Under the Knife
by Mark Borsuk
Wall Street "cybersurgeons" are about to cut into retailing, forcing store
closings. That's bad news indeed for real estate investors.
Wall Street this year will be pressuring large retailers to create "channel
leverage" by strengthening their online sales at the expense of store expansion. This
is going to create a new breed of investors call them "cybersurgeons"
who will slice and dice retailers that cannot become true multichannel merchants.
And the cybersurgeons' cure could become a bloodletting for both property owners and for
real estate investment trusts, or REITs publicly traded portfolios of property
Expect a schism to develop between mass merchandisers and retail property owners over the
value of location. Formerly, merchants and landlords had parallel goals the best
location generated the highest sales, paying the most rent. The online sales channel turns
this rule on its head. Now cyberspace competes for merchants' attention.
Look for Wall Street analysts to demand that retailers curtail new store growth, reduce
the number of locations and shrink store size. The punishment for slackers and those
failing to provide superior online execution will be stock downgrades and credit
rationing. Some will end up in the cybersurgeons' operating room.
Cybersurgeons are hostile takeover specialists hoping to maximize a firm's value by
selling it piecemeal or re-engineering a store's core strengths for the information age.
Their goal is to find a retailer with sufficient brand equity to prosper online while
cutting back on brick-and-mortar locations. Strangely enough, retail merger and
acquisition activity in the 1980s centered on the value of real estate. Now cybersurgeons
are hell-bent on reducing stores.
For aggressive cybersurgeons, three characteristics dominate patient selection. First, the
merchandise must consist of brands, standardized goods and self-service items. Books, CDs,
consumer electronics, pet items, sporting goods, office supplies, groceries, health and
beauty products, and toys all fit the bill. Second, customer demographics must be
favorable to buying online. Finally, does Pareto's Rule apply? Do online customers
generate the bulk of profits? If so, cybersurgeons will risk downsizing or closing stores
that serve customers who generate only a fraction of the profits.
Cybersurgeons will carve up retailers with depressed stocks. They will prescribe a
merchandising strategy aimed at the most profitable customers. They'll also make
purchasing easier online, convert some locations to showrooms, radically cut costs,
substantially eliminate noncore personnel and management, and centralize inventory.
Cybersurgeons will present landlords with painful choices. They are likely to demand
cheaper rent and take less space. They may "go dark" while continuing to pay
rent. The going-dark scenario is particularly deadly for landlords because the loss of a
key tenant cuts foot traffic for other retailers. Lease termination by bankruptcy can be
worse, with wider implications for property investors such as pension funds and insurance
The retail property community is confronting a growing sense of irrelevancy and
obsolescence in several ways. The International Council of Shopping Centers and the
National Association of Real Estate Investment Trusts joined the so-called e-Fairness
Coalition to oppose favorable tax treatment for online transactions. They hope to increase
customer costs and slow the growth of e-commerce. The ploy is completely misdirected. In
many cases, buying online is more convenient it offers better comparison shopping,
provides greater selection, is less expensive and saves time in comparison to
brick-and-mortar stores. Manipulating the sales tax issue will not force shoppers back to
Cybersurgeons may also turn their attention to distressed retail REITs. Retailers
receiving the cure are also likely REIT tenants. To avoid evisceration, REITs may be
forced to dump properties at fire-sale prices. The trick will be to align themselves with
nonretail users. Adaptive reuses of big-box retail stores and supermarket-anchored
community centers is inevitable.
The information age symbolizes the shifting of wealth from tangible to intangible assets.
Cybersurgeons will exploit the opportunities in the transition. Online buying's negative
impact on retail property is part of the economic and social upheaval ahead.
Mark Borsuk, a property attorney and retail
leasing broker, is managing director of the Real Estate Transformation Group in San
This article first appeared in The Industry Standard Magazine on January
14, 2000. For more news and analysis of the Internet, visit TheStandard.com
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