For years, investors have grappled with the idea that online retail would eat the lunch of brick-and-mortar retail. But is that true? Open-air shopping center real estate investment trust (REIT) Kimco Realty (KIM +0.71%) doesn't think so. Here's why.
The pandemic's effect
As the coronavirus was spreading around the globe in 2020, governments tried to slow the illness's progress by effectively closing vast swathes of their economies. It was devastating for brick-and-mortar retailers, which couldn't open their doors unless they were "essential" (think grocery stores). And it was a huge boost to those retailers with a robust online presence or that only operated online, since shoppers migrated to online platforms when they couldn't physically go to the store.
Image source: Getty Images.
The big expectation was that the pandemic would be like hitting the fast-forward button on the so-called retail apocalypse. That's the hyperbolic term given to the trend of financially weak retailers that were losing ground or going bankrupt over many years because they failed to keep up with changing consumer tastes (including, but not limited to, the desire to shop online). For many, heavy debt loads made it difficult to reinvest in their businesses to keep up with financially stronger, more nimble peers.
But according to REIT Kimco, which owns around 550 outdoor shopping centers, most with grocery anchors, that may not be what has actually transpired. And that's great news for retail landlords. The truth is that all of the pandemic pain felt in the retail sector may have actually cleared the way for a renaissance of sorts.
The cloud's silver lining
There were, indeed, a lot of retailers that finally threw in the towel because of the pandemic, either liquidating or declaring bankruptcy. Even those that muddled through often closed less desirable locations. So, in this regard, the pandemic did speed up the "retail apocalypse." But that cleared the air, if you will, for new concepts and stronger companies to create better business models.
CEO Conor Flynn explained during Kimco's third-quarter 2021 earnings conference call:
And just anecdotally, the last, I would say, five to 10 years, we've been dealing with the narrative of shrinking box sizes, downsizing, downsizing, downsizing, and now the question is, hey, is there additional adjacent space that we can take to enlarge the box? So it has changed, I think the narrative on becoming more flexible in how you use the square footage and integrating that last-mile distribution inside the box.
The key here is that strong retailers want to be close to their end customers so they can quickly and easily get goods, of whatever type, into consumers' hands. The point is to make buying easier in the new retail landscape, which clearly includes online sales. But retailers have found that online sales are higher in areas where they have physical locations. Management at both Macy's (M 2.24%) and Chicos FAS (CHS +0.00%), for example, have explicitly stated as much.
For Kimco, one of the biggest tenant groups looking for additional space is grocery anchors. That makes sense, given that they didn't actually have to close down during 2020 because they were essential businesses and because there's a grocery store in roughly 80% of Kimco's centers. But a key piece of the puzzle, even for grocery stores, is making shopping convenient for customers, in whatever form that shopping happens. That means having extra space for goods that are bought online, with stores basically doubling as distribution hubs.
However, this isn't the only place demand is coming from. Kimco is also seeing an increased need for space from off-price retailers. This is a category of store currently in high demand from shoppers and, as a group, they are taking advantage of the store closures left in the wake of the pandemic to expand into shopping centers that may not have had room for them before. And smaller stores are coming back as well.
In other words, demand across the board has picked up, with a notable online component to the trend. And the pandemic actually helped bring about a material amount of the shift.
It's time to update your thinking
If Kimco is right -- and there's mounting evidence that it is -- the retail apocalypse could be over, or at least very near its nadir. That means investors have to start thinking about retailers and, by extension, retail landlords in a new way -- one that takes into consideration the complex, and complimentary, interactions between online and physical retail. And that probably means paying more attention to the best-positioned names in both industries. Taking a closer look at Kimco's third-quarter results, and perhaps even reading the transcript of Macy's third-quarter conference call, would be a good starting point.
