Blog Post

The New Retail Paradigm and How Craft Retail is Accelerating It

The buzz of the retail apocalypse has died down, giving way to a concession from the industry that what we are really experiencing is more of a retail renaissance or even a new retail paradigm. The necessary shifts and adaptations for retailers to be successful won’t be letting up anytime soon though. In this article, to better understand where we are today and how you can better position your brand for the future, we’ll look at what the manufacturing industry can teach us about the evolution of consumer preferences, how consumer preferences are the driving force behind the new retail paradigm of needs and wants, why the return of craft retailers is helping lead this new paradigm, and how successful retailers, restaurateurs, landlords, and real estate service providers are adapting to meet these changes.

The New Retail Paradigm – Serving Needs and Wants, Not Classes

Well through the 1990s, retail had followed along with what we consider to be the “old paradigm.” Stores generally focused on serving three classes of individuals. High-end luxury stores served the wealthy, while price-conscious department stores like Sears served the middle class, and more budget-driven brands such as Walmart or dollar stores served the lower class. These stores catered toward a variety of their intended classes’ needs with products of similar quality and price. As we usher in a new era of retail, and as the middle class continues to condense, a “new paradigm” has emerged.

The “new paradigm” has retailers generally broken into two groupings based on a split of how consumers are spending their money. The first group is the needs-based retailers, for whom value and convenience are the focus. The second group is the wants-based retailers made up of brands that tend to be aspirational, experiential, or craft retailers. As retailers are adjusting towards serving a category of product or service (needs or wants) instead of serving a category of customers (economic classes), retailers whose products and services which are not unique, convenient, or offered at the lowest price, have started to fail. The experience of shopping at these stores in the “middle” leaves customers wanting something more as they did not get an exclusive product or experience and they do not feel like they got a good deal, either. Retailers who cannot shift to provide consumers with a unique product or experience, nor win on pricing and convenience will find themselves squarely in the middle. The middle for retailers, much like the middle class, will continue to shrink as the consumer expectations driving this new retail paradigm are only strengthening.

A Brief History of Retail Manufacturing – A Precursor to Today’s Consumer Preferences Driving the New Retail Paradigm

Before grocery stores and shopping centers, towns were built around the handful of merchants that served the community. Bakers, carpenters, butchers, and other merchants were an integral part of a community, often spending their entire lives perfecting the products and services they sold to the town.

The industrial revolution introduced the U.S. to mass production and distribution

In the U.S., the craftsmanship model of merchants serving one community was a constant into the early 19th century. The Industrial Revolution brought us mass production methods in factories that initially needed to be located near a natural energy source, such as a river, but more canals and railroads meant that coal became a favorable source of energy, followed by steam and electric motors. These advances made mass production and distribution possible and expanded the horizons of both retailers and consumers.

Ford’s assembly line created large batches in record time

In 1913, Henry Ford introduced the moving assembly line, designed for the mass production of the Model T. Ten years later, the 10 millionth Model T rolled off the production line. However, in the coming years, what had been a benefit of the production line – an identical product created consistently and cost-effectively – would be a shortcoming in the eyes of the consumer. Now that everyone had a car, consumers wanted bells and whistles to differentiate their purchase from everyone else’s, but the assembly line did not allow for customization. It was at this point that consumer preferences began driving further innovation.

Toyota’s evolved manufacturing methods meant more options for the consumer, while still being cost-effective

After World War II, Taiichi Ohno, a manager with Toyota, sought out to improve their efficiency by learning from Ford’s assembly line. To overcome the cash and space requirements for the large inventory that Ford’s method created, Toyota developed the “Just-In-Time (JIT) Manufacturing” process, which focused on small batches according to Toyota’s website. A happy side effect of the modified production method meant that Toyota could change the production line quickly while maintaining a low product cost. If cars of a certain model or color were selling well, they could change the line to focus on that trend.

Dell helped pioneer mass customization to meet consumer desires

As customers became used to a variety of options with evolved manufacturing methods, their desire to customize products continued to increase. Dell filled this void in the PC industry with their variant of the Just-in-Time Manufacturing model called “pull to order.” The bulk of the computer was built according to Dell’s specifications, but consumers could go online to pick the customizable components, which were shipped quickly from suppliers to Dell for final assembly. Production took as little as four hours and Dell eliminated warehousing component inventory that would soon become obsolete. Through the “pull to order” method, Dell’s customers could customize to their heart’s content while keeping manufacturing times efficient and the product at a relatively low cost.

Today’s Purchases are Focused on Value and Convenience (Needs) or Aspiration and Experience (Wants)

We’ve spoken in depth about how retail is changing in several of our past blog posts. From store closures to the importance of portfolio optimization, retailers simply must adapt or die. Millennials, nor the internet, are the sole cause. It’s more of a farther-reaching change in consumer preferences and behaviors. As more shoppers focus their spending on restaurants, entertainment, travel, and technology, traditional retailers of goods have had to find ways to re-engage their customers. Much like Ford, Toyota, and Dell, today’s retailers are having to innovate to meet ever-changing consumer preferences.

Purchases are increasingly driven by value or aspiration

In a 2003 marketing manual titled “Trading Up,” by Michael J. Silverstein and Neil Fiske, the authors were ahead of their time when they observed that with the volume of options and information that consumers have access to, they tend to “trade down,” or save money, on basics and essentials, while they “trade up,” or pay more, for goods that are especially fashionable, functional, or aspirational. Target has embraced this high-low strategy to keep customers in the store while they “trade up” and “trade down.” They stock inexpensive necessities alongside clothing lines and home furnishings designed by upscale brands. In today’s Instagrammable world, the consumer is fixated on saving money on their basics so they can, in turn, spend more on aspirational goods and experiences.

Casual dining is struggling because it falls in the middle

Casual dining restaurants have been one of the hardest hit categories in the new retail paradigm, with Applebee’s, Ruby Tuesday, and others announcing hundreds of location closures over the past year. What caused these restaurants to fail in the current retail environment? Unique, interesting, and experimental foods often weren’t these casual dining restaurants’ forte, and the experience of the physical restaurant environment could leave much to be desired. Consumers became pushed to higher and lower end restaurants, while the middle category has struggled to adapt to these evolved consumer preferences.

In a restaurant concept where more care is taken with the design and preparation of the food and environment, the experience is elevated, no matter the price point. QSR Magazine has observed more and more chef-driven concepts taking over the fast-casual category, driven by the consumers’ focus on quality, unique, and often healthier food options at a reasonable price point. Fine dining is more often reserved for special occasions, but consumers may hit up trendy fast-casual spots multiple times per week. The cheaper, more convenient option of a quick-service restaurant with an interesting environment means consumers are satisfying their desire for both value and experience. The explosion of food delivery services has further hampered those restaurants who aren’t adapting fast enough to consumer preferences, as consumers are just as happy to opt for the convenience of enjoying a restaurant dish in their own home.

Commodities have largely been driven online

Thanks to e-commerce, the consumer appetite for increased convenience and low prices has driven a significant portion of necessity purchases online, where consumers can compare prices for their favorite toothpaste and also have it delivered to their doorstep quickly. And online sites never close, so shopping can be done whenever is convenient. According to a recent study by Deloitte Consulting, categories such as accessories, electronics, appliances, personal care, and beauty products have already flipped over to transacting predominantly online.

Shopping for basics online, however, is a relatively new behavior and as internet sales started to steal market share, brick-and-mortar retailers adapted by focusing on their omni-channel experience by rolling out services like online ordering with in-store pickup, same day delivery, and subscription boxes to recapture their customer’s dollars. This creates a convenient and seamless shopping experience for customers as they move from one channel – mobile, online, social media, or in-store – to another to make purchases, returns, and exchanges, as well as flexibility in shipping and pick-up options. In other words, make the shopping experience as fluid as possible, knowing that today’s busy consumers place a high value on that convenience. A leading example of what a successful omni-channel approach can result in is Walmart. As other big box retailers shrink their size, Walmart is excelling despite its large footprint, thanks in large part to their omni-channel platform. Their most recent omni-channel feature is their online grocery ordering service, allowing customers to make their order online and have it delivered to their car upon arrival to the store. This distribution center approach is not only a smart use of their large footprint, but also incredibly convenient for shoppers as they never have to enter the store.

Craft Retail – A Movement by Creators of Aspirational Products and Curated Experiences that is Accelerating the New Retail Paradigm

Craft retail, which we defined in our predictions for 2018 as retailers who specialize in a more customized product or experience, is a leading category in the new retail paradigm. In contrast to stores that stock mostly mass-produced items easily found at other retailers or online, craft retailers offer a more curated, personalized, and locally-relevant product or experience. Craft retail is a movement with a passionate consumer base much like what we’ve seen with the craft beer movement. As local craft breweries began to pop up, mass beer producers began to lose market share. And when those local breweries began to get distribution outside of their local market, consumers everywhere had many more options to choose from, which took a toll on the mass production brewery volumes. While the craft brewers amounted to a small toll, they disrupted a stable industry. The consumer mindset had been altered. Social media further cemented the influence of these brands, making consumers want to try something new, be “part of the club,” and identify with the community where these breweries hailed from. Today’s craft retailer and the larger retailers who are mixing in craft products and experiences within their overall offering are capitalizing on this highly influential category.

Identifying with the brand

The draw of craft retail has come down to the products and experiences that consumers gravitate towards in this post-recession environment. Millennials want to feel a connection with the brands they support and want to feel like they have a reason for purchasing with them over another. And it’s not just Millennials who have shifted their definition of “value.” Ben Zifkin, author of The Rise of the Craft Brand, predicts that leading brands of tomorrow will not only provide unique products of quality, but they will be supported by a narrative about the brand itself. From commitment to the environment, community, or human rights, consumers now expect more from their retailers than to just sell goods and services – they want to be able to identify with the brand.

Curating the customer experience

One thing that all craft retailers do well is to create an emotional attachment to the brand, and as a recent study by Calabrio confirmed, today’s consumers are loyal to brands where they feel a connection. Craft retailers are committed to an in-store experience that makes the shopper feel valued and cared for. But, not all craft retailers are small local operations. Bigger brands can adapt and find huge success with a highly-curated customer experience. A good example is Lily Pulitzer, where you will find their iconic prints adorning the walls and plush sofas and arm chairs anchoring the dressing area. Not only is your sales representative eager to help you find that perfect dress, but they’ll treat your shopping companion to cupcakes and candies, and a beverage of their choice, from sparkling wine to a local craft brew. Along with a sophisticated CRM system that tracks each shopper’s preferences and adjusts the marketing accordingly, Lily’s in store experience sets them apart from other retailers just as much as their unique prints.

Embracing technology to create engagement

Some retailers end up creating a craft experience simply by embracing new technology. Ministry of Supply, an apparel retailer focused on high-performing, comfortable apparel, recently started experimenting with 3-D printing garments on-demand in the store. Each product takes 90 minutes to complete and allows creative input from the customer. This technology is allowing for custom products for each customer and the experience of seeing the printers in action is unique and engaging in itself.

Shopping centers shift to themed tenant mixes – catering to needs, wants and experience

As retailers are evolving, many retail centers are also shifting towards becoming an aspirational, experiential, or needs-driven destination. The traditional model of anchoring a center around a major retailer has begun to shift to centers being anchored by a category of retailers or a type of experience.

Aspirational and luxury shopping centers

An aspirational or luxury center might include a mix of luxury retailers and restaurants, as well as entertainment options and more economically-priced local craft retailers, making it an upscale destination that attracts more than just those in the upper-income brackets. One example of an aspirational center is Highland Park Village in Dallas, which is home to Fendi, Chanel, and Hermes, as well as upscale local restaurants and shops.

Entertainment centers are the go-to for families

An entertainment center strives to be top of mind for consumers trying to come up with something to do or entertain their kids. These centers will include unique entertainment concepts as well as the older stalwarts of movie theaters, bowling concepts, and restaurants. Even traditional retailers are leveraging experiential aspects of their offerings, such as the cooking classes at Sur la Table and the learning sessions at the Apple Store. The retailers and restaurants in an entertainment-driven center complement each other to create a memorable experience as visitors work their way from one store to the next and the common area amenities tie the whole experience together.

The Hub, located in Watersound Beach, Florida, is billed as a festive gathering place for friends and families to eat, drink, shop, and play, is a perfect example of an entertainment-focused center. “All of the retail and food is built around a larger center courtyard that serves as a concert venue, movie viewing area, and outdoor picnic space. It really is a very unique concept,” said Martin Smith, senior vice president and market leader in SRS’ Birmingham office, who worked with The Hub in establishing their location.

Successful needs-driven centers and retailers focus on more than value, they focus on convenience

A needs-driven center doesn’t necessarily focus on discount retailers, rather they are focused on the utilitarian needs of the community. These centers become a destination for errand trips, where shoppers can get many things done in one place. These centers might have a gym, quick service restaurants, a grocery store, and a handful of personal and small business service retailers. The retailers in these centers are not typically aspirational brands, nor are they necessarily entertaining to visit, but they provide a vital role for the surrounding community and convenience with their grouping in the same center.

The New Retail Paradigm is Just Beginning. How can Retailers, Investors, and Developers Take Advantage?

While industry experts will continue to speculate on the future of retail, what we’ve observed is how retail is following a similar path to the evolution of manufacturing processes. Ford brought us the assembly line and mass production, but that ultimately lost favor with customers once the products became commonplace. The Just-in-Time method from Toyota gave consumers more options at a great price point, but eventually, even those options were not enough. Then mass customization, popularized by Dell, allowed consumers to customize mass-produced products to meet their needs while keeping costs relatively low. The parallels to the evolution of the retail industry are striking – mass merchants who haven’t evolved to meet consumer preferences are struggling, while wants-based retailers are succeeding by offering unique experiences and customizable products, and needs-based retailers are succeeding by providing the lowest prices with the greatest convenience.

In either industry, the old adage of “the customer is always right,” has never been truer than in the new retail paradigm. With smart devices in tow, consumers will continue to have more and more tools to influence the direction of retailers and shopping centers. For long-term success, retailers must constantly realign their strategy to meet changing consumer preferences by adapting quickly, but thoughtfully to create valuable products, services, and experiences that meet the needs and aspirational desires of tomorrow’s consumer.

For today’s retail investors and developers, the smart money is on the locations that have attracted, or have the potential to attract, the purveyors of this new retail paradigm. With the volatility we saw in 2018 driven by fear of the unknown or unfamiliar in our industry, we now see opportunities for making strategic investments that will capitalize on the new retail paradigm.

Retail Real Estate Services are Adapting too

As retail continues to evolve, retail service providers are aligning with the path that the retail industry is taking as a whole. Retail real estate has traditionally followed the “old paradigm,” by opening stores based on rooftops and demographics. Today’s retail real estate broker must be much more of an advisor with services tuned to the needs of the needs-based retailer and wants-based retailer, which are often quite different.

For needs-focused retailers, service providers such as SRS have evolved their suite of services to more thoroughly support portfolio optimization, which helps retailers focus on having the right size stores, in the right places, at the right occupancy cost. The shift in what is needed for the physical box and what is needed to support omni-channel distribution is creating a significant amount of movement in retailer portfolios. From new stores to smaller stores to closures, relocations, rent reductions, rent restructuring, and negotiated terminations, the amount of work is vast and broad. A service provider that can become part of your team to affect results in all of these areas is essential.

For wants-focused retailers – those retail brands that are experiential or aspirational – a variety of locations can be ideal. Craft retailers are focused on a curated product, so their locations need to have surroundings that reflect their brand and create the attraction needed for a buzz-worthy locale. For aspirational retailers with a high end or upscale product – their locations need to be landmarks or highly unique or within top-tier centers. Securing those types of rare locations takes a specialist, for which SRS Real Estate Partners has recently introduced SRS Signature, a specialty service and group built to serve the real estate needs of high-end, digitally native, established and emerging brands, as well as upscale entertainment flagships and chef-driven restaurants. Focused on the evolving needs of this fast-growing segment of the retail industry, SRS Signature is based in Los Angeles and has senior real estate advisors located in key high-end markets around the U.S. and beyond, including New York, Boston, Miami, Atlanta, Dallas, Toronto, Chicago, Denver, San Francisco, and Hong Kong.

AT SRS, we look forward to helping you navigate and thrive in the new retail paradigm.

Contributors: Steve Dawkins, Ashley Loyd, and Christina Wezwick