Interviews

Is Shopping Fulfillment Center’s combined retail and logistics set-up the model that retail needs?

Shopping Fulfillment Center - Retail Innovation 2019
Sometimes it’s the simple ideas that are the best ideas. Take the Shopping Fulfillment Center, or SFC, for example. At its core it’s an idea that marries retail and logistics to turn the shopping mall into a hybrid online-offline fulfillment channel. Customers can come in-store or they can shop online and everything is managed from one location. Simple right?

This is retail as a service taken to the next level. It may also be the model that shopping malls need to bring them in line with changing shopper habits, while making use of all that well-located footprint.

We spoke to founder Shlomo Chopp about what inspired the SFC model, how it works, and why it’s coming whether retailers are ready or not:

 

Shlomo Chopp, Founder, Shopping Fulfillment Center

 

What is your background?

I’ve always been a problem solver and from the day my marketing professor taught me about differentiation it’s been my mantra. I’ve never been one to chase easy dollars per se, because more often than not those are short term plays. Everything I’ve done in life has been looked at from a long-term impact perspective.

I have three primary businesses – real estate investments, commercial real estate debt restructuring and the Shopping Fulfillment Center (SFC). When it comes to the debt restructuring business, I’m one of the few people in the US that specialises in working out securitised loans that have seen the most distress since 2009. At that time when the proverbial hit the fan, I found myself to be one of the few people round the table that actually had the technical understanding of what was going on and a plan to resolve it.

For example, if you have a piece of real estate and the value goes down significantly, you must recognise that the lender parties trying to resolve it are disinterested parties. They’re disinterested not just because they don’t have a horse in the race, but at times they’re just not interested in doing anything. It’s about how you get someone like that to work with you in a manner that achieves your goals.

I’ve been able to develop proprietary strategies to resolve that. I dig through property financials and audit property business plans, re-engineering them into turnaround plans and then execute those plans. While the market individually has had only a 20% success rate resolving these types of loans, I’ve got a hit rate of over 70%.

 

Shopping Fulfillment Center - Shopping Centre Innovation
 

 

Where did the idea for SFC come from?

I was grappling for an investment strategy in retail and industrial and hit a wall. In the last few years retail tenants at our properties and those we were looking to acquire often haven’t shown a clear understanding of “what they want to be when they grow up.” They may design a nice store today, but with the volatility, they don’t know what their store prototype is going to look like in a few years’ time. Unfortunately, the lease terms are longer than just a few years.

Historically, if I had a 10,000 square foot space, I would talk to my leasing brokers and go into my database and see who takes 10,000 square feet, or a combination of multiple retailers. Now every tenant is saying ‘let’s try to do a smaller store’ or ‘we don’t need to and shouldn’t be in every market and we need to close stores’ or ‘we want to keep this store the same size but we want to totally reconfigure its interior’. Oh, and the landlord is presented with the bill – in exchange for a lease extension or some other sweetener.

When you sign a lease with a retail tenant you provide them with money to build out their space. For example, I was recently pricing out a restaurant space and if I wanted to achieve rent to the tune of $50 a square foot, I’d have to pay something like $75-120 a foot in improvement dollars to build out the space. That’s all right because a restaurant is what a restaurant is. But some retail tenants haven’t figured out what the ultimate prototype is going to be and they’re experimenting. They may also be in trouble. At some point it becomes an issue.

I also saw that as some tenants went out of business, a lot of the secondary tenants that were backfilling the spaces weren’t your historic first choice. You now see community spaces and the equivalent of flea markets going into shopping centres at a rapid clip, but it used to be that these tenants were the death knell of the shopping centre. It was a case of ‘oh they couldn’t get a regular tenant, they had to go and get that type of tenant so obviously it’s not a solid shopping centre so don’t buy it or finance it’.

So, ultimately, in assessing my retail options, it seemed overpriced based on in-place cash flow and very risky due to the tenancy credit risk.

Analysing the industrial property sector, I took a look at how hot the market was and identified that a lot of these industrial tenants propping up the market are ecommerce related, and as we all now accept – pure play ecommerce doesn’t scale profitably. So, there is a real market risk of a collapse in the industrial sector and if I was to buy industrial at today’s high price, I’m betting that ecommerce fixes itself and somehow figures out a way to become profitable long-term. I just didn’t see it.

My analysis took me headfirst into a brick wall. Sometimes you have to stop and accept what’s going on, and I was not going to risk investors’ money. The knock on the head seemed to produce an idea that until today seems so obvious that I can’t understand why nobody else has thought of it, but no-one did it and anyone I spoke to about it thought I was off my meds – why don’t we take a mall that’s vacant and convert the back to warehousing and the front to retail?

When I threw the idea at a certain CEO of a large REIT, he told me that you just can’t combine retail and industrial; retail land is more expensive than industrial land and therefore you just can’t make the numbers work putting industrial on it. However, today land values seem to be almost interchangeable. I met him last May and he reiterated, “Shlomo, I just don’t see it.”

I immediately set out to patent some of the proprietary components and we now have three pending.

 

[youtube https://www.youtube.com/watch?v=AFETqU2U10s&rel=0&controls=0&showinfo=0&w=737]
 

 

How does the SFC model work?

To properly explain the SFC model, I will give you some of what I am trying to solve.

A pet peeve of mine is that I think the retail industry is very much on the wrong track when it comes to interpreting experiences. Not all experiences are the same. The experience that Amazon provides to the shopper is convenience, nothing else. It’s not a water feature or an aquarium or a party room – it’s convenience.

Amazon tells you – shop from wherever you want, and we will get you your product. Now for someone who is very busy like myself that’s amazing, but for someone that likes shopping and touching and feeling, maybe less so. But everyone uses Amazon.

Retailers have misinterpreted this convenience as necessitating an experiential store. While this may be true in its own right, it’s not that simple. You don’t fight Amazon with experiences.

The only way you can physically compete with ecommerce is if you have a massive amount of product in a store ready to be carried out the front door. Ecommerce has an unlimited assortment and you only have what’s on your shelf and if it’s not stocked attractively or tracked properly you are behind the 8-ball. Shockingly though, to save money legacy retailers are cutting staff and stock on hand. Here’s some advice, just go ahead and cut off your head to make the retail suicide complete.

To compete with online, you must integrate the digital into your physical stores. Not for glitz or glamour but for streamlining the sales process. You need to be able to tell the shopper that instead of shopping at an online retailer with no stores, we give you the option of a shopping trip to the store where we have the product, we will give you superb customer service and personal guidance and you can walk out the door that day with your product (or a plethora of other fulfillment options). Your other option is to stay home, order what you think you want and wait for it to be delivered a day or two later.

With conventional ecommerce such as Amazon you are buying into a big bait-and-switch – while you may get free speedy delivery you have a high probability of needing that return service, at which point you wait another two days and the cycle repeats itself. Pretty soon you are a week in.

Ask yourself as a consumer – if I know I have this product 10 minutes from me, would I go online and decide between three different things and hope that ultimately I made the right decision? Or would I just take a quick drive and go see it before I buy it? The problem is most retailers don’t provide their shoppers with true inventory visibility. Most retailers don’t even know if they have the product. All they know is it came into the store and didn’t leave the store. With Amazon, at least I know what I select is in stock.

Another concern of mine is that impulse buying has been replaced by buyer’s remorse. In-store you can toss something into your cart and immediately check out, online – you have several hours to cancel your order, let alone free returns. When you go into store you see a product, you want it, you buy it. If you are online, you add it to your cart, price compare, hunt for coupon codes and then try and come to grips with the total cost! There is too much decision making and little impulse buying resulting in lower sales, a less fulfilling shopping experience and high probability of costly returns.

We are advocating for and rolling out a series of facilities that have small shops and a co-located robotics fulfillment centre that actually shops for you while you digitally shop. Whatever you add to your virtual shopping cart on your phone is added to a bin in the rear. If you want to touch and feel the product it’s brought to the front or there’s a sample out front.

The shopper’s experience is enhanced significantly. You can cross between stores so you could buy a top in one store and a skirt in another store and checkout once. You can have your products individually delivered to wherever you want. You now have the option of shopping online or shopping in-store, starting your shopping trip at home and finishing in-store or vice versa and having the ultimate flexibility that the product goes where you want, when you want it, and how you want it.

It solves the last mile issue, because even if you are a small guy that doesn’t have last mile volumes in your own right, you could participate in this co-located last mile facility that serves multiple retailers. It solves the store footprint issue as you can have a much smaller store. It solves the sales per square foot question because one of the big issues is retailers say their sales per square foot are down, but their ecommerce sales are up, so if you combine ecommerce with the store you’re good to go. All in all, by solving the fundamentals you solve for the customer experience.

With the SFC being a fulfillment centre all the stock is tracked and the shopper knows whether or not to take a trip and can even add it to their cart before visiting. Also, the stock levels can be as high a retailer desires making it a viable competitor to the unlimited stock on the web.

That is our greater vision of how retail can and will compete with ecommerce. When I say retail I mean physical and ecommerce blended into one big concept known as retailing. People looked at me crooked several years ago, now some even think me a genius. Imagine that.

 

Shopping Fulfillment Center - Schlomo Chopp
 

How does the SFC model help retailers?

First of all, it enables smaller stores, more attentive, more curated and more experiential (if desired), but also more convenient. In the current model, if a retailer wants to roll out a group of stores across a region, they need to open a regional distribution facility where manufacturer A sends in a pallet of their products, manufacturer B sends in a pallet of their products, manufacturer C sends in a pallet of their products and so on. Once the products come in, they’re depalletised and taken apart into individual cases and then combined into a mixture pallet that goes to the individual stores. Then the store takes it apart and puts the product on the shelf and some in the back room. That’s the process of supplying stores.

The challenge is that I could technically have 20 of a specific item and show that I’m sold out either in store or online because the 20 products I have are in the other supply chains. They could be sitting on shelves in stores, but I have nothing left in the warehouse and I can’t fulfill an online order. I could technically ship from store, but I’ve got to be properly integrated (which cannot happen from shelves) and also it’s a disruption to store operations.

The only way to get around it right now is proper inventory planning, which means you got to mess up enough to learn from your mistakes and know how you should do it in the future – and then you put the proper controls in place to make sure that you stock properly. What we’re proposing is very different with the Shopping Fulfillment Center. The product comes in on pallets and then it gets taken apart into individual pieces and it goes out like that whether it’s ship to home or to the shelf in the store.

A key element of all this is technology. Technology is evolving so quickly. Amazon is constantly reinvesting into its business from a tech perspective with new robotics and new processes. If you’re a retailer that doesn’t have as many shoppers and sales as Amazon to spread that cost over then you’re out of luck. You just can’t afford to compete.

But if you can group together and join an ecosystem that can provide you with tech that’s constantly evolving and kept up-to date, and a logistics network that really enables your retail fundamentals, you can spread that cost across everybody’s sales. The future of retail innovation revolves around agile distributed and collaborative networks. In short, this means you’ll be able to innovate with the best of ‘em because you have so many collective sales over which to amortise the costs.

 

Shopping Fulfillment Center - Retail Trends 2019
 

What stage are you at with the concept?

What I have laid out to you thus far is our big vision. This will replace every regional mall. Unfortunately, though, legacy retailers are not ready to take this step. They’re just not ready to save themselves. They’d rather take incremental steps towards failed innovation. They’d rather do things that get them press such as AR, VR and cool experiences. But the reality is the shopper experience is only one part of the total retail paradigm.

So, instead of trying to sell something to somebody that they’re not ready to do, we are rolling out a Phase I that targets a group of retailers who are actively seeking to improve upon their approach – digital natives. We are acquiring existing shopping centres that are doing well and making money, but have a vacant anchor. Current ownership can backfill it with non-credit tenants who want significant improvement dollars up front in exchange for a low rent, or they can sell it to us – a real estate company with a proven record of closing on deals and over $500 Million of assets under management.

The shopping centre remains operational as-is, and we’re converting that anchor box into a retail front-end and logistics back-end. Digital natives will be able to not only supply their store on site, but also any stores they roll-out in that market (something we will enable), so it acts as a regional distribution centre as well. They also ship to home from that location, so it acts also as a fulfillment centre. A swiss army knife of retail.

These digital native retailers don’t have any infrastructure and otherwise would spend significant amounts of money on pop-up shop that are a marketing line item. Whereas a pop-up shop would cost them the equivalent of $400 per square foot or more annualised (compared to Manhattan retail rent in the range of $100-250 per square foot), our retail rent would be closer to 90% less than a pop-up and sustainable operationally. While pop-ups have no stock or very low stock and you just don’t get the bang for the buck pushing orders via low-margin online sales, the SFC minimises the amount of money spent and pushes higher margin store sales- all while acting as a huge billboard for the online brand.

Historically, you want your occupancy costs to be something like 6% of sales. That means that to justify a $400 pop-up rent you have to do $6,700 a square foot in sales. Over a year you’ve got to do $1.7 million out of a 250 square foot pop-up. Unless you’re selling high end jewellery that’s going to be very difficult. The SFC reintroduces the concept of profits to physical retailing.

With the SFC you can actually operate a store that is profitable, stands on its own, and adds sales, as opposed to other options that are just a cost line item. We’re providing retailers and digital natives with the ability to plug and play into locations that produce high margin sales, is a logistics infrastructure, has built-in technology, and enables them to cover a market. All they need to do is to tell us where the inventory currently is, work with us on branding and we can technically take care of everything else.

We’re enabling retailers to leave pure online and become hybrid powerhouses that sell in-store and online and delivers from one location for both. That’s step number one. As we continue, we’ll grow into the larger robotic concept that I mentioned before.
 

Are any of the spaces live yet?

No. We decided to take this approach in mid-December and we hope to have our first SFC location up and running in fall of this year. The configuration will be the Phase I of multiple retailers with one fulfillment centre operated by our logistics company that will handle all the tenants that are on location. Stay tuned over the next few months, it’s pretty exciting.
 

What are the costs for retailers?

The store rental will be akin to normal market rental and the logistic rates will be akin to market prices. The value comes when the combination of the two produces sales and savings.

Do you hope that the model will encourage people to return things to the store rather than sending it back online?

100%. One of the biggest expenses of returns is the sorting. When it comes back you have to sort out what is good, what’s not and where it goes. Imagine if that sorting can be done at store level. Imagine if the product that’s returned could be put on the store shelf. Now, if the store shelf is a fulfilment centre then the product goes right back into the ether without major expense.

 

Shopping Fulfillment Center - Shopping Centre Retail
 

How does multiple locations add to the concept?

It helps to maintain optimal inventory levels across a network. The stock doesn’t go to one central location but rather it resides across many facilities – a decentralised logistics network. That means that the product will get moved around based on sales patterns. If our analytics tell us that sales are picking up in one area we’ll move product to that area as opposed to keeping it where it is at that moment.

At present if a store in one location has one shirt left and a store in another location has 40 shirts it’s extremely expensive to take 20 shirts and put them on a truck and send it from here to there. It’s not worth it. The retailer would rather hold onto it and sell it to TJ Maxx at the end of the season.

But in the case of SFC we have trucks constantly going between locations. One of the patents we have pending is for this massive logistics network that keeps on balancing out stock without any empty legs. Empty legs mean that you pay more per product being shipped with that truck, because the whole way back there’s nothing in it. With SFC we have drop-off and pick-up at every location in the network.
 

Do you think there needs to be a more collaborative approach in retail in general?

It used to be that landlords let space to retailers. That’s the way a lot of retailers and owners still look at it, but that’s incorrect. Landlords let shoppers to retailers. The store size should be irrelevant.

Now if you’re a retailer that can handle those shoppers and provide the experience and deliver the product to them, you’re adding value to my property. That allows me to continue to let more shoppers to other co-located retailers. If you as a retailer are having issues it is beholden upon me as the landlord not to kick you out and have a vacant store but to help you. However, if I help you and you still can’t perform, you need to go because you are bringing down my property and over time will reduce shoppers for me to let to other retailers.

That’s how retail real estate needs to be. It’s not longer ‘I have a box, I put in a tenant and wait for my money to come in.’ Those who think about it that way have compounded past mistakes, and are looking for a magic potion to solve retail – all the while shouting from the rooftop that brick and mortar retail isn’t dead. You need to help your retailers provide a better experience so that you can still own, hold and provide the shoppers to the other retailers that are there, and keep the property relevant to shoppers. That is how retail real estate should work and that is how it works with us.

I think it’s beholden upon property owners to provide that level of expertise to their tenants. While Amazon can compete against and demolish almost any individual retailer, Amazon cannot compete against and demolish a strong group of multiple retailers across the country working together to be best in class on both a topical and infrastructure level. If the retailers got together to “fight back” they could provide a better mousetrap than Amazon can on its own. It’s a simple thing right? Power in numbers. You’re stronger together.

The fact is though that Amazon has been able to capture a massive chunk of the ecommerce market and every time it announces something, anything, all of a sudden its stock goes up and its competitors tank. Amazon is built on market share and stock price, not on retail profitability. So long as the stock price goes up you can’t compete with it. If its shares decline it won’t have the dry powder to compete. Only a cohesive group can prove that it in fact has a better mousetrap than Amazon – AND can execute.

The reality is if you can fight back as a group and say ‘we have as much resources as you do Amazon’ then you could poach market share. That is the only way smaller players can band together in a smarter, more nimble way and compete.

Amazon came in and reinvented a wheel but to maintain that attractiveness it has to continue to dominate and constantly reinvent and disrupt itself – easier said than done. The bigger it gets the less nimble it becomes. A new ecosystem and infrastructure that is nimble and takes you to the next level and also allows you to continue innovating over time is a force that cannot be stopped. The SFC concept does just this and as a retailer you just need to plug in!

Images courtesy of Shopping Fulfillment Center

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