of reasons for that. They’re available at a variety of price points, which makes them like a small luxury – you can buy a tube of lipstick or a new perfume and feel like you’re treating yourself without having to exceed your budget. They’re also not dependent on body shape or your size. 

And – because the margins on cosmetics are relatively high – international makeup, cosmetics and fragrance brands are increasingly more comfortable going into other markets. Obviously, there’s always a risk, but these days, there’s also more room to play with the margins. 

A good example is MAC, which does very well all over the world because they recognize different skin tones and have product available for everyone.

We see a lot of Asian brands into the US, to the West Coast and California, because they have a lot of customers here.

Aside from cosmetics, fitness is big, too, especially in the US. We’re all living longer and want to be healthier.

And what about the retail sector – where do you see it developing in the next 10, 15, 20 years?

What’s happening globally is that there are many places like China, India and other parts of the world that are under-retailed, so to speak. 

You also see development happening but there is scarce supply of resources – of steel, concrete, etc. As a result, what we’re starting to see here in the US, is a new focus on different materials. For example, there was a multi-level apartment building built off the ground with wood, which seems mind-blowing. Everything old is new again. 

In the US, retail development has definitely slowed down because we have too much of it as it is. I think in general, since the financial crisis 10 years ago, lenders around the world are cautious about approving new developments. 

Many projects – not just in the US, but the UK, Canada, Australia, and other places, as well – probably have more retail square footage than they need, so retail is being repurposed in other types of uses, which I can talk plenty more about in November. 

In other parts of the world, given the rise in middle class, especially in China, we can see more new developments. 

People are using stores differently. The whole idea of what retail experience has changed.

I don’t see the number one purpose of the future retail store to sell a product. It will be to allow a customer to engage with the brand, to build loyalty and excitement about it, as some brands are already doing.  

That will be a way toward future sales. It will not be about having a lot of inventory in the store. You may, but that won’t be necessarily. 

Interesting. So does that mean that the current trend of stores becoming entertainment centers may not even be enough? 

Yes, and it also relates to building a development project. 

The reality is that most of the retailers anywhere in the world are in the business to sell something. If you need to fill a mall with tenants, you’re going to fill it up with tenants who sell things. 

You have to therefore have a very clear vision of where you’re going as a company, especially if you see yourself being around 20-25 years from now. 

We can see that brands that have been around for longer are trying to figure out where they want to take their brand next. They want to have smaller stores because they need less inventory as they’re able to get their product to people more easily via e-commerce.

The more futuristic tendency in the US is brands placing customer loyalty at the core of their strategy because if you’re loyal to a brand you’ll buy their merchandise – you will consume in a way that makes the company profitable.

There’s an increasing investment in the brand, and how that translates for each retailer is of course different. This is a trend that’s going to be a big part of any project going forward. 

For a developer it means that when you build a new project, you need to be really honest about how much retail you think the project – the area – can support. 

This means not building a site saying ‘We’ll fill it up’, but instead being precise about what the area can support and not going above that. 

It’s difficult, I know, because it makes the economics harder for the developer to pencil. 

It also means making sure that you’re building a facility where you can demise smaller spaces for retailers more easily because they may eventually want less space, and that’s not always a bad thing – if you have less space for a tenant, you can accommodate more tenants.

Overall, the trend seems to be going back to the origins – like the souqs or the Bazaar in Istanbul – with a vibrant tenant mix housed in smaller spaces. 

It’s important that the physical facility of a project can support that, which you can’t ensure without thinking well ahead. 

As we’re looking at these developments, what is the impact Millennials and Generation Z have on the global retail market? 

Millennials are now in their mid-to-late thirties, moving into their prime household formation years. There has been so much talk they’re so different from their parents and the Baby Boomers; that they’re doing everything so differently, but what we’re actually finding is that they’re still buying houses, having kids, and so on. 

They’re getting married – granted, later than previous generations, in part because they became adults during the recession and they either came out of school with a lot of debt or were underemployed for a while. They’re also scared so they’re thinking about things differently.

Millennials, and especially Gen z, aren’t as interested in buying things. 

Yes, they are buying houses, they’re moving to the suburbs, etc., but in general, they’re not buying as much. They can afford less real estate because they don’t have as much money; they’re also moving into smaller places, which obviously makes you question how many things you have. 

As a result, the sharing economy is very big here in the US, and it’s growing. Some early examples are Uber and Airbnb, which are also big in Europe. 

Here in the US, there are many models for sharing clothing, whether resale or rental clothing services, where you can have that freshness and newness of buying something without having to own it. This is something that’s becoming an enormous business in the US. 

Some of the US companies are now starting to look at the Western Europe to open something similar.

That’s very interesting. The US has long been known for its low prices on clothing, so it’s interesting to see rental and sharing expanding as a trend there regardless. 

It is. This could easily be a separate discussion, but I’m trying to stay on your questions. (laughs)

In general, Millennials and Gen Z are starting to become very aware of the impact of their choices, so they don’t like to just buy things and then throw them away – it’s like throwing money away. 

Say you need a dress or a ball gown for a charity or other dressy occasion – you’re not going to wear that dress more than once or twice, so why buy it? 

Many people are embracing this model of the sharing economy where they can have something new without shopping and packing their closet all the time. 

Millennials are also very interested in customisation and personalisation – being marketed to directly – so much so, that they’re willing to trade off some of their personal information and privacy in return for receiving a message tailored to them and their interests. They want to see the brand caring about them. 

This is another new development we’re seeing a lot of these days. This goes hand in hand with the trend towards companies wanting their consumers to engage with the brand, and it’s obviously working. 

Gen Z wants to identify with brands. They’re a little bit more community focused, wishing to bring about a positive change. 

They want interaction with a brand. They want to feel special, to be part of a community of other people who are interacting with that brand.

 

Will they continue to have a strong impact on commercial real estate, as well?

I think it comes back to recognizing that stores may want to modify their concept mid-lease in order to be able to accommodate their new corporate vision. This means we have to think about the physical space. 

As a mall owner or its Head of Marketing, you need to understand that your tenants will likely want ways outside of their premises to engage with their clients, such as, in common areas, the mall’s marketing events, promotions, through new partnerships, and so on.

This requires a certain flexibility within a shopping center; the landlord just needs to be aware and open to that. 

Sounds like ingredients for a smart retail development strategy…

Yes. Brands will want to engage more – not just with their customers, but also with the community, through philanthropy, social projects, etc. If a developer or a shopping center owner can offer that platform to their retailers – that’s a competitive advantage. 

It can be complicated and expensive to implement but once you have a certain structure going, especially if you can leverage it across multiple shopping centers in a region or in a portfolio, then you start to build a reputation among tenants as the place to go – this developer, this owner is innovative. 

It is often the case that when a retailer develops its own project, that project is driven by the anchor department, the anchor store or tenant who wants to have a lot of control as they’re funding it. And they want to have it all big, big, big, but this is the part where you have to take a step back and say ‘We want this to be profitable’. You know who your customers are and how much they will be spending realistically. 

It’s better to build a bit too small than to build too much square footage and then have trouble leasing perennially, or leasing the last 10%, 15% of the shop space, because that drags down the entire effort made, and the entire project for everyone.

Essentially, it’s about crunching the numbers upfront. I was a developer for 15 years, so I know that any developer would probably cringe hearing this. 

However, the reality is that today in the US, we see a lot of developers struggle trying to repurpose retail spaces that had not been thought of carefully enough 10, 15, 20 years ago. 

If you have control, you need to be smart about it upfront, design projects that have more mixed use components in them. You might activate that side of the project at different times of the day, with different types of customers who are there for different reasons, and you spread the risk around, because at any given time in the market, hotels might be doing great, but retail might be struggling; or office is great and medical’s great, but hotels are struggling. 

Hence, if you create an active community place, you have more things going on to keep it healthy. 

I have plenty of data from the US and examples of how retail spaces are being repurposed and the partnerships that are happening between brands you’d never think of would be partners. 

I don’t want to make you give away too much, but maybe you can mention a few examples of partnerships and brands that are adapting particularly well to the current changes in the market?

If you look across innovation and customer-focused approach, I think Zara is just amazing. They have probably the strongest supply chain in the world. It’s impressive how quickly they can get a product to the market and really engage with their customers. Now they’re talking of sustainability initiatives that help them engage customers even further. They’re a great brand. 

Carrefour and Ikea are doing great. In the US, Target (a kind of department store) is very popular. They sell across many product categories – soft goods and hard goods, but they’ve been trying to invigorate their fashion by having clothing capsules from high end designers (one example is Missoni) installed in their stores. 

They design a selection of limited edition products to be placed in Target, build up excitement and then they drop them in the store. Everybody freaks out and goes and buys them. These products are at lower prices than you would pay for a Missoni dress in a Harvey Nichols, for example, but they still bear the same trademark and logos. 

Another interesting partnership here in the US is between Kohl’s, which is a mid-market discounter – they’re all over the country, and Weight Watchers, which is a global platform to help people lose weight. 

Kohl’s is very interested in families, you can find them in a lot of middle market areas around the United States, and Weight Watchers of course wants to be in that sort of family-focused wellness sector. So they’ve started co-branding and a concession together. Kohl’s lets Weight Watchers have monthly meetings at their stores; they sell Weight Watchers branded cooking equipment and other things like that in their stores. 

It’s interesting not just because these two brands have found each other, but also because a concession model is not typical to the US stores as it is in Japan, for instance, and to a certain extent, in Europe. The US is now starting to play catch-up with Europe and Asia in this sense. They have realized that it’s more profitable for a department store to get rental money from concessionaires inside their store than by generating sales from another product.

I think Lidl’s also doing very well. There are plenty of grocery stores that have tried to come to the US or someplace else and have not done well. It’s a low margin business. For Lidl to have taken the risk of coming to the United States grocery market, and succeed… This is what sets them apart. The amount of research Lidl did before coming to the US is phenomenal, and they’re seeing the results pay off. 

Alibaba in China is innovating in a huge way as far as relationships with other brands go. They’re building platforms with brands that are not purely retail – such as financial services, fulfilment. 

They needed somebody on the financial services part to facilitate transactions, the technology and other layers of the business. It’s almost like Alibaba are outsourcing parts of their business to companies that can help them do it better and allow them to stay focused on retail. 

I will come to Riga with many more examples like that. There’s so much going on; it’s exciting. 

And these partnerships work?

Yes. They’re new – it’s been within the past year or two – but so far, they have been successful.

Retail is ultimately a cyclical industry, and, to the extent that retailers can find a partner that makes sense for them, it’s useful to partner with somebody in a different part of the economy like Kohl’s and Weight Watchers do. It benefits both brands and in a way also insulates them a little from some things that are coming down the pipe. 

Ann will speak at the BREL Forum 2019 on  ‘The Mature U.S. Property Market:  Developing Relevant, Engaging Retail for the Next Generation of Consumers’. 

She’s promised to come with many more compelling examples of trends and strategies in retail, so don’t miss your chance to hear her live. Book a seat right here →