In a conversation with a client earlier this week, I was asked “How do you think the Internet will continue to affect the real estate investment market in the retail sector?” I took a while to really think over his question and I shared a brief explanation of my opinion. I decided I should expand on my thoughts for not only this client’s benefit, but for the benefit of my current and future client’s as well.
We have all seen what Amazon
has done to Barnes and Noble
, and similar retailers. If we knew then what we know now, many investors would have steered clear from those retailers, but like a well-established real estate investor once told me: “Hindsight is only good for realizing why you lost money.” The key to success in the real estate investment industry is staying ahead of the curve. There could be another Amazon
in the works somewhere out there that will threaten another retail sector, and by the time it establishes itself it would be too late for investors to sell their related assets. So as I look into my crystal ball, here are my thoughts on which retailer sectors investors should keep an eye on:
- Banks- In most cases retailers in the service sector are safe from being infringed upon by the Internet, mainly because they require your presence to perform the service (barber shops/salons, wireless providers, etc.). However, with the continuing advancements in online banking, branches are becoming less of a necessity. New technology has allowed customers to snap a smartphone picture of a check, and deposit it electronically. Combine that with direct deposit and the ability to manage your accounts online and the need to physically visit a bank branch diminishes. Meanwhile, publicly held banks have expenses on their income sheet for lease payments and staff wages for each branch as well as the liability of future lease payments, which hurts their profitability, net worth, and stock price. With a diminished need for this space, it would make sense for banks to cut these liabilities from their balance sheet/income statement.
- Electronics– There is no doubt that one of the few things going for Best Buy right now is that Circuit City didn’t survive the recession. Currently their sales are impressive, but in my opinion, ordering many of their products online will become the norm in the near future. In 2011 consumer electronics spending reached $144B of which 60% of those sales were made online, according to comScore, an Internet market research company that measures trends in e-commerce. In-store sales fell by 2.5 percent in 2011, while online sales jumped by 7 percent.
Positive Outlook: There are certain retailers that can’t be feasibly replaced by the Internet:
- Dollar Stores- Dollar stores are safe from Internet infringement because most of their products represent either an immediate need or something you wouldn’t think to shop on the Internet for. For an example, if you are having a cook-out but forgot paper plates, perhaps you go to your local Family Dollar or maybe Dollar General to buy paper plates. While you are there you see water balloons on a shelf and think “that would be fun,” so you buy them. The paper plates are an immediate need and most would never think to shop on the Internet for water balloons. Even if there was demand for some of these products online the profit margin would be too low to incentivize an entrepreneur to create a company that exclusively shipped water balloons to your front door. Dollar stores have been successful since they first appeared in the 1950’s; I don’t see them going anywhere.
- Auto Parts Stores – Usually when your car breaks down, you would prefer to have the parts available to make the repairs in stock at your local auto parts store and be back on the road within a day or two. The process of ordering a part online, paying for overnight shipping or waiting 3 days for it to arrive will never be desirable to the general public. Auto parts also represent an immediate need and will not be challenged by the Internet.
When it’s all said and done, the Internet will be unable replace retailers providing an immediate need or service requiring a customer to physically be present. Based on current data and projections, my advice to NNN investment property buyers would be to invest in purchasing dollar stores and automotive related part stores.