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Retailers Struggle for Balance between Online Expansion and New Store Openings

new Jason graphic - 6-3-15The new world of retail marketing in the U.S. is proving to be a challenge for retailers as they struggle to find the balance between growth through online expansion and new store openings, a new retail market analysis reports.

Despite solid year-over-year industry performance, positive sales projections, strong consumer confidence and other positive economic indicators, retailers, such as those in the market for Philadelphia retail space, are highly concerned about the best way to invest in their growth, according to BDO USA’s ninth annual analysis of risk factors noted by the 100 largest U.S. retailers in their most recent annual reports.

BDO said 92 percent of U.S. companies identified risks in U.S. growth and expansion this year, an increase from the 56 percent that found risks in this area in 2013. While retailers in the U.S. and Philly retail space markets are moving forward with plans to boost sales and strengthen store brands, they also acknowledge consumers’ growing demand for online shopping choices and the convenience that comes with omnichannel marketing.

Retailers abandoned the approach of investing primarily in new store openings in 2008, BDO noted. As online buying soared in popularity, the return on investment in new stores declined and retailers instead earmarked capital for online sales, supply chain networks and systems implementations, all the while recognizing the increased risk with these new, largely unproven investment strategies.

As they navigate this new world of retail marketing, retailers in the U.S. and Philadelphia retail space markets are in many different stages of funding their growth.

With 4,500 U.S. stores and 2,120 more outside the U.S., Wal Mart Stores devoted nearly 40% ($5.1 billion) of its fiscal year 2014 capital expenditures ($13.1 billion) to new stores (both expansion and relocation). By the 2015 fiscal year that ended January 31, the amount committed to new stores decreased to $4.1 billion or about 34%, BDO reported. While expenditures for new bricks and mortar stores declined, Wal Mart’s investment in information systems, distribution, digital retail and other omnichannel expenses increased from $2.5 billion (20%) to $3.3 billion (27%) over the same time period.

Meanwhile, Macy’s Inc. — the USA’s largest department store, with 823 stores in 45 states — has experienced early stumbling blocks as it starts out on its new omnichannel marketing strategy.

Macy’s sunk about $1.1 billion mostly on new stores, store remodels, store maintenance and the ongoing renovation of it’s flagship Macy’s Herald Square in New York during its last fiscal year. New store openings are still a key element of Macy’s plans for growth. The retailer has announced plans to open eight new Macy’s or Bloomingdale’s stores between 2015 and 2018 from Puerto Rico to Hawaii and three states in between.

Macy’s first quarter 2015 sales were down 0.7% from a year ago, dropping to $6.232 billion, but the retailer’s expenses increased 1.2% at the same time. The company noted that some of the higher expenses were the result of the new major omnichannel initiatives aimed at increasing sales growth and improving consumers’ online, mobile and in-store shopping experiences.

Macy’s remains committed to its new omnichannel marketing strategy, but admits the learning curve was “steeper than we had expected.”

Retailers in nationwide and Philly retail space markets have spent significant capital and devoted extensive time and energy to develop their omnichannel sales potential. But only 16% of retailers can fulfill omnichannel demand profitably, saying the high cost of order fulfillment lessens their margins, according to a new survey conducted by PwC for JDA Software.

Still, retailers ranked omnichannel fulfillment as a high or top priority and committed an average of 29% of 2015’s total capital expenditures on improving omnichannel fulfillment operations.

For more information about Philadelphia retail space or any Philadelphia commercial properties, please call 215-799-6900 to speak with Jason Wolf (jason.wolf@wolfcre.com) or Leor Hemo (leor.hemo@wolfcre.com) at Wolf Commercial Real Estate, a premier Philadelphia commercial real estate broker with expertise in Philly retail space.

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