Why Retail Owners Are Partnering With Hotels

Retail owners are partnering with hotels to help boost sales and foot traffic. This cycle, retail has evolved to become more experience driven, with a focus on service, events and amenities. In many ways, retail now has a lot in common with the hospitality sector, and it makes sense that the two asset classes would overlap.

“Hotels are a unique and important addition that can be the spark plug of energy, hallmark art and design, the comfortable meeting place, and a temporary home for 200 to 500 credit cards a day for the retailers and project components,” Jim Butler, partner in the Global Hospitality Groups at Jeffer, Mangels, Butler & Mitchell LLP, tells GlobeSt.com.

Downward sales trends have been the primary motivation for retail owners to bring in hotel flags and forge partnerships. Online retail sales have grown 300% since 2000, an online sales activity has doubled in the last decade, accounting for a total of 13% of all retail sales in 2017 and 19.1% of total retail sales in 2018. “Competition amongst retailers is fierce, and sales growth is generally flat or disappointing,” says Butler. “Non-store online sales—a category dominated by Amazon—continue to outpace other retail. To be successful shopping center owners and developers must give shoppers a reason to leave the comfort of their home, get dressed, get in their cars and drive to the brick and mortar facilities.”

Hotels are an inventive way to creative an experience, boost sales activity and guarantee consumer traffic. “Hotels are not the “silver bullet” to accomplish all these goals, but they are one important ingredient to create a great mixed-use project,” Guy Maisnik, a partners in the Global Hospitality Group at Jeffer, Mangels, Butler & Mitchell LLP, tells GlobeSt.com. “So are entertainment, office, and residential elements along with other factors like great public transportation, and proximity to other attractions. Adding events and activities is important. So is getting retailers to add online sales or enhance them with brick and mortar (Nordstrom Local) and vice versa (Amazon drop).”

This isn’t the first time that retailers have looked to partner with hotel brands. It was becoming a popular trend before the Great Recession when retail needs were starting to change. “The Great Recession taught retailers that the old mantra was dead,” says Maisnik. “’If you build it, they will come’ may work in the movies but not for increasing retail sales. There were just too many stores and they were boring, outmoded and couldn’t attract shoppers. The drivers for adding hotels to retail projects have not changed in the last 10 years but the force of the drivers and their impact has increased tremendously. Failure to adopt and grow to meet consumers’ desires can be the death knell for retailers.”

While the driver is the same, the situation for retail owners is more dramatic. Today, retail centers are polarized, with some well-located assets seeing huge success while others are failing. “Former J.C. Penney CEO Mike Ullman said in 2018, that only 25% of America’s 1,200 shopping malls will survive over the next five years,” says Butler. “Those that do will serve the highest-earning 20%. Whether or not those dire projections of a 75% failure rate will prove out, in 2018, record numbers of retailers filed for bankruptcy and closed stores. Major owners of shopping centers and department stores scrambled to offload space or find ways to remain relevant and viable. They are all searching for the right magic.”

Hotels promise a significant advantage and increase in sales. For some retail owners, it could mean survival, if done right. “A great hotel properly integrated into a project can increase retail sales per square foot by up to 40% over properties in the relevant competitive set,” says Maisnik. “And the right retail setting can similarly enhance hotel revenue per available room by a similar premium over the hotels’ competitive set. These synergies are not just esthetic; they provide significant financial benefit.”

Butler echoes the need to properly integrate a hotel to truly take advantage of the benefits. “To survive the challenges from online retailing, brick and mortar retail will need to create exciting environments for consumers, where art, music, events, convenience and lifestyle provide a magnet for consumers,” he says. “Properly done, hotels can be an important part of creating this magic, but hotels provide new levels of complexity in mixed-use projects with their own unique norms, customs, and players.”