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Profit Margins Reveal Why Apparel Will Always Have a Place in Stores

There’s a lot of misinformation floating around about the state of retail today—and a new report sets out to debunk a few myths while providing a glimpse at where the industry is heading.

“This report is not another examination of retail’s demise, because quite the opposite is occurring,” said K.C. Conway, chief economist for CCIM Institute, which developed the “Retail e-Volution: Predictions for 2025” special report in conjunction with the Alabama Center for Real Estate at the University of Alabama. “With total retail sales increasing at an average annual rate in excess of 4.35 percent, this is a story of how retail will continue to grow and evolve, fueled by e-commerce, technology, logistics and innovation.”

In the quest to understand what’s driving a cascade of retail bankruptcies and thousands of stores going dark, people have fingered the wrong culprit, the report says. Many of the largest leading retailers from Target to Home Depot turn in consistent quarterly sales growth, and e-commerce, while a hot sector, still only accounts for about 10 percent of total retail, though it’s expected to make a “material impact” by 2025, capturing up to 25 percent of the market.

The real boogeyman, according to the report, is the over-leveraging phenomenon that reared its ugly head in the 1980s. Those chickens have now come home to roost, according to the report, which cites 2006 as the peak of the leveraged buyout movement when mall properties’ commercial mortgage backed securities debt topped $15 billion with loan-to-value ratio standing at 70 percent.

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“Retailers felt the acute pain of being over-leveraged when growth slowed, the Great Recession hit, and the cost to service debt overtook revenue growth,” the report noted.

And though many hope the end is nigh for this tumultuous spate of store closures, liquidations and bankruptcies that have rocked some of retail’s most iconic names, the report all but says: don’t hold your breath.

The “overstored” U.S. retail landscape is simply going through a Darwinian shake-up in which only the fittest will survive, the report confirmed. The country’s 24 square feet of retail space per person leads the world, and is 50 percent more than No. 2 Canada, and close to six times more than the U.K.’s store-to-resident footprint.

Credit Suisse says one quarter of all U.S. malls will go out of business by 2022 and the store-closing pain is expected to wreak the greatest havoc in California, Florida, Texas, Pennsylvania, New York, Ohio, Georgia, Illinois, Michigan, the Mid-Atlantic states of Virginia and Maryland, and Tennessee, based on worsening metrics and mall inventory, the report said.

If you follow the maturing direct-to-consumer market, you’ve probably heard some founder or executive lament the rising cost of digital customer acquisition. In other words: the barrier to entry in e-commerce might be nearly non-existent, but overall, online retail no longer maintains its cost-effective edge versus offline commerce.

Apparel sold in stores versus online garners 2 percent higher margins, based on AlixPartners’ calculations cited in the report.

“The cost to build omnichannel systems, operate last-mile delivery reliant upon the current inefficient infrastructure, and process the volume of returned online merchandise (now an estimated 30 percent of all merchandise sold online) are much more capital intensive than leasing, stocking and staffing brick-and-mortar retail stores,” the report found.

Apparel’s profit margin is 32 percent when sold in a store, 30 percent when sold online, 23 percent when sold through BOPIS, and just 12 percent when shipped from brick-and-mortar, according to the report.

These cost pressures could hold valuable clues indicating why department store retailers, including Macy’s and Lord & Taylor—which was newly acquired by direct-to-consumer subscription apparel startup Le Tote—are dabbling with fashion rentals, a model that’s proven popular among consumers.

However, the logistics demands of rental garments that must be cleaned and repaired come with headaches and tribulations of their own, the report added. And Rent the Runway’s fulfillment debacle this week, which forced the brand’s supply chain leader to resign, illustrates the complexities of scaling operations in the enormously complex on-demand apparel rental game.

The secret to succeeding in retail could lie in identifying a way to minimize the high cost of last-mile delivery, the report said, confirming the well-trodden notion that online and offline retail fuel each other to drive a robust omnichannel ecosystem placing customer experience front and center.

And that leads to a final question: Is the mall dead?

Myriad headlines might scream “yes” but the reality is that while the shopping centers we grew up hanging out in might have aged well past their prime, new experiential and mixed-use facilities will replace these relics of a different time. If you need proof, just look at the 3-million-square-foot American Dream mall, slated to launch in urban New Jersey by the close of 2019, housing a mix of entertainment experiences (55 percent) and stores (45 percent) largely in the premium or high-end segment, according to the CCIM report.

“The mall is not obsolete—it is just going over the top on entertainment offerings,” the report said, listing American Dream’s first-ever indoor snow park, largest indoor water park, Nickelodeon theme park and NHL-size hockey rink among its standout attractions.

Adding to this notion of a new look for retail, the report said, “Technology is rearranging the chairs where retail activity will be seated, rather than eliminating the need to seat retail in real estate space.”

Companies like American-designed premium goods brand Shinola, famous for its sleekly designed watches, have already seized upon this burgeoning concept of co-retailing in hospitality. The company recently opened the Shinola Hotel in Detroit, which features a Shinola shop inside and has attracted brands like Madewell and Le Labo to set up shop in the alley next door. And brands ranging from fitness empire Equinox to home furnishings company Restoration Hardware have also opened hospitality business that extend their brand experience.

“They will join a smattering of hotels already operating around the world under names more associated with fashion, jewelry, crystal or home goods, including Armani, Versace, Bulgari, Baccarat, Ikea, [and] Muji,” the report said.

CCIM speculates in the report whether the axiom that “real estate is location, location, location” might soon give way to a more modern take on the subject—that all retail real estate is logistics, logistics, logistics.