Experiential retail is a growing way for retailers to draw in shoppers, increase omnichannel sales, and build their brands. Real estate owners and operators that can attract experiential retailers can benefit in multiple ways. Here’s what it takes.
Katy McLaughlin: What is experiential retail?
Colleen Baum: It’s a format designed to help customers touch and feel and experience products as well as get to know a brand. Experiential formats tend to have far more brand messaging. This type of retail experience is not to be confused with temporary pop-up stores or branded events. Instead, experiential retailers seek long-term leases and aim to become known as destination shopping. It’s a reason to go. Some leading experiential formats have been within sporting goods, where shoppers can try on shoes and play on a basketball court or run on a strip of AstroTurf.
Katy McLaughlin: What kind of real estate do experiential retailers look for?
Colleen Baum
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Colleen Baum: Experiential formats tend to be more capital intensive. To make the return on that capital effective, experiential retailers need to be in higher-traffic locations where they can access everyday shoppers and some tourist traffic to help build brand awareness.
Katy McLaughlin: How is the return from experiential retail different from that of traditional stores?
Colleen Baum: First, most experiential formats don’t achieve profitability from in-store sales for three to five years, because of the capital intensity.
Second, they often boost omnichannel sales. When one specialty retailer opened their first ten locations, they were all experiential. They had a 200 percent increase in omnichannel sales within those catchment areas. People who stopped by didn’t necessarily buy at the store, but they bought online later on. Two hundred percent is really impressive; a more typical lift is in the 15 to 25 percent range.
Third, brands use experiential formats to acquire customers. Customer acquisition through social media has become increasingly expensive, and it is prohibitive for a lot of brands to do large-scale acquisition in a digital channel. Instead, retailers hope to draw customers into cool, exciting locations, track the number of new customers, and encourage them to join the database or loyalty program.
Katy McLaughlin: Why should real estate owners or operators try to attract experiential retailers?
Colleen Baum: In a more experiential format, you have a longer dwell time and a greater likelihood that people will shop across locations. So if a real estate owner can get a core or anchor tenant that’s more experiential in nature, it can attract more destination traffic to the high street or mall, which is a benefit to other tenants.
Katy McLaughlin: How can real estate owners and operators attract experiential retailers?
Colleen Baum: Tenant improvement allowances may have to be higher because of the capital intensity of experiential locations, and build-out could take longer. So real estate owners or operators have to balance finding the right tenant and possibly more up-front costs to secure a lease that will really drive traffic. You can’t put an experiential retailer just anywhere. They need highly trafficked locations that are highly visible, are on a ground floor, and have lots of windows.
Real estate owners and operators can also attract these tenants by offering valuable data. This includes details about the area demographics, which shoppers are coming here, major sources of employment around the area, and the traffic on different occasions. The retailer or brand team can then take all of this into account to determine what experiential components they’ll include to delight these customers.
Katy McLaughlin: How could leases be designed differently for these retailers?
Colleen Baum: The data demonstrates that someone who shops online and in-store is at least 1.25 percent more valuable than someone who just shops in a single channel. So there’s real value in having someone who goes in the store as well as buys online. We also know that when you open a store in a particular area, the online sales increase. On the flip side, when a store closes, there is a decline in online sales in the area surrounding that store.
That’s all proof that a great in-store location can lead to higher online sales. So it only makes sense for real estate companies to pursue a rent structure that’s correlated to a percentage of omnichannel sales. The real estate owners can figure out a measure of those omnichannel sales that are connected to the experiential location.
Katy McLaughlin: How else can real estate owners and operators profit from experiential retail?
Colleen Baum: Much of the benefit comes from how the real estate owner uses the experiential retailer to build a noncompetitive ecosystem of complementary retailers nearby. Owners and operators can use analytics, including mobility and credit card data, to figure out, “What’s the collection of tenants that have overlapping customer bases and would feed off of one another?” There’s an opportunity for owners and operators to think about broader placemaking—including food and beverage, events, and special installations—and how to take advantage of the traffic that’s coming into that location.
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