MILAN — Authenticity in the sales experience, the impact of digital technologies on shopping malls and how the slowdown in China will force brands to rethink their strategies in order to keep creating value for shareholders — these and other issues facing retailers in industries ranging from fashion to food and beverage were among the topics discussed at the annual conference of the International Council of Shopping Centers.
Held this year in Milan, the site of last year’s universal exhibition, the event featured talks and discussions by industry executives, consultants and experts including David Simon, Joseph Pine and Armando Branchini.
One message emerged clearly and repeatedly: In order to continue to thrive while facing threats like more budget-conscious consumers and the continued rise of online shopping, those in the industry — both mall operators and retailers — have to take their businesses to the next level and find new ways to engage their customers, creating ever stronger and personal bonds with them. “Experience” and “authenticity” were the keywords.
“It’s time to move to a new level of economic value, to staging experiences for your customers,” said Pine, cofounder of retail consultancy Strategic Horizons LLP, who first coined the term “experience economy” in the late Nineties. He said experiences are “distinct economic offerings, as distinct from services as services are from goods” and challenged retailers to “create a memory which is the hallmark of every experience. We are shifting into an economy where experiences are the predominant economic activity.” Using coffee as an example, Pine explained how as a commodity its cost is very small “but surround it with the ambience of a Starbucks” and it can sell for $4 or more.
But how does one create memorable experiences? Here the answer is authenticity. “Authenticity is so important now because in the experience economy, people question what is real and what is not. People want real not fake,” Pine said.
“Authenticity is becoming the main buying criterion,” he added, although he warned that doing it right is not easy. Most companies advertise as authentic, Pine pointed out, but by doing so they “render themselves inauthentic.” As examples of authenticity, he cited Milan’s 150-year-old Galleria Vittorio Emanuele II and PGC Hajenius, an almost 200-year-old cigar shop in Amsterdam (“we tend to perceive things as authentic if they’re older than we are”), while strip malls in the U.S. are not (“there’s no ‘there’ there”). For a taste of things to come, Pine said conference attendees should take a trip to Las Vegas, which he called “the epicenter of the experience economy. Everything happening in Las Vegas is coming to your town sooner or later.”
In a later roundtable talk, Branchini, vice president of Italian luxury goods association Altagamma, offered a more detailed definition of authenticity as a combination of aesthetics, style identity, superior craftsmanship and intangibles like the charisma of the artistic director and the aura of a brand.
The difficulty lies in transferring this aura to consumers, Branchini explained. He said “more and more over the last 30 years, the experience in our sector is that luxury stores have become more and more critical.” The reasoning goes that a luxury product with a very strong aura made by a strong designer that isn’t sold in the proper environment of a luxury store undermines its authenticity. This is why luxury stores have become more like “temples” that are borrowing display techniques from museums and at times displaying artworks with their products, Branchini explained. “Theatrical rituals” — closed doors giving the impression that one is entering a reserved place, for example — help “create a relationship of reverence” and turn customers into “adorers,” Branchini said.
Monobrand stores remain a core part of the authenticity experience and in some markets their role is increasingly important. Marcus Wild, chief executive officer of SES Spar European Shopping Centers and ICSC divisional vice president, Europe, said that in malls in Germany, for example, there was a big trend toward monobrand shops replacing multibrand stores. Over the past 10 years, Wild said, some 20,000 multibrand retailers in Germany have closed and have been replaced with monobrand units. He highlighted how monobrand stores have several advantages over their multibrand brethren; for example, in terms of having better control over delivering brand messages to consumers. “The store is the emotional message, it’s not the show room, it’s the core room,” Wild said.
In some German malls, monobrand units now account for 80 to 90 percent of stores, he explained. It’s no coincidence that many retailers choose malls, Wild said, for they are “hubs, social and logistic meeting points — in some ways, for young people, the main meeting point.” This is one reason why food and beverage is increasing its footprint in malls: in the past 5 to 8 percent of locations were eateries while now that figure is more like 12 to 18 percent, Wild said.
But the mall format faces risks. “A lot of shopping centers are very boring, they are exchangeable, look the same,” Wild said. To counter this, he suggested city malls should seek to reflect distinctive urban architecture, bring in local “heroes” — well-known local brands that draw shoppers — and offer the best in class in terms of food and beverage options. “It’s all about lengthening stay, which will drive spend at the end of the day,” Wild said.
Although it may not seem very sexy, the shopping center business has changed significantly over the years.
During a keynote interview, David Simon, chairman and ceo of Simon Property Group Inc., said one of the biggest changes in the shopping center industry is greater attention to the market’s needs: ” We’ve become more disciplined in some respects. We’re still seeing a bit [of] ‘build it and they will come’ — to unbelievable proportions in China — but generally we’re only building product now where we think supply and demand warrant the project,” he said.
The relationship with key tenants has also changed. In the past, department stores — which were given preferred treatment such as under-market leases to draw them in — served as big magnets to malls, but “this equation has changed over recent years since they’re not driving as much traffic as we were counting on,” Simon explained. This means that real estate operators have to find “more sophisticated ways than in the past” to drive traffic to malls.
Technology can help. “Malls are relatively dumb boxes” from a tech point of view, Simon said. Operators have to figure out how to use tech to communicate directly to consumers, as opposed to letting retailers do it themselves. “We’re just scratching the surface of that, whether it’s loyalty programs or events,” Simon said.
Because of the Internet, consumers tend to browse less in shopping centers, for they know what they want when they get there. Simon said consumers spend on average a dollar per minute in shops. “We need to get them to browse a little bit more,” he said. “It may be hard to drive traffic to the mall but it shouldn’t be hard — when they’re in there, predisposed to spend — to get them to do many more things than they’re doing today. That’s a big challenge for us and our peer group is doing a lot of experimenting.”
Technology can also be a problem by keeping traffic away from stores. While he called for more technology, Simon was critical of aspects of online retailing. “This idea of immediate gratification on the Internet, I don’t buy that at all. When people buy, they just want to know that at a specific time it will be there. In our research this is more important than ‘I need it now’.”
He also pointed to critical issues in the business model, explaining that “the last mile is extraordinarily expensive.” He continued: “These things are great, but they have to be done profitably. At the end of the day what’s the model of profitability if the consumer isn’t willing to pay for it? And none of this is really clear in the last mile equation…the whole idea of the last mile is probably one of the least sustainable approaches that can exist.”
Diversification also seems to be on the cards. Talking about his group’s activities, Simon said his company is investing in “retail and venture capital startups” in the U.S. and that, if these are successful, the group may make similar investments abroad. “We are hopeful some of the companies we invest in will actually go to Europe or to other places.”
He said one investment he is considering is in a U.K.-based food company that makes “unique drinks” and is “already big in the U.S., kind of like Starbucks.” Describing the strategy, Simon said, “We might see it more that way, a European retailer who wants to grow in the U.S., how can we help them and offer some capital and strategic advice?”
The choice of a beverage company is probably not coincidental, for Simon said that U.S. malls rely “too much on apparel, books and music, which the Internet hurts.”
A part of the conference was dedicated to the future of luxury brands and the message was that they have their work cut out for them. Uncertain prospects for the global economy and a slowdown in China, which has been driving luxury goods sales the past few years, means it’s not business as usual. According to Luca Solca, managing director, global luxury goods at Exane BNP Paribas, although growth in luxury sales over recent years has been around six percent, if one strips out Chinese consumers buying in China and abroad, that figure would drop to a more modest two percent. Luxury goods makers have to “reinvent their growth paradigm” and in particular “shift gears” in terms of retail, Solca said. He advised greater “discipline” in managing businesses and attention to cost management and capital allocation.
“If growth is lower you need to commit less CapEx. You need to focus on sales per square meter and not open more stores, and go back to basics of business, which is based on brand desirability,” Solca said.
In the end the future is about what’s new and new or emerging retailers — whether food and beverage or fashion — hold the keys to growth in the industry. Simon summed it up best when he called on the industry to foster and facilitate the next generation of retail entrepreneurs. “I think [as an industry] we’re great at catering to the big guys, but you know what? Cater to the little retailer because we need that next generation.”