The big news last week was Macy’s announcing the closing of 100 retail locations. Paired with this was the report that newer fashion brands are not seeking placement in traditional retail stores out of a fear it devalues their brand. Together these reports paint a bleak picture for brick and mortar retailers that sell brands that are not their own.
Retail is seeing the impact of multiple trends converging at once. Trends that also point even further down the road that could impact even online giants like Amazon. The internet + social media has made it possible to actually control your brand while direct selling your product in a cost effective way. Until a decade ago the only way to get to market at any sort of scale was to have your product in a department store (including the likes of Wal-Mart and Target) of some sort. They provided you with access to customers that would be interested in what you have available.
The trade-off to this arrangement was that you had to comply with how that department store wanted to position and sell your merchandise and you had to setup your supply chain around those outlets. In short, the infrastructure of your business was not setup to support who you needed to be as a company, it was setup to support your vendors and make their life easier and more cost effective.
Over the past decade we have seen the information revolution really blossom. The end result has been more and more brands choosing to self-source their retail spearheaded most notably by Apple. Self-sourcing allows companies to control their message, more strongly interact with customers, and manage inventory and discounts. They get to control the entire experience of their brand. This applies even to smaller online storefronts that slowly start to build dedicated followers.
Any business reliant upon a product produced by others and customers that can go directly to the vendor is starting to realize the impact to their business. Macy’s is just the latest in a long string of retailers that are evidence. I do like how Macy’s and Best Buy are spearheading their turnaround – give companies a place to showcase themselves instead of just being another brand on a rack. The store-within-a-store concept can really work. Customers have a reason to come in because they get to see lots of brands in a way that matches how the brand wants to be represented and walk away from immediately with their purchase. Brands have a reason to partner in because they get a brick and mortar presence at a fraction of the cost.
Here’s the takeaway for you though: are you planning for disruption in your CRE portfolio? What are your plans for when customers demands start to shift? What are your plans for when your vendor demands start to shift? How will you ride the wave of demographic change that is starting to cascade across all parts of the economy? All of this effects the CRE decisions you are making today. Those accounting for it will find themselves in better business positions 3+ years from now than their competitors.
One of the questions I’ve received a lot recently is “what does the Brexit mean to companies with real estate in the UK?” The question often comes from a sense of urgency to figure out if a change of direction is needed. Will the Brexit cause companies to change their plans for locating in the UK?
Real Estate is often equated with financials but in this case there is a significant difference between the impact on financials and the impact on real estate. Real Estate (especially leased real estate) is not a financial investment – it is the physical location that a business operates from. Real estate is required if a physical presence is needed.
Prior to the Brexit (is it just me or is this the worst word ever?) a company could minimize their European presence by focusing on a few key locations (which often included the UK but not always). Now they will likely need to guarantee a physical UK presence if they want to have an operational presence in the country. This likely means an increased need to have a physical presence in the UK regardless of industry.
This is not to say that businesses will see increased financial benefit in the UK from the Brexit; companies are going to find operating in greater Europe more complex now which will likely reduce organizational efficiency and lead to a new location strategy for the continent.
Some quick questions that won’t be resolved anytime soon but will need to be addressed potentially changing organizations’ real estate strategy throughout Europe:
- Can UK business be conducted from hubs in Spain, Italy or Eastern Europe? Will some functions need to relocate back in country?
- Will regulations change within the UK leading to separate legal operating conditions for EU countries and the UK?
- What will the new tax implications be for operating in the UK versus elsewhere in the EU?
- What will the impact be on workforce within the UK given new constraints on immigration/freedom of movement? This one in particular will be longer to play out – possibly not even over the next 10 years.
- Will uncertainty in Scotland/Ireland need to be accounted for in plans? Is there any advantage/disadvantage for establishing an Irish or Scottish presence given that Scotland in particular wants to be in both the UK and EU?
Nothing will be resolved quickly particularly because it is difficult to change real estate operations quickly. It will be two years before CRE trends really begin to surface. My guess is that you will see a short-term pick up in real estate operations throughout non-London England and probably Scotland as well. Longer term there are too many questions to figure out to really know yet.
The biggest industry facing uncertainty is Financials and Insurance. Given London’s presence as the European center of Finance and Insurance will the EU try to establish a counter-market within one of its member countries that requires business in these industries to setup sister operations to their existing London presence? Interesting to see but again, any change is in the future.
This time of year is one for making resolutions on how we are going to change in the coming year. We seek to improve ourselves and what we do. The goal is improvement over the past.
But the past is fickle. We remember the good and bad while forgetting the 80% of everything else. We overreach on what is needed for change. Change does not need to be going from not exercising to going to a gym three days a week – it’s too big of a change. It can be parking further from the door at work. It can be setting an Outlook reminder to walk around the office every 2 hours.
The same games for corporate change. Too often our strategies start with 2 to 5 years from now and forget about where the company currently is. But changing an organization means getting everyone from the top down involved and pushing in the same direction. It isn’t easy.
Change Management is the key to all of this. Knowing how to drive effective, lasting change is so important to the decision making process. Start with a Google search and get studying. Knowing more will make you better.
Seasonality is the fact that our demand, revenues, profits, or business requirements do not follow a set line – they tend to ebb and flow over the course of the year. Retail businesses obviously do most of their revenue during the holiday period starting with Black Friday. Real estate businesses make most of their money in Q4. Financial institutions often start the year strong. Anything involving outdoors or water peaks in the summer. These are all seasonal factors.
But the same concept applies to any business. Most of us don’t want to negotiate new vendor contracts at the start of the year because our budgets are already set – but we are more than happy to renegotiate now that our budgets are set. For public companies, the end of each fiscal quarter is a time of closing the books – not opening new costs. Just as the start of each fiscal quarter is when delayed items all rush through.
Geographic seasonality also comes into play. US, Europe, Asia, Latin America, Australia and Africa all have different holiday schedules and cultural work requirements (in general and for specific job requirements). For 365 businesses it’s important to account for those factors as you don’t want a US holiday to disrupt global business. For 24×7 businesses a follow-the-sun strategy is also a way of dealing with seasonality especially when holidays are factored in. You can’t just have 1 office per region of the world, you need redundancies to deal with those cultural factors.
In the distribution and logistics space, seasonality becomes a huge factor when inventory levels suddenly ramp up and what was once empty space is now full just to have it fall away again. Does it make sense to your business to keep warehouse space that is empty 8 months out of the year? Maybe (even likely) but worth thinking about alternatives.
CRE strategy can’t solve all of these but it can certainly address a lot of them.
Theoretically your office should reflect your business strategy.
If you are a high tech, development organization your workplace should reflect teaming space as well as heads down comfortable work zones where developers can hide for days on end. It’s a weird mix.
If you are a law firm your space might reflect the prestige of individual partners and attorneys while giving clients a sense of confidence and stability. There will likely be lots of high quality offices and well thought out conference rooms.
If you are a professional services firm you may not need real estate at all because you’ve adopted alternative workplace strategies to the point that you no longer need space at all.
But then again, you may be one of the above types of firms and not want the “classic” space design at all (particularly if you are trying to differentiate). Workplace and business strategy go hand-in-hand. It isn’t possible to have a highly innovative and collaborative business strategy yet have a high percentage of high end private offices. The two items are incompatible.
Workplace is the first representation of your business vision. Workplace is to your employees what your website is to your customers. It’s how they know your intentions and goals for them. It tells them whether they should sit quietly in their office or if they should be out socializing and collaborating with colleagues.
Any given real estate decision is preceded by dozens or hundreds of business decisions. Real estate is the culmination of those decisions and the implementation of the vision. But the decision did not start by imagining a certain building or plot of land. The decision did not start by envisioning a certain office or workstation layout. The business decision is the same regardless of where in that MSA you locate or how you design the site.
It’s like a great painter. All you see in the museum is the finished product. You don’t see the years of painstaking practice, you don’t see the hours and hours of planning, you don’t see the anguish behind the decisions that go into every brushstroke. This is real estate. Real estate is the final execution of an idea. Done right, real estate looks easy and flawless. Done wrong and you have wasted all of the effort that goes in behind the scene.
While an artist accounts for the materials that she has on hand before beginning to work, our artist does not let those materials constrain the initial vision. It may become adapted over time but the right vision should be known regardless of constraints that may come up throughout the process. And just as an artist practices to understand those constraints, we in the real estate world provide inputs to the process to help guide what the decision will look like if it were to go to market today.
Bad real estate execution can destroy a business. As Allan Buchanan wrote last week, Real Estate decisions can be deadly.