How retail is reinventing itself in an age of online sales

Chattanooga developer Duane Horton likens the ongoing evolution of retail shopping centers to National Football League stadiums.

When TV started showing the NFL, many stadiums weren't comfortable and the food wasn't particularly tasty, prompting a lot of people to watch games at home or in a restaurant, he says. Then stadium owners, to fill seats, built venues to make seeing the game in person more of an experience, Horton says.

"Retail has to do the same thing," he says. "It has to reinvent itself."

Shopping in the Chattanooga area, as in other parts of the country, is changing. The Internet, evolving tastes and new technology are helping create a transformation of the industry, according to the International Council of Shopping Centers.

A new report by the trade group says shopping centers are "in the midst of one of the most exciting periods of evolution since the rise of the suburban malls in the 1950s." The Internet and e-commerce compete against sales at many traditional bricks-and-mortar stores, but the technology also provides consumers and retailers with new tools to enhance the shopping experience and drive store sales, it says.

"Rather than trying to stop or slow this evolution, the shopping center industry has embraced it - seeing it as the next wave of opportunity and a way to connect with consumers like never before," the ICSC study says.

At the same time, new shopping center supply grew at its slowest pace in 2013 in more than 40 years. There's been essentially no growth in retail employment since 2000, experts say. While a bricks-and-mortar retailers employs four people per $1 million in sales, pure online retailers have cut that to two workers.

Michael Lebovitz, a top executive for Chattanooga-based shopping center developer and operator CBL & Associates Properties Inc., agrees there's an industry evolution going on and that e-commerce is a way for all retailers to grow their businesses.

"They have to compete, and they have to meet their customers' expectations," Lebovitz says.

CBL, which was founded in 1978 and takes its name from Michael's father, Charles B. Lebovitz, owns and operates 140 retail properties across the country and is one of the largest Real Estate Investment Trusts in the nation.

Michael Lebovitz said CBL properties and other shopping centers remain key to retail selling because many people still want to go to a store "to see it, touch it, smell it, feel it. They like to research it online in a lot of cases, they like to compare."

Retailers have gotten very price competitive, says Lebovitz, the executive vice president for development and administration for one of the biggest players in the industry.

"In a lot cases, someone goes to a store and might think they're going to find that same thing on the Internet. But it turns out to be the same [price in the store] and they buy that, and they also buy other stuff," he says.

ICSC says that some online-only retailers have started to open physical stores, such as Warby Parker, Athleta, and Boston Proper and even Amazone

While e-commerce is growing, bricks-and-mortar store sales for 2013 still accounted for 94 percent of total retail sales of $4.3 trillion, according to the U.S. Census Bureau.

Online sales are growing nearly five times faster than traditional brick-and-mortar sales. In 2013, online sales were up 17 percent while sales from brick-and-mortar stores were up 3.5 percent. But Internet sales are expanding from a much smaller base. Online sales growth in 2013 equaled $38 billion while in-store figures rose $144 billion, according to CBL.

Recovering from the recession

With the Great Recession in the rear-view mirror, ICSC says key industry fundamentals are strong. It says the U.S. economy is recovering, the labor market is improved, and population growth is up with another 2 million people annually creating new demand for goods and services.

At the same time, physical retail supply is at historically low levels, ICSC says. Retailers have plans to open more than 40,000 stores over the next year and more than 77,000 over two years, it says.

Lebovitz says that, along with specialty shops, CBL brings in a broad array of retailers to its properties, such as restaurants, grocery stores and fitness centers. For example, a Rush fitness center is prominently located in CBL's Walnut Square Mall in Dalton, Ga.

"Retailing has always been dynamic," Lebovitz says. "It's always been changing and it's going to keep doing that."

In many cases, retailing boils down to a market-by-market situation, he says.

Lebovitz notes that CBL earlier this decade purchased Northgate Mall in Chattanooga, which had been losing shops and customers under prior owner General Growth Properties.

CBL has brought in a number of new retailers and is re-purposing the existing square footage in what it considers a prime location in the market.

"That is a good example of satisfying customers' desires for a good shopping experience," Lebovitz says.

CBL continues to work on finding one or more new tenants for a J.C. Penney store, which closed last year at the mall, and they point to what it has done in other markets. Officials cite former Sears locations at CoolSprings Galleria in Nashville and Fayette Mall in Lexington, Ky., where CBL brought in new retail and restaurants.

With struggling retailers such as J.C. Penney and Sears, the company says it anticipates closures and works on plans to redevelop units with new stores and restaurants which generate higher traffic and productivity than before. Last week, Radio Shack announced it would close 4,000 stores nationwide, including seven in the Chattanooga area. CBL will lose Radio Shack outlets at both Hamilton Place and Northgate malls.

In response to the retail changes, CBL announced plans last year to sell off about 21 of its shopping centers to boost operating income, upgrade its remaining properties and seek further opportunities.

CBL said then it expects to dispose of the properties within the next 24 to 36 months. The aim is to upgrade CBL's overall portfolio and generate more from its upper tier properties.

Shoppers visit the Hamilton Corner lifestyle center off of Gunbarrel Road.

Retail growth in Hixson

But while CBL trims in portfolio, other developers are planning to add more retail space in the Chattanooga market. Horton and his designers are proposing a $100 million apartment and commercial project on 190 acres in Hixson. They're planning on what they call a village-like development for which there's nothing to compare in the Chattanooga area.

Dubbed Hillocks Farm, it would hold 280 apartments, which would go up first, with work expected to start this year, Horton says. Project officials say plans call for a clubhouse, restaurant and chapel, along with 500,000 square feet of retail space and 250,000 square feet of corporate offices.

All of the three zones of development would be connected by trails. A 100-foot wooded buffer would separate buildings from existing neighborhoods, project designers say.

Rick Hill, involved in the retail portion of the project, says Hillocks Farm will have "a garden-like environment" with barn-like structures.

"I see outdoor cafes. I don't see aluminum storefronts like a Kmart shopping center," he says. "It must be a pedestrian-friendly village."

Hill says he doesn't foresee big-box stores such as a 150,000-square-foot Walmart. He does see stores of 25,000 to 35,000 square feet, along with specialty shops.

Horton says landowner Jack Lonas' intent is to create a project with long-term durability that withstands the test of time. The project would develop more like a town and have a village feel, he says.

Hillocks Farm, with standalone buildings, creates interest much like a town that would have grown organically, Horton says.

"There's nothing else its size" in Chattanooga, he says, adding that One North Shore off Manufacturers Road show similarities. "Nothing points itself exactly to what we're doing here."

Taxing online sales

But traditional retailers say they continue to operate at a tax disadvantage to their online competitors.

While brick-and-mortar stores are collecting sales taxes in all states, pure e-commerce companies are doing so in a small number. States are losing revenue and so-called Main Street vendors are at a disadvantage, says Dr. Bill Fox, who directs the Center for Business and Economic Research at the University of Tennessee.

Fox told ICSC that he's surprised Congress doesn't pass legislation to address the tax situation.

"It's stunning to me," Fox says. "They've simply chosen to sit still. It's costing the U.S. economy jobs and raising the cost of doing business in the U.S. and Congress hasn't fixed it."

Lebovitz says online purchases ought to be taxed in the same way as those from a physical store so there's "an even playing field."

"We've been very active in our efforts with strong support from our [U.S.] senators to promote legislation that fixes that," he says.

Lebovitz says that in Tennessee, consumers are required to remit the sales tax on online purchases, but a lot people don't follow through.

"The federal government needs to pass a law," he says. "The issue as been mischaracterized as a new tax."

Lebovitz says he's hopeful the current Congress will pass the legislation.

"I've been involved in the effort to promote that," he says.

This story appears in the February issue of Edge magazine, which may be read online at www.meetsforbusiness.com