Retailers Need ‘Wow’ Factor to Stay Competitive, Says CEO of Lee & Associates

by Kristin Harlow

LAS VEGAS Amid a throng of more than 37,000 convention-goers at RECon — the world’s largest retail real estate trade show — Heartland Real Estate Business sat down with veteran Chicago broker Rick Scardino and CEO Jeff Rinkov of Lee & Associates on the show floor of the Las Vegas Convention Center in late May.

Scardino, a principal with the Chicago office, spearheads the retail division at Lee & Associates of Illinois. Rinkov serves as CEO and chairman of the board.

The two discussed the overall health of the retail market in the Windy City and beyond, the emergence of “grocerants” and the driving factors behind the recent rash of retail bankruptcies and store closures. What follows is an edited version of that conversation.

Heartland Real Estate Business: Does the old saying that the grocery sector is recession-proof because everyone needs to eat still hold true?

Rick Scardino, Lee & Associates

Rick Scardino, Lee & Associates

Rick Scardino: I just hate painting anything with a broad brush. I don’t think anything is recession-proof. I grew up with family retail and the restaurant business. Sometimes people move from one category to another, they’ll go from an Aldi when things are tighter to a Jewel.

HREB: Who do you think is winning today in the grocery marketplace?

Scardino: I still think that’s to be determined. Costco is a formidable force for people out there. While it’s certainly not a full-service grocer, the store carries a lot of items and a lot of people have figured out how to get comfortable with it. The café concept it maintains is cheap and good quality. Last year, Nation’s Restaurant News noted that Costco was 64th in overall restaurant sales in the United States. In Chicago, we have a lot of good, strong independents that are ethnically diverse with their product mix and stock keeping units (SKUs).

HREB: Mariano’s has expanded rapidly in recent years, with approximately 50 stores in the Chicago area now. Is the company still on that growth path?

Scardino: I still think Mariano’s is the new shiny toy in the toy box. The stores are gorgeous, the merchandising and marketing is wonderful. The company spent an enormous amount of money on build-out. I don’t know if it’s profitable yet, but now with Kroger behind it I’m sure that will help sustain the company. I think profitability eventually is going to come into play with these stores. Mariano’s pays significantly higher rents than others in the marketplace.

HREB: In a few years, do you think Chicago will have the same number of players in the grocery sector?

Scardino: I don’t think we’ll have more. That area is consolidating, just like the rest of retail. I don’t think there’s any dying need in Chicago for [more grocers]. At the end of the day, there are only so many grocery dollars to go around. I think you’re going to see a few grocers come in, and a few go out. We’ve seen chains that used to have a nice presence bite off more than they can chew, such as Dominick’s. (The Chicago-based grocery store chain closed in December 2013). The next three to five years is still going to be real touch and go in that retail sector.

Jeff Rinkov, Lee & Associates

Jeff Rinkov, Lee & Associates

Jeff Rinkov: It seems like there’s a real flight to specialty, such as Trader Joe’s and Whole Foods. Costco and Walmart take away from traditional grocery, and the dollars are being bifurcated between Costco/Walmart and the Trader Joe’s/Whole Foods. The guy in the middle, the traditional grocer, might struggle a little more going forward, especially among millennials.

Scardino: Jewel had 40 to 45 percent of the market in metro Chicago for many years. People are looking to be wowed. For many years, you could walk into a Jewel and not smell food, and that’s kind of imperative to a grocery store. The advantage of Mariano’s and Sunset Foods is that they have cafes.

HREB: What happened to Dominick’s?

Scardino: Dominick’s was a local player and Jewel was a national player. I just don’t think Dominick’s had the money behind it to expand with national players. When the company did land national backing, the format and feel changed and market share declined.

HREB: Is there anything else you’d like to add regarding the grocery sector?

Rinkov: People want to be wowed, either by price, service, selection or experience. There’s an element as to why Costco is doing so well. It wows with price and selection. There’s no service. Trader Joe’s wows by diversity of product type and experience. At Whole Foods, people are wowed by service and selection. They’re wowed by price in the wrong way, but also the quality of the product and the uniqueness. Growth is really in the “wow” factor. That translates to all retail. Traditional retailers or grocers are really suffering because there’s no experience, no wow factor. But retailers who are offering that experience are doing really well.

HREB: Are we seeing more store closures today than in the past, or is that more of a perception than a reality? In the national press, the consensus seems to be that the malls are struggling mightily under the weight of store closures.

Scardino: This is my 30th time attending RECon. I’ve been through three solid recessions. I just don’t think I’ve seen this level of store closures. You always see them in January after holiday sales. But this year it continued into February, March, April and May. We’ve been overstored for many years. You definitely have the millennial factor — consumers who are happy to surf and buy online.

HREB: As the industry wrestles with the store closures, what do you think is the solution?

Scardino: When I started in the industry 30 years ago, nobody wanted to put medical offices into strip centers. Now, I can’t tell you how many medical deals I’m doing in strip centers because they don’t want to be stuck in a seven-story office building with no exposure. This is just one of many options to backfill space.

HREB: When you look at the wave of store closings among retailers, was there any common denominator?

Scardino: There are so many retailers doing similar things in apparel that there’s not enough of a point of differentiation. You’re still seeing so many new restaurants pop up because of a different ethnicity, flavor or format. Millennials, from what we’ve seen, will pay more for higher quality.

Rinkov: Young people are using technology in ways that are very foreign to the generations that preceded them. While I agree with Rick wholeheartedly that we’re overstored and there’s too much retail, you have some older concepts that were resistant to the marriage of online and brick and mortar. Now, you’re seeing some retailers embrace it.

Best Buy was dead five years ago. Today, Best Buy is one of the great retail stories in general. The company said, “We’re not going to be Amazon’s showroom. We’re going to price match, have regional distribution centers and ship and fulfill Internet orders to compete.” Best Buy shrunk its store size to have less, but higher quality inventory. The company just leased a 500,000-square-foot distribution center in the hottest distribution center market in the South Bay (in southern California) at a record-high rent. The center is within close proximity to both Los Angeles and Long Beach.

HREB: What’s different about shopping at Best Buy today versus five years ago for consumers?

Rinkov: It’s about the experience when you go there. The product selection is smaller. It used to be so overwhelming. The level of expertise is substantially higher, so that creates an experience you can’t get online.

HREB: Rick, what would you like to emphasize to our readers about the Chicago retail market?

Scardino: We’re still a very vibrant marketplace. The city is on fire again with millennials rushing downtown.

HREB: Are the well-documented crime and budget issues plaguing Chicago having any impact on the retail market?

Scardino: It’s like two different worlds. The crime and issues are highly concentrated in demographically challenged markets and everybody feels for it and wants to do something about it. Hopefully in time [police and city officials] will get a handle on that. But when you go downtown, it’s thriving, beautiful and well kept. What makes me feel good is the rush of new, young energy coming into the city.

— Compiled by Matt Valley and Kristin Hiller

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