Fighting The Last War

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In 1934, Edward P. Warner, writing about the implementation of the National Recovery Act (N.R.A.), expressed the following: “There is a saying that is rather common among the critics of the military profession that ‘soldiers are always preparing to fight the last war.’ Business must not incur the rebuke that it is devoting itself to preparing to sell goods under the conditions of the last economic cycle.”

The language is a little “1934” stiff, but the message remains relevant. We shouldn’t be structuring deals for the future as if the future will be unchanged from the past. That’s not to say we should fashion every deal tabula rasa (as if on a blank slate). Of course, much of what has worked in the past remains valid today. But, “much” falls short of “everything.” The trick is knowing what to save and what to discard. Until a genuine “crystal ball” is invented, we’ll need to divine the future unaided by a magical device. Instead, what we all need to do is to pay attention to early trends, some of which have been in front of our eyes for years, even decades.

Last week, the following headline appeared: “Kohl’s plans to shrink stores, add Planet Fitness gyms.” Shrinking store size isn’t a new approach to retail survival. We don’t know the exact rule for retail stores, but it probably follows that proposed by Vilfredo Pareto: the 80/20 rule. He deduced it from land ownership statistics in Italy, but it has been found to be a good approximation for a lot of situations. One variant is that 80% of sales come from 20% of customers. Another, more relevant to today’s rant is that 80% of sales comes from 20% of the stock keeping units (SKUs). Yes, it is true that some portion of the remaining 80% of SKUs brings traffic to a store, but that doesn’t mean “more is better.” Given the choice between the “possibility” of finding an “oddball” item at a brick and mortar store or the certainty of finding it on the internet, customers are less and less likely to burn gasoline on what is often a foolish errand. Retailers have been slow to learn this, but the avalanche may have already started.

Having an exit strategy has always been a major focus of retailers. Disproportionate time is spent on the issues of assignment and subletting – rightly so. But less time is spent on collateral issues that impair the flexibility sought by such retailers. For example, how many Kohl’s locations permit a health club? Once a pariah, health clubs are one of the uses now saving retail projects. Yet, we still see many leases that prohibit such a use at a shopping center. And, this restriction and many others become such because one or more tenants have bargained for them. It is likely that some of the very same retailers now skinnying-down (and seeking to sublet space or assign their lease to someone with a “prohibited” use) may be regretting what they have wrought. Yesterday’s “obnoxious” uses can be today’s lifesavers. It isn’t just the health club. Banning tattoo parlors, massage spas, and day spas are other examples of fighting the last war. Major retailers of the past, department stores being the poster child, used their bargaining power to impose the morality of the 1950s on retail projects, even today. Those retailers met the needs of the new automobile-driven suburbia and the morality of the “Father Knows Best” generation. Those days are over. Yet, the handcuffs of the past remain as binding covenants or restrictions in the title history of many properties.

We need to face the truth. These restrictions are hobbling brick and mortar retail projects. And, it’s not just use restrictions doing this.

Self-driving vehicles, a disruptive technology, and ride-share, a disruptive business model, will greatly reduce the amount of parking needed to support a successful retail project. Yet, we are imposing the last war’s parking ratios into today’s leases. We’ve written about this before. [Click: HERE if you’re interested.]

We need to abandon “holy grails.” Certainly, some tenants require protection against cannibalizing competition. But, as we’ve written before, the product (and service) mixes of one retailer will overlap with those of another. Having competitors within a retail project is not entirely detrimental to an individual retailer’s business. Just as the shopping center creates an environment where people generally go to “shop” (for the sole sake of shopping), having a property with multiple jewelers, quick service restaurants, shoe stores, toy stores, etc., creates a reason for the jewelry shopper, hungry customer, etc. to visit that property.

No, we aren’t endorsing any particular, global change to the concepts that have made brick and mortar retail projects successful. All we are doing is warning against slavish adherence to trench warfare and mounted cavalries. We need to rethink the “why” behind those revered principles we still insist be enshrined in our leases and restrictive covenants.

There is a Latin phrase: “Cessante Ratione Legis, Cessat Ipsa Lex” and it translates to: “The reason for a law ceasing, the law itself ceases.” Unsurprisingly, this isn’t a self-operative principle. Generally, after the reason for some law or “requirement” no longer exists, we invent a new reason for it. Our industry needs to stop doing this if it wants to remain healthy or, as some would state, survive. And, many of us doing deals weren’t around when the “principles” of (landlord-tenant) warfare were created. So, in some cases, all we are doing is perpetuating things that are no longer valid. At a minimum, let’s keep these words of Oliver Wendell Holmes in mind: “The young man knows the rules, but the old man knows the exceptions.”

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