The Retail Revolution

The rise of mobile e-commerce has already had a massive impact on the way people spend money.

The U.S. Census Bureau’s seasonally adjusted figures from August show retail e-commerce totaled $75B in the second quarter, up 15.7 percent from the second quarter of 2013. Overall retail sales rose only 4.4 percent during the same period.

During Q2, e-commerce accounted for 6.4 percent of total sales.

At a recent conference in New York , a panel of industry experts turned their attention to just how profoundly this change in spending patterns will shape the retail sector.

It is by no means a given that the online shopping juggernaut will do away with brick and mortar retailers.

O’Connor Capital Partners chairman and CEO Glenn Rufrano pointed out that there is a cost to e-commerce, particularly that of consumers returning unwanted goods.

He suggested that this could result in a hybrid model as retailers try to find a workable model for “omni-channel” retailing. This could include a shopper’s being able to buy a product online but, if he wanted to return or exchange it, having to physically go to a store.

Rufrano used clothing retailer Gap as an example of a retailer facing challenges. The apparel brand expects 35 percent of its sales to be made online by 2016, but that’s an estimate. It could easily be 20 percent or 40 percent, Rufrano said

It is inevitable that some kind of evolution will occur, he said but how it looks is to be determined.

For investors trying to establish the best way to gain exposure to retail, the ongoing evolution in the sector poses challenges.

Thor Equities CEO Joseph Sitt said technology has cut the need for some malls, with many now posting negative net operating income growth.

However, Sitt pointed out, there is also a trend towards largely Internet-based businesses, like Samsung and Microsoft, opening storefronts. For this reason, he believes the best-performing retail areas are likely to be the high-profile shopping strips and emerging neighborhoods of gateway cities.

Dean Adler, CEO and co-founder of real estate investment company Lubert-Adler, agreed that technology is set to create a divide in the retail market.

“There will be winners and losers, and nothing in between,” he predicted

Adler said it used to be the case that if you bought an A-, B-, or C-grade mall at the right price, you would make money. That is no longer the case, he said, thanks to a “movement towards quality.”

The panel’s views echoed Colliers International’s retail outlook report for the first half of 2014, which noted that the growth of online retail sales has benefited the industrial property market at the expense of retailers.

However, the firm’s view is that the growth of online sales will not represent the death of traditional stores but rather will change the way retailers interact with their customers.

“Retailers that can seamlessly integrate their online and brick and mortar operations will be best positioned to succeed going forward,” the report noted. “This is not limited to traditional brick and mortar retailers adopting an online strategy; some retailers that have operated exclusively online are venturing into the brick and mortar world with pop-up stores and permanent locations for marketing and customer outreach purposes.”