Discussions about the fashion industry thread

[bry2000]

Uh what? This model of a smaller fixed + higher variable rent is prevalent in Asia, particularly HK and China.

\
the premise we started with was no fixed, all variable.

 

[bry2000]

There will always be alternative uses for land, property. Who cares if it is not another Epaulet.

 

[dieworkwear]

There will always be alternative uses for land, property. Who cares if it is not another Epaulet.

I think you're assuming the doom-and-gloom scenario isn't possible, not that variable rent structures themselves aren't possible. At least, given your view, the structure only isn't possible because they are easy alternatives for empty commercial spaces. But that inherently assumes that the doom-and-gloom scenario isn't possible.

In the end, that may be true, but it's not obvious.

For expensive commercial area, it may not be easy to convert something into a residential space. And residents may not give you as much money as you'd get from a commercial lease. And there may be political problems for conversion. And online sales may take a bigger and bigger portion of future shopping. Assuming a 90-minute turnaround for delivery, and the fact that Amazon sells toilet paper for less than local grocers, what's left for a local retailer? Toilet paper is probably the hardest case to make since (I assume) the bulk of its retail cost is in shipping.

 

[bry2000]

What doom and gloom scenario are you talking about? Worse than the Great Depression? Or are you just focused on the decline of B&M retail in favor of on-line? Real estate is cyclical so we have gone through downturns, I will grant you that. But the economy is growing and can still grow even if people are shopping more on-line. It is hard to picture a growing economy where real estate in general is in a recession or depression as your doom and gloom scenario may imply. In a growing economy, people should have income to spend on rent, experiences, restaurants, clothing, etc. and not all of that can be purchased on line.

 

[dieworkwear]

What doom and gloom scenario are you talking about? Worse than the Great Depression? Or are you just focused on the decline of B&M retail in favor of on-line? Real estate is cyclical so we have gone through downturns, I will grant you that. But the economy is growing and can still grow even if people are shopping more on-line. It is hard to picture a growing economy where real estate in general is in a recession or depression as your doom and gloom scenario may imply. In a growing economy, people should have income to spend on rent, experiences, restaurants, clothing, etc. and not all of that can be purchased on line.

Not sure if you've been following the thread, but the doom-and-gloom scenario isn't about an economic recession. It's about a shift in expenditures, from local B&M to online. That has ramifications for commercial spaces since Amazon isn't buying Fifth Avenue real estate, they want warehouses where they can fulfill orders.

The economy can still be booming in that scenario; but it shifts jobs and physical landscapes.

 

[bry2000]

Amazon does not need to be the buyer of 5th ave real estate. There are other buyers of that. Maybe I have not been following this thread carefully enough to see where the disconnect is. Real estate is far more resilient than you appear to recognize.

 

[dieworkwear]

Amazon does not need to be the buyer of 5th ave real estate. There are other buyers of that. Maybe I have not been following this thread carefully enough to see where the disconnect is. Real estate is far more resilient than you appear to recognize. I am checking out.

Right, I think that's the contention. Inherent in the doom-and-gloom scenario is that online shopping takes a greater portion of everything you're talking about (in a way that closes out other B&Ms). For every product you can think of -- from toilet paper to Gucci bags -- people may be buying all that online. Maybe all those Fifth Avenue-like spaces will be converted into online fulfillment centers, but that seems even less likely than flexible payment plans. Or maybe they're converted into residential spaces, but that takes collection coordination among property owners and political will.

I think you're assuming that this is just about clothing stores closing but 1) clothing stores closing is a much bigger deal than previous shifts in retail (e.g. music, movies, and books). And 2) this could be about more than just clothing. Again, Amazon could be a bellwether.

People still want to go out and do stuff, but not every place can be a hip coffee shop or restaurant. If all your shopping is done online (and even an increasing number of services), then the physical landscape shifts.

This doesn't have to be about Fifth Avenue, incidentally. Huge commercial spaces around the country are already closing:

https://www.nytimes.com/2015/01/04/business/the-economics-and-nostalgia-of-dead-malls.html

 

[baltimoron]

Damn, I still remember going to Owings Mills a couple times in college. It's spooky to see what it's become.

 

[dieworkwear]

Damn, I still remember going to Owings Mills a couple times in college. It's spooky to see what it's become.

The picture they paint for malls across America is actually the same in China, but it's being addressed in different ways. In Beijing, for example, they have these hhhuugggeeee multi-block shopping complexes. Like, maybe three square block radius in NYC or something. But it's just a huge multi-story mall. And there are a bunch of these around the city.

The malls themselves, however, are nearly empty. They're stocked full of Western shops, such as Levi's, but few people are actually inside shopping. Walking inside, there's just nobody except the shopkeepers.

A few years ago, I visited one and went to the food court. And like any mall food court, the whole level was filled with stalls, where you can buy different kinds of cuisines. Each one had a full menu, but when you actually tried to buy a dish, they couldn't sell it to you. Despite having a full menu, each stall only had enough ingredients to make one or two specific kind of dishes. So after running through the menu and trying to order, you'd eventually have to ask "OK, what can you make?"

The reason is because ingredients go bad, so restaurants only stock enough to justify being there. They open every day with the expectation that they'll only sell to a few people.

The whole operation is heavily subsidized, however, cause the government has a huge surplus from exports and is trying to build a domestic engine for economic growth. But they've also experienced a contraction in B&M retailing.

https://www.bloomberg.com/view/articles/2016-02-17/china-s-empty-malls-get-weirder

Somewhat similar to the US case, but given the difference in political economy, the Chinese case can put up with this through government subsidies.

 

[JohnAAG]

It seems to me that a better integration of online shopping and B&M is what's needed to address some of these challenges. Why is it so bad if I walk into a store to try on some shoes and then order those shoes online as long as I am ordering from the company's website? The company doesn't have to stock much physical inventory reducing needed retail space (and costs). And with advances in the logistics chain the customer can get their purchase in a day or two.

While I completely understand the whole "people want to comparison shop online" argument, it seems like there's a bigger problem that comes before that: why don't people want to go to stores anymore?

 

[clee1982]

I can't even begin to imagine the nightmare of reporting and auditing sales numbers, giving access to books, etc... to the landlord. This is a good recipe for creating distrust and conflict between the landlord and tenant.

well, the system can be built, it's hard (as in tedious hard not as in we try to solve nuclear fusion hard) but very doable, though I suppose another way around is instead sharing revenue just share profit, then the landlord just become another equity owner (though a special class given it's location specific). Would landlord want to move themselves to the most junior tranches? Probably not, but if no other choice, why not

 

[clee1982]

Better online shopping with B&M is definitely one incremental area that existing shop can do waaayy better on. Like a clear inventory system customer can see is probably also helpful, I don't want to call someone to find out if it's in stock, why can't I consistently accurately see if particular item is in store or not.

 

[bry2000]

The landlord can always sell his property so he has choices. If nothing else, sell it to someone who has a vision of what to do next with it.

 

[clee1982]

The landlord can always sell his property so he has choices. If nothing else, sell it to someone who has a vision of what to do next with it.

if we believe commercial real estate in general has issue, then selling is just force selling, in that case I can see some people getting interested in taking equity like kind of exposure. I don't know how prevalent it is now, but when I was a kid in Taiwan lots of small restaurant had revenue sharing with landlord (multiple restaurant to a single landlord typically). This is pre-electronic age, if they can revenue share then, definitely can revenue share now, it's a change of mind set. If you're use to fixed income like cashflow stream you might not be happy, but oh well too bad, if landscape is really changing, then you do what you do to survive.

 

[dieworkwear]

It seems to me that a better integration of online shopping and B&M is what's needed to address some of these challenges. Why is it so bad if I walk into a store to try on some shoes and then order those shoes online as long as I am ordering from the company's website? The company doesn't have to stock much physical inventory reducing needed retail space (and costs). And with advances in the logistics chain the customer can get their purchase in a day or two.

While I completely understand the whole "people want to comparison shop online" argument, it seems like there's a bigger problem that comes before that: why don't people want to go to stores anymore?

Because of a couple reasons:

1) Zero transaction costs online make it easy to try whatever you want, even without having to visit a store. So, many people opt for that. Why go to the store when more and more retailers will ship you something within three days and allow for free returns?

2) More importantly, stores run into an inherent problem with what they can sell. Local stores constantly face a commodification problem, where anything they sell is likely very basic and popular, so it's easier to comparison shop and drive things down on price.

That's because, unless they're in NYC, they have a smaller audience for fashion. And that audience probably wants very basic things. So, if you're selling a basic item, you have to compete with the millions of other options online, which are likely to compete on price. Except you have the burden of physical retail space (and, likely, rising labor costs since living in cities nowadays is very very expensive due to shifts in other industries. It's hard to get by in San Francisco nowadays on less than six figures unless you're married or have a roommate). You have an inherent disadvantage if you're selling basic, cheap commodities in a place with rising rents and labor costs.

If you want to get out of the commodity game, then you're selling niche items to an online audience, which likely isn't driven by price. However, for a local audience, most people aren't going to want to buy that.

Take a concrete, easier to follow example. If you're a store in the Bay Area, you can choose to sell white t-shirts and M-65 jackets, or super weird Kapital stuff. The first is what the local market wants (cause it's easier to wear). But a lot of that stuff compete with cheap goods (and, in the future, the market competition will be tougher -- driven even more by price -- because of the networks Amazon is building). Except you're store now has to pay $$$$$ in real estate and labor; Amazon is building machines to package everything in some cheaper location (a warehouse).

If you switch to Kapital, you're not selling a commodity (ie an item that competes on price). Kapital doesn't compete on price because nobody else sells an American field jacket mixed with a kimono, so they can charge $500 or whatever it retails for (unlike, say, a basic M-65, which everyone and their mother sells). However, how many local people want to buy a Kapital Ring coat? Not even a lot of guys on StyleForum want to wear one and we're spread around the world.

Local B&Ms face a difficult choice with commodification and audiences. Anything popular in a locale will compete on price (and everyone has a smartphone where they can compare your item to the hundreds like it online). Anything niche a local audience won't want -- only an online audiences -- which will make you wonder why you're paying for physical space.