Retail Real Estate: How to Develop the Optimal Merchandising Mix

by Greg Barrett

The second most important factor in determining the success of a shopping center is the “merchandising mix”.  After a property’s location, the mix of business types and brands, has the biggest impact on the shopping center.  We can define the merchandising mix as: the array of goods and services mixed together to create a cross shopping experience. The objective is to increase foot traffic and create synergies so that people go from one place to another within the shopping center.

A shopping center owner should merchandise their center, just like a retailer would merchandise goods in their space.  At the end of the day, the goal of a retailer’s “merchandise mix” is to bring in a lot of customers, to provide them the products they want and need, and to encourage them to purchase additional products they didn’t intend to purchase prior to entering the store.

As the owner of a shopping center, your goal is to bring many people into your center, to promote cross-shopping (when customers visit more than one store when visiting the center), increasing the length of time people stay at the center, and ultimately to create an environment where your tenants generate strong sales.  Listed below are several strategies and ideas to consider when curating a merchandising mix that will be successful now and into the future.

Identify the Property’s Potential & Create a Vision

Before you implement the following techniques, you should determine how you wish to position the property within the competitive landscape.  You should do an analysis of the competitive set (the competing centers in the trade area or submarket), determine your property’s comparative advantages, and ultimately put a plan in place to improve your competitive position.  You need to understand the history of the subject property and have a clear vision for the future. Once you’ve figured that out, you can utilize the below strategies to improve the merchandising mix.

Keep in Mind the Changing Retail Landscape

The COVID-19 pandemic accelerated many shopping trends.  The most obvious is the increase in e-commerce purchases. Entertainment uses, gyms, and restaurants have come roaring back due to the pent up demand.  Coffee shops are filling up where possible.  Even though some uses have been hit hard and may not recover, like dry cleaners, most will do just fine. We are also continuing to see an influx in medtail (medical users like urgent care, dentists, optometrists etc.).  We are also seeing increased demand for drive-thru buildings. By adding pad sites and creating additional density is a big opportunity to meet the needs of customers. A key component to curating the proper merchandising mix is bringing in tenants that meet the needs of consumers.

Promote Cross Shopping through Complimentary Uses

There is a strong correlation between the success of a shopping center and the amount of cross shopping that takes place. Cross shopping means increased sales. It means that tenants are benefitting from being located next to a complimentary set of businesses.  The classic example of a tenant that promotes cross shopping is a grocery store–this is why shop tenants love to be located next to them. Grocery stores bring in a lot of traffic, and that traffic will visit other stores on the way to, or from, the grocery store.

Cater to Diverse Demographic Profiles

You generally want to focus on curating a merchandising mix that caters to a wide range of demographics. By bringing customers of all types to the center, you increase the foot traffic at the center.  For example, it is great to have a diverse set of restaurants that bring a broad group of people to the center.  It can also be helpful to have retailers that sell goods and services at different price points.  You need to be careful though, because if you throw a discount type retailer into a center that generally caters to high or upper income customers, you might be signaling, to prospective tenants, that your center is in a declining area or market. 

National & Local Brands

Shopping centers are more successful when the have both national established brands and unique local and regional operators. Nobody likes to see the same stores at every single shopping center. Consumers like to have variety, they enjoy supporting local businesses, and they enjoy trying new things. For that reason, even though the credit profile of local and regional tenants may not compare to national chains, they will bring different customers to the center. They are often more successful because they provide a unique and valuable product or service; they could be restaurants, coffee shops, dessert places, gyms, entertainment concepts, and more.  Even though national brands may not be exciting, they are widely visited by most people and are national for a reason. They provide consistent prices, products, and services, that customers find valuable. It’s nice to know what you are getting. It’s best to find a nice mix.

Hit all the Categories

Not only should you have a mix between local, regional and national tenants, but you should have a wide variety of uses that run the gamut of retail users. You want to make sure you have your daily needs users, your restaurants (full service and fast casual), coffee shops, medical (dental, urgent care, etc.), vanity users (hair salons, nail salon, massage, etc.), gym and fitness, apparel (discount or high end depending on the shopping center), and a dessert operator or two. Each project is unique, so not all of these my apply. But you should make sure to diversify the tenant mix so your tenants aren’t competing with one another. You also improve the foot traffic and cross shopping when you have a diverse set of users.

Location Matters

Locating specific uses is both an art and a science.  It’s part science, because you need to provide tenants with the appropriate sized space, power, utility and mechanical specifications.  At the same time, placing tenants in the right places improves their ability to generate sales and contribute to cross shopping. This becomes even more important at lifestyle centers and outdoor malls where the location of tenants can make or break the investment.  Here are a few thoughts in no particular order:

  • In lifestyle centers, lease the spaces at the entrances to full service restaurant tenants with outdoor dining. Nothing makes a property more appealing than seeing a bunch of people enjoying a great meal and drinks.  It’s much more inviting than a wall.
  • Leverage spaces with awnings and large sidewalks to create outdoor patios for restaurants. Don’t lease these spaces to shop tenants, make sure you save these for full-service restaurants that can pay a premium for the space.
  • Put the fast casual restaurants in clusters, ideally in a place within the center that is easy to access. If possible, build outdoor dining areas with tables, chairs, umbrellas and attractive landscaping.
  • Cluster tenants into theme-oriented zones. In lifestyle centers, for example, it’s beneficial to have an area for fitness and gym users; a section of the project for vanity users like massage, hair salons, nail salons, etc.; a section for banks, insurance companies and other quasi-office users, and an area for entertainment operators as well.  You can also create zones for kids, fashion, luxury brands, family, household goods, jewelry and accessories, etc.–you see this a lot in malls. This creates a nice flow and promotes cross shopping. 
  • Put destination users in less desirable locations. Certain tenants we call “destination users” locate in shopping centers; however, they are different from most retail tenants in that they don’t rely heavily on cross shopping or visibility.  Oftentimes these users are medical or dental users, quasi-office users, or gym users. Save the most visible, easily accessible spaces, and spaces located next to key traffic driving tenants (like grocery stores) for tenants who really benefit from those features–they will pay for it whereas destination users will not.

Final Thoughts on Developing a Great Merchandising Mix

Retail operators need to keep their ideal merchandising mix and long-term vision for the property front and center. Oftentimes, it is harder to pass on a deal then wait for the right deal. It is tempting for shopping center operators to slam a deal in a center that may not help them achieve their long term vision.  I’ve seen countless times when a quality class A or B center, which is positioned to cater to middle or upper-middle class demographics, leases space to a discount retailer typically seen in lower quality properties. They do this to quickly improve NOI and increase occupancy; however, long term this move can backfire. 

What does this say to those higher end retailers that would be a better fit for the center? It says to them that this area are trending downward–they will choose to go somewhere else. Again, be focused on your long term vision for the property and don’t try to cut corners by doing deals that won’t help you achieve that vision.

Keep in mind that a strong merchandising mix leads to improved financial performance. When tenants perform well, you can charge more in rent and limit the amount of tenant turnover. Increasing your rental revenue equates to an increase in net operating income. When you boost your NOI, you increase the value of the property.

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