After two consecutive years of weak projections, retail CFOs forecast 4.9 percent sales growth for 2017, according to BDO’s 11th annual Retail Compass Survey of CFOs. Supporting this optimism was The Conference Board’s statement in late March that consumer confidence has reached its highest point since December 2000 — a noteworthy cause for celebration.
Nevertheless, history has shown us that consumers are not always the best indicators of the future. There remain many unknowns and potential headwinds. Retail space overcapacity is one of those pressing issues. The US has more retail space per person than any other country: 7.3 sq. ft. per person versus 1.7 sq. ft. per person in France and Japan, the next two countries on the list, according to CNBC.
Despite the excessive number of stores, however, there is a growing consensus that the traditional brick-and-mortar store is far from dead, as e-tailers, including Amazon, have expansion plans within the physical retail space.
This makes developing a proactive, agile real estate strategy more important than ever in supporting critical business goals and objectives. To begin the process, companies should strive to address key strategic questions. Among them:
Is there clear visibility and transparency into all real estate and facility-related occupancy costs?
Because retailers often use a variety of data management systems to manage and report key information, the data that they need is often not aggregated. Unfortunately, having siloed data can prevent organizations from developing, and adhering to, consistent processes, procedures and governance. The lack of an integrated approach to managing and reporting information can easily compromise informed decision-making.
Has a clear decision matrix been implemented?
Without well-defined parameters guiding decisions on which stores retailers should remodel, relocate or close, companies often run the risk of making inconsistent investment decisions that can reduce needed returns. The columns and rows in the decision matrix can vary, but it’s important to think about including key criteria such as store location, format and size, weighing each score differently depending on importance.
Location is especially critical. In fact, according to a recent survey, retailers are shifting their focus from quantity — having the most stores in the most locations — to quality, having well-positioned stores in popular malls or shopping centers, even if it means having fewer stores overall.
Is there a technology enablement strategy?
External technologies refer to those that directly impact the customer and are often aimed at enhancing the customer experience. Companies should also create a strong internal real estate and facility management technology strategy that addresses the entire life cycle of portfolio management, including: lease administration, information management and reporting, space management, construction management, work-order management and more. Without the right system, retailers will find it difficult to comply with new accounting standards and regulations.
Has the operating model for service delivery to all sites been recently reviewed?
Retailers should conduct a periodic analysis to ensure that they have the right mix of retained team versus outsourced functions.
Are basic portfolio management practices instituted and adhered to?
Practices that retailers should keep in their back pocket include:
- Lease audits of CAM pass-throughs and tax appeals for owned locations
- Contract and vendor audits for material measurement system analysis and contracts in key category spends
- Construction audits for material projects
- Portfolio strategy to address relationships with major landlords who own a large percentage of malls and power centers.
Are you working well with others?
Real estate and facilities management does not exist in a vacuum. As part of developing the entire real estate and facilities policies, procedures, standards and governance, input and support from the HR, IT, finance and operations departments are required to ensure success on any initiative. Proactively engaging in each of these areas will accelerate decision-making, allow for more informed results, create an agile working environment that can quickly respond to business changes and improve cybersecurity by reducing vulnerabilities to cyber-attacks.
Does real estate and facilities management have a seat at the table?
Is real estate and facilities management viewed as a strategic partner or only a necessary cost of doing business? Real estate and facilities management can drive innovation and become a true competitive differentiator to support business growth if proactively aligned with operations, marketing, and other departments to develop new store concepts, experiences and ideas.
Riding on the wave of technological, social and regulatory trends, the retail industry will continue to experience tremendous disruption in the foreseeable future. Competition and consolidation remain top concerns for the sector, with nearly 46 percent of BDO survey participants believing that there will be an increase in retail M&A activity throughout the year.
It is a business imperative that retailers have a well-defined real estate and facilities management strategy to remain competitive and grow their business. This includes having detailed responses to each of the questions above.
Ross Forman is managing director and leader of Portfolio Strategy for the Corporate Real Estate Advisory Services (CREAS) practice at BDO Consulting, a division of BDO USA, LLP. For more information, visit www.bdo.com.