Value Retail Prospering; Discount Grocery, Fitness and Beauty Leading the Charge

On July 18, Commercial Observer Partner Insights hosted the online custom event, presented by Placer.ai, “CRE 2023: Evolutionary Step Forward or Fundamental Disruption,” which dealt with the economic effects of the disruptions that have shaken the commercial real estate industry.

The panel featured thoughts from Meghann Martindale, head of retail research at Madison Marquette; Bret Swango, senior vice president, head of location intelligence and workforce analytics at Colliers; and Ben Witten, head of real estate at Placer.ai.

After a brief introduction of Placer.ai, which provides demographic insights on visitation patterns based on anonymized information from tens of millions of mobile devices, Witten asked Martindale about the impact of recent economic headwinds on the retail sector.

Martindale replied that the market is sending back mixed messages.

“Retail sales were weaker in June, up 0.2 percent for total retail versus forecasts of half a percent,” said Martindale. “But then we also saw a revision in May where sales were up pretty significantly to a half a percent for total retail. We’ve been expecting consumers to really pull back on spending, but we really haven’t seen that. We have to take into consideration that retail sales are nominal, so they’re not adjusted for inflation. So inflationary prices have driven a lot of the retail sales growth this past year.”

Witten noted that the even with inflation starting to wane and better economic news possibly on the horizon, discount grocery was still going strong.

Turning to other CRE segments, Swango mentioned that the manufacturing side has been seeing a resurgence of onshoring activity. Given the supply chain issues of recent years plus increasing geopolitical uncertainty, sectors including defense, green energy and pharmaceuticals feel “more comfortable having those things a little closer to home,” said Swango.

“On the supply chain side, I keep hearing that we went from just-in-time inventory to just-in-case inventory,” added Witten, adding that the supply chain crisis was a learning moment for the industry.

For the upcoming back-to-school retail season, Swango noted that according to Colliers’ retail team, there’s been a widening wealth gap playing out at retail, as one segment of the population becomes “less price sensitive than ever.” He said that social media has led a portion of the population to never want to wear the same thing twice, while at the same time the value/dollar store segment of retail is prospering as well.

Regarding the summer season, Martindale delved deeper in the June numbers, noting that expectations for June retail sales were somewhat high given the start of the summer travel season and the Juneteenth holiday weekend.

“The broad consensus was that June was going to be a really strong month for sales,” said Martindale. “We started to see a pause in the rates, which would hopefully inspire more spending and less reluctancy. So it was a little surprising to see that June was a little softer than what the median estimates were.”

Martindale noted that the recent Amazon Prime Day, now a full-fledged retail event as big-box stores and other major retailers have taken to holding competing sales, can now be expected to pull back-to-school spending forward, just as holiday sales now begin in October.

Witten reiterated that even with sales falling short of expectations, retail sales were still up 20 basis points in June with overall retail traffic up 50 basis points, which was a marked improvement over April and May. Witten credited this, at least in part, to the Fed pausing rate hikes, which helped burnish public sentiment.

To this discussion, Martindale added that breaking out spending on services provides an added challenge.

“When we look at census sales that came out this morning, the only service category reported is restaurants,” said Martindale. “People are back to the gym, they’re going back to the movies, there’s travel, airfare, hotels, all of that. We don’t get as clear cut spending unless you look at reports from credit card companies and big banks.”

Martindale also noted that since services were shut down during the early days of the pandemic, spending shifted quickly to products. Then, once services returned, the pendulum swung the other way. Given those wide swings, she said that this year is the first since the start of the pandemic where spending patterns are starting to feel more “normal,” noting that for the first quarter of this year, sales were up 4 percent year-over-year.

Witten then displayed two charts. One showed the strength of the beauty and fitness categories via weekly visits to their physical locations, with fitness up over 25 percent year-over-year and beauty hovering around 18 percent. The other showed how much off-price apparel chains are thriving, with T.J. Maxx up 13.7 percent in the first half of 2023 compared to a year prior, Marshalls up 13.9 percent, Burlington up 10.9 percent, and Ross Dress for Less up 5.1 percent.

“The bargain hunt continues to be a hit. The value proposition is hard to beat,” said Witten. “Combined with the fact that a lot of those businesses don’t have an omnichannel component — you’ve gotta be there to find the deals — this element of discovery continues to excite the consumer.”

In addition to the fact that people are returning to the gym in droves after not being able to during the height of the pandemic, Martindale pointed out what she sees as structural shifts in those sectors of the retail landscape.

“A lot of the gyms that closed during the pandemic were more boutique,” she said. “We’ve seen a lot more absorption back into the bigger gyms now. A lot of the boutique and MicroFit categories are really expanding again.”

Martindale noted that the pandemic ignited significant shifts in the beauty category as well.

“Sales of lipstick dropped during the pandemic because everyone was wearing masks, and then all of a sudden it started to surge again if you look at the prestige brands,” said Martindale. “The bottom line is that people came out of the pandemic with an even bigger commitment to their own health, fitness and well-being.”