Posted: May 17, 2017 by Eli Randel, Director of Business Development and Paul Cohen, Regional Director of Business Development
SIDE STREET vs MAIN STREET
Who will win the battle for retailers?
Traditionally in retail, traffic counts and signalized corners are the most coveted locations for retailers and therefore generally the most expensive. While I don’t expect this to change for some uses like gas stations which are dependent on ingress and egress, the theory has been posed by my Colleague, Paul Cohen, that with the advent of mobile apps such as Yelp and virtual signage via-digital word of mouth, retailers will shift from Main Street to the Side-street to incur lower occupancy costs and increase their margins?
The argument for “yes” (by Paul Cohen): Of course they will! Most people under the age of forty (and me) use apps like Yelp to determine where to find many “retail tenants.” No longer is it a function of simply driving down the street and looking for a “name yo know” but rather a selection based upon peer review in search of that special experience. For example, I was in a small town called Sylva in Western North Carolina last month and wanted to get a coffee and check my emails. I found this great bookstore in a converted house two blocks off the main drag. I would have ended up at a Waffle House otherwise. People instinctively know that the best restaurants, coffee shops, barbers, and massage parlors (don’t judge me) are not on Main Street anymore. The reason why brand stores exist is primarily so that the customer knows they are getting a good quality of service wherever they happen to be. Especially when traveling; you are more likely to visit the Panera Bread off the Interstate rather than risk Big AL’s BBQ. It could be great or it could be a short cut to the urgent care (which doesn’t need to be on main street either). Now armed with a mobile phone, the weary traveler can quickly find that awesome BBQ joint (or food truck) that was previously hidden down some side alley only know to a few locals.
The argument for “no” (by Eli Randel): Yes, the basic concept makes sense and will apply for some retailers, but not in a significant way. Retail remains dependent on foot and vehicle traffic counts and even though word of mouth can be spread more efficiently with the internet, LOCATION, LOCATION, LOCATION is still a driving force in retail and real estate in general. Perhaps naively, I assume the smartest retailers have contemplated this strategy yet they still are choosing main corridors for their brick-and-mortar locations. The reason? Visibility, convenience, and access. The side street has become more viable for certain uses, but those are limited. Retailers which brand on main corridors and provide the best customer access will outperform less visible outlets and will continue to outsell sell-side street locations and while net profits might be slightly lower given higher occupancy costs, revenue will remain higher at main locations and any difference can be absorbed as a pseudo-marketing and branding expense. As online sales continue to erode brick-and-mortar sales, retailers may reduce store footprints, but will increasingly view stores as branding and marketing vehicles maintaining the need for visibility. Stores will change by becoming exchange centers and showrooms for online inventory and brands, but will still want to be in the best and most visible locations. In terms of digital signage, nothing replicates the real thing and a hungry driver on a main road is still a valuable entity that is harder to capture in an off-the-beaten-path location.
Paul Cohen: Ahh, I can see where you went wrong. You’re looking at this from the point of view of the national retailer who needs visibility because they are selling brand as a way to suggest consistent experience. Walgreens and Starbucks and fast food franchises will always be on Main. I conceded that point already. I am coming at this from the local tenant perspective. These “Mum & Pop” retailers who have built a strong customer base will happily move to the side street for a fifty percent reduction in rent and will still outperform the main street counterparts as long as they have a high customer rating. Yelp is free while Main Street is expensive. Anyway, there doesn’t have to be a significant shift to the side street to have an impact. There is approximately 5 Billion square feet of traditional retail (excluding regional mall and power centers) in the US and if 20% of the tenants are local and if 20% of them moved to the side street that’s 200 Million SF of new retail. The opportunity is for the developer who can find lower cost real estate on the side street and repurpose it for these local retail tenants. For example, a warehouse or an office building a block or two off main could be redesigned and marketed to attract the local retailers. I’ll agree that they lose visibility but in many cases the location can be more convenient and accessible. There is a significant arbitrage between main street and side street and, in many of the top MSA’s across the country, it’s being overlooked.
Eli Randel: Well what are we talking about here? We’re talking about ICSC RECON; a destination event that usually attracts more national tenants. You raise a valid point that in small towns across the nation, Al’s BBQ might represent half the restaurant landscape, but as that town eventually grows and traffic counts and/or incomes increase, the nationals will penetrate the market and will roll out their Main Street strategies. Anecdotally you can name a couple concepts that work on the side street but for every great hidden gem in town, there seem to be dozens struggling to get by because no one knows they exist. Perhaps they aren’t utilizing digital signage properly, but maybe that is part of the argument. Can digital signage replicate the real thing? Perhaps I’m mistaking the familiar for the universal (one of my father’s favorite sayings: “don’t mistake the familiar with the universal”), but I personally don’t see it (yet?). Do I go to some side street stores and restaurants? Yes and I enjoy it. But do I see many of them or their neighbors go out of business? It sure feels that way. The extraordinary can become a destination and thrive on the side street, but the extraordinary are just that: outside of the ordinary. Last, I would argue that the different between main roads and side-streets in rural markets can be minor and parking, traffic, and access are not major issues.
Paul Cohen: The reason why these stores go out of business is that they do not provide excellence. We all know that the off the beaten path store is the gem and it’s what people want. Particularly in “Hipster” districts which tend to be all side street and no main street. I don’t think that anyone is saying that all retailers will move to the side street. That would be very Yogi Berra (“nobody rents on main street anymore because it too expensive”). ICSC attracts National Tenants because they benefit from the efficiency of meeting hundreds of owners and operators over a couple of days. I agree that most Nationals will stick to Main Street but some will develop side street strategies. I don’t think this will happen in rural markets where the town has one strip and vacancy but as towns grow and rents increase on Main Street then, obviously, tenants start looking for options. Investors should snap up those secondary locations with a view to reposition them as Main Street booms. A percentage of local tenants have and will continue to move to the side street so retail developers should look to take advantage of this trend. In years past it was suicide to move your business away from foot traffic. Now it could almost be a positive. Not only are you paying less rent with improved access but you’re sending the message that you’re a hidden gem. Will it move the needle drastically on the traditional retail market? Maybe only five percent but locally an enterprising developer could relocate 30K SF of tenants from the main strip into a side street center by offering lower rents and free parking. I would not be surprised if national retailers have not already developed a strategy to take advantage of this trend. Maybe they already have, we just can’t seen them!