Retail Revolution: Unveiling the Dynamics Behind a 29% Surge in Industrial Demand

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    The landscape of Big Box retail, a mainstay for the past 30-40 years, is undergoing a notable transformation, moving away from its traditional one-size-fits-all model. Retailers are now harnessing the power of data to redefine their market stance, tapping into insights from Point of Sale (POS) systems and other sources to optimize their brand’s value. This includes a deep dive into Stock Keeping Units (SKUs), consumer preferences, and store layout. The wealth of data sources encompasses POS transactions, foot traffic, online and in-store mobile data, location data, and purchase specifics. Despite the lack of a universal retail playbook, retailers are becoming increasingly sophisticated through strategic data utilization.

    Landlords are witnessing heightened demand from retailers, especially from brands looking to acquire more retail space to meet last-mile demands. Retail giants like Costco and its competitors are seeking last-mile sites with a smaller footprint, around 50,000 square feet. The continued presence of Big Box retailers, combined with the liquidation of Bed Bath and Beyond sites and their acquisition by other retailers, has the industry contemplating its future.

    Despite a 29% decline in the first half of 2023, demand for industrial big box products is rebounding to pre-pandemic levels after a period of unprecedented frenetic demand in 2021 and 2022.

    Vacancy rates, particularly in big-box industrial spaces, are on the rise nationwide, primarily due to the delivery of record new supply. While this may raise concerns initially, increasing vacancy rates in big-box spaces can be beneficial. In some markets, vacancy rates had plummeted so low that tenants had limited or no options. The surge in new supply will significantly expand the available options in modern space, restoring big-box vacancy rates to healthier, functional levels. As we head into 2024, the construction pipeline is expected to drop significantly, rebalancing the relationship between supply and demand.

    Retailers are contemplating slightly larger footprints in shopping centers, while larger big-box retailers are reducing their footprints. Many retailers are experimenting with new formats in different markets to gather customer feedback and determine how to replicate the multichannel model in the future. Target, for example, is moving towards a larger footprint and has implemented new design elements to enhance the customer experience.

    In the industrial sector, tenants are making adjustments, especially in the last-mile segment. Micro-fulfillment centers are gaining traction in various markets, notably in Chicago and Florida. Target, for instance, recently leased a 25,000-square-foot space in Chicago, strategically located to serve a large population of Target shoppers. In South Florida, Kroger and Publix have also embraced the trend of micro-fulfillment centers to enhance their last-mile delivery capabilities.

    E-commerce, along with supply chain reorganizations and 3PL requirements, has been a driving force behind the unprecedented demand for industrial space over the past two and a half years. E-commerce sales, which accelerated in 2020 due to the pandemic, have returned to their trend line, representing 15.4% of all retail sales. By 2027, e-commerce sales are projected to exceed 20% of retail sales, contributing to continued demand for industrial distribution space, both in large-scale distribution centers and smaller last-mile facilities.

    The influx of new construction industrial facilities over the past few years has significantly increased options for tenants, making it easier for them to build their distribution networks to support their omnichannel approaches.

    Retailer brands are still exploring their multichannel approach and evaluating the capital needed to support sales growth, customer loyalty, and spending. A focus on digitalization within stores is anticipated to streamline processes and improve manual systems, providing a convenient shopping experience through touch-screen search options. Some grocers are utilizing POS technology in-app on the user’s device to search and scan products as they shop, enhancing the shopping experience.

    The intersection of artificial intelligence and mobile recognition is also making waves in the industry. McDonald’s, for example, is testing a drive-through pull-up feature that uses AI and mobile recognition to personalize the consumer experience, creating a more interactive and engaging ordering process.

    The spike in e-commerce sales in 2021 impacted store workflows, but since then, economic spending patterns have shifted. Total retail spending reached $4.9 trillion in 2019, with e-commerce accounting for 10.5% of total sales. In 2022, sales escalated to $7.1 trillion, with e-commerce accounting for 14.6% of total sales.

    As the holiday season approaches, the last mile of the supply chain becomes even more critical. Ensuring end-to-end visibility for shipments and stocking in-demand items is crucial to avoid supply chain disruptions. Retailers and 3PL providers need contingency plans for potential breakdowns, particularly within the last mile. The 2023 holiday season will likely test the industry again, following severe supply chain disruptions in the past two years.

    Overall, holiday spending is forecasted to grow by 3.1% this year, with a focus on high sales, in-store quality experiences, and opportunities for consumer enjoyment. Strong merchandising, omnichannel options, and deep discounts will be vital to driving retail traffic. Omnichannel fulfillment is expected to be strong, with consumers increasingly opting for mobile ordering, especially among younger generations. Retailers, with better-controlled inventory levels and improved supply chains, have supported margins in the first half of 2023, crucial for preserving margins during the holidays as consumers seek bargains in an increasingly e-commerce-dependent world.

    Also Read: India’s Data Center Stock Set to Double to 23 Million Sq. Ft in 3 Years: Colliers-CII Report

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