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I’ve been in Las Vegas this week for the “Super Bowl of retail real estate.” That would be the annual International Council of Shopping Centers (ICSC). Cue the lights. The glitz. The swelling theme music.

Brad at ICSC
Source: Wide Moat Research

In all seriousness, the ICSC is a window into the larger investing world. After all, where the consumer goes, the economy goes too. And it’s events like these that provide us an edge in the research we publish. After all, you can only learn so much from sitting behind a desk.

That’s why I’ve been faithfully going every year for almost four decades now. It gives me great insights on how to proceed with what I do and how I do it – no matter whether I’m buying or even building up properties, or evaluating potential portfolio positions.

Between the broader presentations and the one-on-one meetings I schedule with CEOs of publicly traded companies, I always come away with something valuable. This time around, there are five key insights worth pointing out, starting with the rumors of the death of retail.

1. E-Commerce is No Longer the Enemy

E-commerce was a huge theme this year. It has been for a while, admittedly, but there wasn’t any fear involved this time around.

It’s worth remembering what the conversation was like in recent years. Especially during the 2016-2018 timeframe, it was very trendy to predict that e-commerce – led by the likes of Amazon – would displace brick-and-mortar retail. It was only a matter of time before physical retail stores were fully abandoned, or so the thinking went. I never believed that.

I knew e-commerce would continue to grow, but physical retail would always have a place. I knew an equilibrium would eventually develop. And everything I saw at the conference confirmed that. Every retailer I spoke with seemed pretty excited about this power they’re learning to control.

I’ve written countless times in past years about how America has too many shopping centers – especially when it comes to malls. Even before the internet became a “thing,” it was an unsustainable amount.

So, when the internet started to gain adoption 20 years ago, it only made sense that many would suffer. Though, admittedly, the sheer number of failures over the last 10 years has shocked many consumers and analysts alike.

Even so, it seems like we’re seeing a major turnaround for two different reasons:

1. Retailers across the board are getting wise about how to utilize both walk-in and online customers. Turns out consumers like a bit of both if they’re properly incentivized. And the retail world has put a lot of research into doing exactly that.
2. We humans still like to see, hear, feel, and taste things before we buy. Plus, we’re social creatures, which means some part of us will always want to get out there and interact with others.

Even Amazon (AMZN) recognizes these two realities. That’s why it’s been investing in brick-and-mortar locations for years.

My takeaway: E-commerce will not be the apocalypse for brick-and-mortar that many predicted. And companies that can balance physical and digital retail experiences could make for interesting investments in the years ahead.

2. Low-End Consumers are Pulling Back

Noting that consumers are finally reacting to high prices might not seem like a positive for the retail world. And for many individual stores, including mom-and-pop shops, it definitely isn’t.

There are plenty of big names that are beginning to hurt, too. McDonald’s (MCD) acknowledged slowing quarterly sales in its earnings call late last month. And Target (TGT) reported full-on declines just the other day.

A big topic of conversation is that low-income and middle-income consumers just can’t afford the same stuff they used to thanks to persistent inflation and interest rates being higher for longer.

That’s been true for a while, of course, as evidenced by the rise in credit card debt (it’s $1.13 trillion, a record). But the “little guy” kept shrugging it off month after month. Until now.

This was a point of concern for a lot of the retailers who traditionally cater to lower- and middle-income customers. And it’s something we’ll be keeping in mind as we explore new investments in the future.

My takeaway: Lower-income consumers have mostly held out for years since inflation became a serious concern. But now, inflation appears to be having a meaningful impact on spending habits. These consumers are pulling back.

However, that doesn’t mean all retailers and retail-based landlords like real estate investment trusts (REITs) are in trouble…

3. Grocery Store-Anchored Shopping Centers are Thriving

An “anchor store” is exactly what the name suggests. It’s a big, in-demand business that dominates a shopping plaza. Its presence supports the smaller, more niche businesses that surround it. And a big topic of conversation was that grocery anchor stores are thriving.

This one might sound obvious. After all, everyone has to eat. But hear me out, because grocery stores truly are the retail place to be. Take Walmart, one of the most formidable grocers in the U.S. Its CFO, John David Rainey, noted earlier this month that “it’s roughly 4.3 times more expensive to eat out than it is to eat at home. And that’s benefiting our business.”

Starbucks (SBUX) can’t say the same. The stock fell 11.6% after earnings earlier this month. The company missed on the top and bottom lines.

Other fast-casual dining businesses are also struggling:

• KFC
• Taco Bell
• Cracker Barrel (CBRL)
• Noodles & Company (NDLS)
• Outback Steakhouse
• Red Lobster

The latter two, incidentally, are closing dozens of locations. Red Lobster actually filed for bankruptcy just a few days ago. Their previous customers could, of course, go elsewhere. But if they’re looking for better prices – which so many of them are – then grocery stores easily win out.

My takeaway: Inflation is having an unequal impact on businesses that provide food at home and restaurants that cater to lower income customers. The former is thriving. The latter is struggling. Any investors looking at investments in fast-casual dining should be aware of that.

4. Upper-End Consumers are Still Spending Money (Lots of It)

Do you know who is very optimistic? The luxury side of retail. Apparently, the wealthy aren’t slowing down their spending at all. So, the companies that cater to them continue to do just fine.

I spoke with Don Wood, CEO of Federal Realty Investment Trust (FRT). As the head of a shopping center REIT with over half a century of experience, I listen when he talks.

He says, “Inflation is not an equal effector,” and used Lululemon Athletica (LULU) – one of FRT’s tenants – and Big Lots (BIG) as examples. The former is a high-end activewear, loungewear, and shoe store.

Go to its website, and you’ll find a “cropped cami tank top” for $68 and a “women’s woven visor” for $49. Yet, as Wood pointed out, Lululemon is enjoying much wider margins, selling products for much more than they cost.

Big Lots, meanwhile, caters to the bargain hunter, which means it’s buying low and selling low. So, if its customers start pulling back – which they are – it’s got a lot less padding to rely on.

My takeaway: A theme is developing. Retailers catering to lower-income customers are struggling. Margins are shrinking. At the same time, high-end and luxury retail is thriving, that’s especially true of “ultra-luxury” brands.

5. Expect Acquisitions to Heat Up

So what are retailers and associated businesses doing about this dichotomy? The smart ones are divesting of at least some of their riskier properties. And the really smart ones are already properly placed to handle any downturns and difficulties.

As for the outright brilliant ones, they’re on the hunt to grow even bigger and better. Take grocer Kimco Realty (KIM), which laid claim to rival RPT Realty in January in a $2 billion deal. But that was just the tip of the iceberg.

To quote Global Data:

“The global retail market in Q1 2024 witnessed deals worth $36 billion, a rise of 468% compared to Q1 2023. In terms of deal volume, there was a growth of 53% to register 398 M&A deals in Q1 2024.”

And after seeing, hearing, and feeling the enthusiasm out in Vegas, I expect more of the same from here.

My takeaway: We’re already in an environment for major acquisitions in retail. I expect it will continue. We’re going to keep an eye out for any interesting opportunities that emerge in this space.

Poised for a Turnaround

All in all, I have to say I’m psyched about the retail situation this year. I think there are plenty of opportunities to investigate now -- with even more opening up as the months unfold.

Despite the disastrous 2020 shutdowns, the continued social-interaction hesitancy of 2021, and today’s consumer slowdown, I’m confident in saying that retail as a category is coming back into its own.

The ICSC used to be one of Las Vegas’ biggest annual events, drawing up to 50,000 retail-affiliated attendees. This year, that number was only about 25,000, I believe, but that’s still up from 2023. It’s also up from 2022. But believe it or not, I’m not concerned about the lower attendance. If anything, it could prove to be a good thing.

Many retail businesses have struggled in an environment of sustained inflation and higher rates. The S&P Retail ETF (XRT) – which tracks the performance of the S&P Retail Select Industry Index – is down about 18% over the past three years. As a result, many investors have “moved on.”

But as a former real estate developer, I can promise you that these types of cycles are not uncommon. And it’s usually during these depressed periods where the greatest investments are found.

The attendance for ICSC may be down from its peak, but the atmosphere was one of almost constant enthusiasm. Brick-and-mortar retail is here to stay, and the future looks very bright for certain segments of this market.

We’ll use these insights to inform our portfolio positions in the months and years ahead. Expect to hear much, much more.

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