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The Future of the Retail Footprint in Canada Amidst the Accelerating Shift to Digital from Stores: Expert Q&A

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Retail Insider interviewed HRC Advisory’s leaders, Antony Karabus, CEO, and Farla Efros, President, to get their perspective on the situation facing the retail industry. The purpose of this interview was to get the perspective of experienced Retail Experts on the future of retail including addressing one of the most crucial questions – finding the right balance of brick and mortar stores and e-commerce.

Before starting the formal Q&A, Karabus and Efros said that they wanted to express their strong view that consumers love shopping in brick and mortar stores and that the future of retail will always include a meaningful brick and mortar presence. However the reality is that retail in many categories (other than food and certain other categories such as home improvement) are heading slowly but surely towards a world of “50:50”, where 50% of retailers’ sales will be digital or digitally-driven and 50% will originate in brick and mortar. HRC Advisory advises retailers to not plan incrementally on this issue and to develop a business model that reflects an outsize investment in scaling and expanding digital and omni-channel capabilities to be able to enable this transformation, while revamping their lease portfolio to increase occupancy cost flexibility that allows them to gradually exit or repurpose marginal and under-performing stores and locations that don’t have a clearly-defined future ( for example, locations where the main anchors have or are likely to be departing—these locations will likely decline over time).

The following is the Q&A interview:

Retail Insider: There is much being said about the so-called retail apocalypse. What do you think is really going on?

HRC Advisory: We feel very strongly that there is no retail apocalypse. If the health of the retail sector is judged by the number of CCAA and liquidation announcements since 2019 and the off-again, on-again restrictions dictated by governments, some are predicting that retail is facing an apocalypse. But we at HRC Retail Advisory believe that the reality is far more nuanced.

The bar for successful performance has been raised since the onset of the digital era, coupled with the arrival of the pandemic which has lasted longer than any of us expected. Significant opportunities exist for retailers that are committed to deal with the most pressing challenges and opportunities for fundamental transformation. While there are many retailers whose business models are under siege – some of them will either not be with us in a year or two and others will survive in a smaller and very different form – there will be many winners – those that evolve to become the destination and authority for target customers in their category.

RI: Is the consumer still spending and what is the health of the consumer?

HRC: Consumer spending remains strong. Consumers are still shopping, but their habits and choices have changed significantly since March of 2020. Higher-income and high net-worth consumers have for the most part not been negatively impacted by the pandemic ( in fact the media reported this week that Canadian billionaries have significantly increased their net worth since the start of the pandemic) and are shifting considerable spending from dining-out, entertainment-related categories and travel towards spending on their homes and backyards, cooking at home, pets and exercise, both outdoor and at home. Those categories that are the recipient of spending shifts are experiencing significant growth while the others are really challenged. The pandemic has unfortunately exposed the fault-lines of asymmetrical consumer strength. The medium and lower-income consumers are focusing on spending on essentials which is leading to growth in discount, dollar stores and club retail, while the higher net worth consumers are doing at least as well as they were previously and many are doing much better.

RI: Can we discuss the impact of the pandemic on different kinds of retail real estate?

HRC: That’s an excellent question as there is no doubt that retail real estate will experience a secular shift. Mall foot traffic has continued its steady multi-year decline and this trend will continue for a long time to come. Obviosuly this has been sharply accelerated since the start of the pandemic. The shift of sales from physical stores to digital has accelerated sharply and while we see the continued acceleration abating somewhat after a successful vaccine and herd immunity, we do see the increased importance of digital to be a long-term reality and we see the transition to a 50: 50 environment as happening much faster than anyone could have anticipated ( 50% digital and 50% in physical stores). Without a doubt, consumers are being more careful and many are avoiding crowded environments with direct exposure to outside entrances. We are concerned about underground shopping, enclosed malls, crowded department stores especially in downtown cities. However, we believe that street retail, strip malls, power centers, big box and mass retail, and any other retailers whose stores are open directly to the outside and are best positioned for curbside and BOPIS will be happy recipients of the sales shift. While we see a good long-term future for the top-notch malls such as Pacific Centre, Yorkdale, Toronto Eaton Centre, Chinook Mall, West Edmonton Mall, Square One, and a few others, we expect that numerous suburban malls in Canada will need to transform their properties by adding densification projects such as condo buildings on the parking lots and other lifestyle and mixed-use amenities and stronger and more direct access to public transportation hubs.

RI: What should retailers do to fortify themselves for the new retail future?

HRC: This is a complex answer but the first question is to ensure where possible that retailers are able to participate to the extent possible in essential categories and those categories that are now more important than ever before. For example, tailored clothing will improve after the pandemic but we believe casual, lounge-wear and athleisure will become a much more important component of clothing purchases. Retailers must fortify their digital and omni-channel capabilities and capacity, as well as their inventory management and assortment planning processes and systems. Lastly, if one believes the hypothesis that retail will be a 50:50 split in time and that an increased percent of total retail sales will be made in essential retailers who sell both essential and non-essential categories, then the discretionary retailers need to take a hard look at their store fleets – how many stores, where they are situated, what occupancy costs they can afford and which stores can double as digital fulfilment operations as well as serve walk-in customers.

Antony Karabus and Farla Efros are CEO and President of HRC Advisory respectively. HRC Advisory is Canada’s leading retail consulting firm that has assisted more than 150 national retail chains to adapt their economic operating model and key processes in order to compete more profitably and effectively. Visit www.hrcadvisory.com for more information as to how HRC can assist your company in this unprecedented time.

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