The Micro-Retail Opportunity - coming to a City near you!
For the past few years, the catchphrases surrounding the transitions within the retail asset class have been: Experiential Retail and Retail as a Service (RAAS). I’d like to add a third saying to this collection, in the form of: Micro Retail.
First and foremost, I want to dispel the myth that the classic brick and mortar store is dying, this is simply not true. There are fundamental changes occurring within the sector, spearheaded by growing e-commerce demands from consumers, but these demands are still dwarfed by classic brick and mortar sales. Furthermore, while e-commerce (amplified by the anomalous year 2020) has had the larger YOY percentage increases, it’s important to recognize that brick and mortar sales have also continued to increase YOY. Even in 2020, brick and mortar retail sales were over 4.5X larger than e-commerce sales (see infographic below - visible online only). Many think that these two function independently of each other, but the truth is that they run in tandem, and it’s becoming more evident than ever that the functional collaboration between brick and mortar and online sales leads to a more productive bottom line and presence for retailers.
Brick and mortar and e-commerce are like two circles of a Venn diagram, overlapping in their central goals of engagement, but forming separate concepts and strategies for a retailer. Conversely, Experiential Retail, Retail as a Service, and Micro Retail are more representative of building blocks, growing on top of each other to create a fully formed experience for the target retail customer.
The central concept of Experiential Retail is that in order to interact and communicate with customers in today’s world, the product or service needs to immerse their customers in the brand, creating a culture, a community, a shareable experience. From the second the customer walks through the doors, they become immersed in the story of that brand, activating their senses to build stronger emotional connections and loyalty to the products or services being offered. If done well, experiential retail is a great way to engage with customers beyond simply selling them products. It offers brands an opportunity to find ancillary ways to support their community of customers and establish themselves as more than just a product, which ultimately gives consumers more reasons to visit a store. If the only thing being offered is the four walls within which a customer pays for something, then why would they leave their house as opposed to just purchasing online.
Retail as a Service (RAAS) on the other hand, is a concept that draws upon Experiential Retail as its base, but in the framework of smaller, new to market brands who have not established their unique following yet. Online companies can set up curated, immersive experiences in physical spaces, allowing them to engage with their customers in a more impactful way. Multiple retailers promote their products in the same shared space, the focus being on engaging brand experiences in order to trigger the feelings that customers want to have when interacting with a brand. Experience, emotion and connection must be the driving factors to counter the conveniences of online shopping.
Last but not least, the concept of Micro-Retail blends with Retail as a Service in that it can potentially allow for multiple vendors in a shared space, similar to a Marketplace like the Chelsea Market, or it can simply encompass individual retail units that are much smaller than the average, likely less than 500 SF depending on the market. Overall, the idea is that micro-units provide an entry-level gateway for small businesses to establish a brick and mortar location, without the financial requirements and risks typically expected in a standard retail lease. Micro units are set up to have more flexibility in term - this could be as low as an annual or even monthly commitment, as opposed to the 3 or 5 years of a standard commercial lease. They are often structured in the form of a “gross lease” with an all-in rent (including utilities, CAMs, taxes, etc.) for ease of understanding, expectations, and responsibility between Tenant and Landlord. Due to these factors, as well as the lower square footage of the space, micro-units can be priced substantially higher on a PSF basis because the all-in cost is still very likely going to be the most affordable retail space on the market.
Case Study: The Wash, East Nashville - developed by HAMILTON
A commercial broker peer of mine in Nashville, TN is in the process of redeveloping a former carwash into six micro-restaurant bays. Each of the six bays measure approximately 380 square feet, and include a hood vent, three-compartment sink, grease trap, and walk-in cooler. The bays are designed for entrepreneurs and start-ups seeking out a permanent space with lower barriers to entry. Tyler Cauble, the broker and developer of The Wash, explained that “the rate was all-bills-paid (ABP), which meant that we sent our tenants one bill and we covered the utilities, common area maintenance, etc. So, at 380 square feet, we charged around $100 per square foot, which came in at $3,250 per month, all-in. Sure - $100 per square foot sounds like an incredibly high number for Nashville (it’s around 2.5x to 3x the market rate for restaurant space), but on a monthly basis their total rent is only $3,250, which makes these spaces the most affordable restaurant spaces in Nashville.”
From the Tenant perspective, the flexibility of terms, the lower barriers to entry, and the professionalism that can be gained from a brick and mortar location, not to mention the placemaking that can be initiated at the property, make the higher PSF cost of the unit worth it. From the Landlord perspective, micro-units allow for more tenants within an asset and therefore a greater ability to diversify within the building. This is a unique model for Landlords to consider if their assets and tenants have struggled in the recent economic environment, and opens the door to revitalizing the entrepreneurial spirit of the City. It promotes start-ups to take the next step in the progression of their business, or for established businesses to try out new micro-concepts before a broader roll out. In the tumultuous times that we are living in, micro-retail units will be demand drivers.