The Cambridge English dictionary defines traditional retail as: “the activity of selling goods to the public, usually in small amounts, for their own use.” Currently, this definition tends to underlie today’s retail lease agreements despite the increasing value attributed to retail services and experiences.
While many variables go into determining tenant rent including historical & pro-forma revenue, financial solvency, square footage, etc., these inputs ultimately serve to estimate a tenant’s ability to generate enough sales transactions to pay their rent.
Retail as selling goods AND services
However, while sales increasingly migrates to e-commerce channels, other services in the customer buying cycle are still often best served through brick & mortar such as product discovery, returns/exchanges and fulfillment. These elements are no less important to the buying cycle, but their value is more difficult to quantify without direct sales attribution.
As such, while a retailer might be selling fewer products in store, they are not necessarily less valuable to a landlord – especially if their services drive more traffic to their shopping centers than selling goods alone. Considering this re-balancing between goods and services, the concept of “retail as selling goods” may need to be updated, but how?
The intrinsic value of retail services
To paraphrase legendary investor Ben Graham’s definition of intrinsic value, it is “an estimation of earning power that is multiplied by an appropriate ‘capitalization factor.’”
In retail, this ‘capitalization factor’ can be derived in various ways, such as lowering customer acquisition cost for the landlord, driving incremental sales for other retailers or over-indexing in retail shopper loyalty.
Further, being able to understand and quantify these ‘capitalization factors’ can create a sustainable advantage vs. competitors who opt against investing in the appropriate retail technology required to measure them.
Quantifying service ‘capitalization factors’ via WiFi analytics
Historically, these capitalization factors were difficult or prohibitively expensive to measure. However, with the advent of solutions like WiFi analytics, sensors and beacons, it is now easier and relatively inexpensive to quantify, for example:
- A new tenant’s ability to attract first time shoppers,
- Store-to-store cross shopping, or
- A retailer’s ability to attract repeat shoppers.
Fortunately, putting a value against these previously intangible elements are well within reach of retail property owners (and retailers themselves), and the value of understanding these ‘capitalization factors’ will far outweigh the investment required to measure them.