Experiential Retail as a CRE Issue

There’s been a great deal of buzz around “experiential retail.” This is retail where customers can use multiple senses (like touch and hearing) to understand a brand’s attributes. Tenants typically handle the “hands-on” efforts of experiential retail. However, a question-and-answer session with Katy McLaughlin (McKinsey’s Executive Editor) and Colleen Baum (McKinsey Senior Partner) revealed that commercial real estate owners and operators are also involved.

Space, Place and Returns

Baum said experiential retailers’ goal is to become known as a place for “destination shopping.” As such, these retailers like longer-term leases and higher-traffic locations while investing more capital in the space. “This type of retail experience is not to be confused with temporary pop-up stores or branded events,” Baum said.

Regarding returns, Baum explained that profitability from in-store sales can be sluggish for three to five years due to the capital-intensive nature of experiential retail. However, this retail type can boost omnichannel sales while attracting more customers. Through destination-type experiences, “retailers hope to draw customers into cool, exciting locations, track the number of new customers and encourage them to join the database or loyalty program,” Baum said.

Leases and Allowances

When it comes to CRE operators and owners, experiential retail offers somewhat of a good-news, bad-news scenario. The good news is that these retailers are more likely to stick around longer because of the above-mentioned capital investments. Furthermore, a core experiential retail tenant can be ideal for attracting destination traffic, benefiting other center occupiers.

However, Baum explained that tenant improvement allowances might be higher, while buildouts could take longer. Furthermore, an experiential retailer can’t be put in just any old space. They require a highly visible location on the ground floor with multiple windows.

Said Baum: “Real estate owners or operators have to balance finding the right tenant and possibly more up-front costs to secure a lease that will really drive traffic.”

Leases also should be revamped. Baum commented that a great in-store location can result in more online sales. Her suggestion is for real estate companies to develop a rent structure correlated to a percentage of omnichannel sales. “ The real estate owners can figure out a measure of those omnichannel sales that are connected to the experiential location,” she added.

Strategic Planning

Finally, experiential retail offers the advantage of building what Baum dubbed “a non-competitive ecosystem of complementary retailers nearby.” Analytics from credit card usage and mobility can determine which tenants have overlapping customer bases that would benefit.

Baum also said that owners and operators could use experiential retailers to embark on placemaking. This might include “food and beverage, events and special installations—and how to take advantage of the traffic that’s coming into the location,” she added.