Winning Retailers Leverage Real Estate as Competitive Advantage

Improved offerings, robust digital and omnichannel capabilities and optimized real estate footprints are yielding positive results for some retail chains despite doom-and-gloom headlines about the "retail apocalypse."

Improved offerings, robust digital and omnichannel capabilities and optimized real estate footprints are yielding positive results for some retail chains despite doom-and-gloom headlines about the "retail apocalypse," said Joe McKeska, president of Elkhorn Real Estate Partners, during a recent panel discussion at BMO Capital Markets' 12th annual real estate conference.

While store closures get a lot of attention, the way in which many retailers are transforming their businesses to the benefit of consumers while improving their longer-term strength and stability is the more interesting story, McKeska said during the BMO (Bank of Montreal) conference in Chicago. The event attracted approximately 200 top executives from all sectors of the real estate industry, along with leaders from the BMO Capital Markets group.

A 25-year veteran of the U.S. retailing industry, McKeska lauded retailers' attempts to remake their business models. In particular, he cited changes to distribution and supply chains that have enabled some chains to compete more effectively in multiple channels. Vulnerable chains should not simply give up and cede market share to Amazon, said. McKeska, who formed Elkhorn earlier this year in partnership with Melville, N.Y.-based real estate firm A&G Realty Partners. The joint venture assists retailers and investors as they seek to maximize real estate portfolio performance in alignment with broader business strategies.

"Vulnerable chains need to identify and bolster their strengths, but in order to do that they will certainly need to have a strong plan, as well as the capital and resources to execute effectively," McKeska said. "Fortunately, we already have some good examples of how to approach this type of transformation—Best Buy being a case in point."

The panel discussion involving McKeska entitled "Amazon's Amazing Impact on Real Estate" explored Amazon's disruptive role—not just its effects on books, electronics, apparel and now grocery, but also on consumer expectations and shopping behavior generally.

Most observers think of electronics retail as having been thoroughly disrupted by Amazon, McKeska noted during the discussion, but Best Buy, for one, has adapted well. "By matching the lowest prices on the Internet, ramping up its Geek Squad and other services and optimizing its real estate, Best Buy has avoided the fate of Circuit City and is now holding its own in a very competitive retail channel," McKeska said.

This strategy hinges on leveraging existing strengths—including investing in the best real estate in the portfolio—in ways that provide a competitive advantage, McKeska noted. "Best Buy had enough strength and moxie to reposition itself for the future," he said. "While this approach isn't guaranteed to succeed, and Best Buy did have some inherent opportunities to differentiate its business, it's an example that can serve as a lesson for other chains."

However, launching such strategies does require a clear-eyed assessment of challenges and opportunities, McKeska noted. "Consumer expectations today are that you can order anything at any time, from multiple different channels at no additional cost compared to purchases through traditional retail channels," he said. "From the perspective of retailers, however, it's critical to ask hard questions: At what point does your business model need to be rationalized and reality-based? To what degree are retail companies taking into account the higher costs of operating these alternative platforms?"

The key, if possible, is to develop a differentiated business strategy, including leveraging current infrastructure such as stores and warehouse facilities, to create a competitive advantage against online retailers, McKeska advised. "You have to evaluate your business model almost on a product-by-product basis within each category and retail channel," he said. "How difficult will it be for those goods to move online? Will continuing to sell them through brick-and-mortar stores ultimately be more profitable and efficient? Or, otherwise, how quickly will sales of these products erode as they move online? These questions can no longer be put off."

McKeska was joined on the panel by Tom Furphy, CEO of Consumer Equity Partners, and Jeremy Giles, president, Central Region, for Prologis. Jeremy Metz, director, U.S. REIT Research, for BMO Capital Markets, moderated the discussion.