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News Releases - December 23, 1998

TOTAL WAR: online buying’s assault on the store presented at the Int’l Mass Retail Association Financial Executives’ Conference is an insight into how location based retailing will radically change in a wired world.

Borsuk used military planning blunders from World War II to illustrate why superior location provided little defense against adversaries using unconventional strategy.  The German blitzkrieg simply went around the impregnable Maginot Line.  Singapore’s seaward facing defenses were useless against an enemy advancing over land and few believed the Japanese could project themselves over thousands of miles of ocean to attack a remote fortress. 

Borsuk urged the mass retailers to consider the historical parallel.  The growing role of information technology in daily life changes lifestyle.  Many will find the desktop the shopping venue of choice.  Online buying erodes the traditional strengths of mass merchandisers based on convenient location, wide product selection, and every day low prices.  A fundamental change in the sales channel matrix portends a deterioration in the store’s financial performance.

Borsuk also cautioned the mass merchandisers to prepare for the emergence of bundle buying within two years.  Bundle buying gives the online customer the best of the super drug and grocery store and the warehouse club.   Pricing will be hyper-competitive along with free delivery on most orders.  The stealth competitors may come from the off-line world or through a trusted intermediary.  Again mass retailers face the prospect of in-store sales migrating to cyberspace.

In response, mass merchandisers have to rethink their store based sales strategy to leverage the online sales channel.  Reformation requires an emphasis on shorter-term leases with multiple options, downsizing some stores into showrooms, opening fewer new stores and reducing the number of stores within an existing trade area.  Developing a profitable online presence requires senior management to fully embrace and nurture the online sales channel.  The merchandisers must also enthusiastically employ the new sales channel.  Finally, the retailer’s strategic transformation needs to keep the real estate team as a full partner.

On October 30, Borsuk chaired a breakfast roundtable at the ICSC Law Conference in Nashville to discuss retail leasing strategy for a wired world.  Participants included in-house counsel for three national retailers and other attorneys representing lenders, developers and property owners.  During the discussion one in-house counsel acknowledged online buying’s cannibalization of only a small percentage of in-store sales would adversely impact store profitability.  Several other conference sessions highlighted Internet shopping as a topic for consideration by traditional retailers and owners.

On November 19, Borsuk addressed institutional investors in Toronto on the question of retail property investment risks resulting from Internet shopping and the shifting demand for retail space.  Highlights from the talk included a case study of consumer electronics retailers likely to get “amazoned” and their need to change location based selling strategy.  Borsuk also commented on the increased risk to investment fiduciaries from not grasping how online buying changes location based retailing.  Finally, he noted cyberselling is accelerating academic interest in reforming the sales channel matrix at the store’s expense.  For example see Professor Hamel’s interview in the Financial Times (London) October 22, page 9.  Borsuk’s paper Millennium Madness: Online buying takes the shop out of shopping is attached as a PDF file.

Next February Borsuk will participate in a panel discussing “The Net’s Impact on Retailers” at the ICSC Southern California Idea Exchange in Long Beach.  Panelists include Ms. Lauren Freedman of the E-tailing Group. {“http://www.e-tailing.com”}

The Real Estate Transformation Group advises landlords, retailers and lenders on property strategies for the information age.  In addition to consulting, Mark Borsuk is a retail leasing broker and real property attorney practicing in San Francisco.

Contact Mark Borsuk, Managing Director at (415) 922-4740 / FAX 922-1485 /

mark@borsuk.com

 The Real Estate Transformation Group thanks Mihalovich Partners, Commercial Real Estate Services {“http://www.mihalovich.com”}in San Francisco for hosting RETG articles.

Copyright 1998.  All Rights Reserved.  Mark Borsuk.

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