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Interesting article...
JW
http://www.thestandard.com/article/display/0,1151,8897,00.html?nl=int
January 14, 2000
Under the Knife
Wall Street "cybersurgeons" are about to cut into retailing, forcing store
closings. That's bad news indeed for real estate investors.
By Mark Borsuk
Wall Street this year will be pressuring large retailers to create "channel
leverage" by strengthening their online sales at the expense of store
expansion. This is going to create a new breed of investors – call them
"cybersurgeons" – who will slice and dice retailers that cannot become true
multichannel merchants. And the cybersurgeons' cure could become a
bloodletting for both property owners and for real estate investment trusts,
or REITs – publicly traded portfolios of property investments.
Expect a schism to develop between mass merchandisers and retail property
owners over the value of location. Formerly, merchants and landlords had
parallel goals – the best location generated the highest sales, paying the
most rent. The online sales channel turns this rule on its head. Now
cyberspace competes for merchants' attention.
Look for Wall Street analysts to demand that retailers curtail new store
growth, reduce the number of locations and shrink store size. The punishment
for slackers and those failing to provide superior online execution will be
stock downgrades and credit rationing. Some will end up in the
cybersurgeons' operating room.
Cybersurgeons are hostile takeover specialists hoping to maximize a firm's
value by selling it piecemeal or re-engineering a store's core strengths for
the information age. Their goal is to find a retailer with sufficient brand
equity to prosper online while cutting back on brick-and-mortar locations.
Strangely enough, retail merger and acquisition activity in the 1980s
centered on the value of real estate. Now cybersurgeons are hell-bent on
reducing stores.
For aggressive cybersurgeons, three characteristics dominate patient
selection. First, the merchandise must consist of brands, standardized goods
and self-service items. Books, CDs, consumer electronics, pet items,
sporting goods, office supplies, groceries, health and beauty products, and
toys all fit the bill. Second, customer demographics must be favorable to
buying online. Finally, does Pareto's Rule apply? Do online customers
generate the bulk of profits? If so, cybersurgeons will risk downsizing or
closing stores that serve customers who generate only a fraction of the
profits.
Cybersurgeons will carve up retailers with depressed stocks. They will
prescribe a merchandising strategy aimed at the most profitable customers.
They'll also make purchasing easier online, convert some locations to
showrooms, radically cut costs, substantially eliminate noncore personnel
and management, and centralize inventory.
Cybersurgeons will present landlords with painful choices. They are likely
to demand cheaper rent and take less space. They may "go dark" while
continuing to pay rent. The going-dark scenario is particularly deadly for
landlords because the loss of a key tenant cuts foot traffic for other
retailers. Lease termination by bankruptcy can be worse, with wider
implications for property investors such as pension funds and insurance
firms.
The retail property community is confronting a growing sense of irrelevancy
and obsolescence in several ways. The International Council of Shopping
Centers and the National Association of Real Estate Investment Trusts joined
the so-called e-Fairness Coalition to oppose favorable tax treatment for
online transactions. They hope to increase customer costs and slow the
growth of e-commerce. The ploy is completely misdirected. In many cases,
buying online is more convenient – it offers better comparison shopping,
provides greater selection, is less expensive and saves time in comparison
to brick-and-mortar stores. Manipulating the sales tax issue will not force
shoppers back to stores.
Cybersurgeons may also turn their attention to distressed retail REITs.
Retailers receiving the cure are also likely REIT tenants. To avoid
evisceration, REITs may be forced to dump properties at fire-sale prices.
The trick will be to align themselves with nonretail users. Adaptive reuses
of big-box retail stores and supermarket-anchored community centers is
inevitable.
The information age symbolizes the shifting of wealth from tangible to
intangible assets. Cybersurgeons will exploit the opportunities in the
transition. Online buying's negative impact on retail property is part of
the economic and social upheaval ahead.
Mark Borsuk, a property attorney and retail leasing broker, is managing
director of the Real Estate Transformation Group in San Francisco.
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