The concept of “experiential retail” has been generating a lot of excitement lately. This type of retail allows customers to engage with a brand through multiple senses, such as touch and hearing, in order to better understand its attributes. Typically, tenants are responsible for creating these hands-on experiences. However, during a recent Q&A session with Katy McLaughlin (McKinsey’s Executive Editor) and Colleen Baum (McKinsey Senior Partner), it was revealed that commercial real estate owners and operators also play an important role in this trend.
Creating Space for Successful Retail Experiences
According to Baum, the goal for experiential retailers is to become known as destinations for shopping. As such, they prefer longer-term leases and high-traffic locations where they can invest more capital into their space. It’s important not to confuse this type of experience with temporary pop-up stores or branded events.
In terms of returns on investment (ROI), Baum explained that profitability from in-store sales may be slow initially due to the capital-intensive nature of experiential retailing – it can take three-to-five years before seeing significant profits from these efforts. However, this type of retailing can boost omnichannel sales while attracting more customers overall by offering unique destination-type experiences.
Leasing Considerations
For CRE operators and owners considering experiential retailers as tenants there are both good news/bad news scenarios at play here: On one hand you have businesses who will likely stick around longer thanks largely due investments made upfront; however tenant improvement allowances may be higher than usual while buildouts could take significantly longer than traditional spaces might require.. Additionally , an ideal location would include highly visible ground-floor space featuring multiple windows – which means landlords need carefully consider placement options when selecting potential tenants..
Baum notes “Real estate companies must strike balance between finding right tenant & potentially paying higher up-front costs securing lease driving traffic.”
Rethinking Leases and Allowances
Baum also suggests that leases should be restructured to reflect the potential for increased online sales generated by a great in-store location. She recommends developing a rent structure based on a percentage of omnichannel sales, with real estate owners determining how much of those sales are connected to the experiential retail space.
Strategic Planning for Success
Finally, Baum points out that experiential retail offers an opportunity to create “a non-competitive ecosystem” of complementary retailers within close proximity. By analyzing credit card usage and mobility data, landlords can identify which tenants have overlapping customer bases – allowing them to strategically curate their tenant mix.
In addition, Baum encourages owners and operators to consider using experiential retailers as part of their placemaking strategy – incorporating elements like food & beverage options or special events/installations into the overall experience in order attract more traffic.
