The Trend Toward Greater Integration of Foodservice Operators in Retail Real Estate

The International Council of Shopping Centers (ICSC) recently released an interesting report prepared in collaboration with Jones Lange LaSalle (JLL) entitled The Successful Integration of Food & Beverage Within Retail Real Estate.  The study explores how foodservice growth is increasingly impacting retail real estate models, and includes case studies and practical analyses highlighting the successful integration of food with traditional retailers at malls and shopping centers around the United States and the world.

The study identifies three macro demographic trends that are driving structural changes in the global retail and leisure landscape, where consumer spending is shifting from “transactional to experiential food offers.”

Urbanization and Population Growth

Ever-increasing numbers of people and customers are moving into key market areas.  This is particularly true for the expanding middle-class who comprise a larger percentage of the global population, and who are “also becoming richer, better educated and more technologically connected.”

The Rise and Role of Technology in the Digital Age

JLL notes that today’s millennials and Gen-Z-ers are increasingly shopping online and are generally characterized as having shorter attention spans with a lack of brand loyalty compared with their predecessors.  More than ever before, they are demanding a seamless transactional experience where they can order online with smartphones and on social media sites, and then have their items ready for immediate pick-up at the store, or vice-versa.

Experience Economy

As time becomes an ever-more precious commodity than “stuff,” consumers are becoming more interested in enjoying memorable experiences that they can share (often contemporaneously through social media outlets) rather than tangible, material items.  The hot trend of food halls – particularly in the United States – is an example of this, where those destinations are increasingly becoming the anchor and key draw at shopping centers given the “experience” they provide for shoppers.

What Does This Mean for Landlords and Tenants?

JLL notes that the amount of space dedicated to foodservice at existing retail properties has grown from approximately 5% to 8%-15% over the last 10 years, and is forecasted to reach 20%-25% in some markets by the year 2025.

Accordingly, there will be a significant transformation in the way landlords approach leasing strategies at their retail centers.  Their efforts will need to focus on seamlessly integrating food and traditional retail operators to create a unique and experiential tenant mix.

In addition, landlords will face new challenges in understanding how their support for foodservice and restaurant operators both differs from, and is also interrelated with, their responsibilities to traditional retailers.  Among other considerations, these include:

• Greater risks from food-based fit-outs and capital expenditures;
• The increased likelihood of dealing with smaller-scale food operators instead of larger “corporate” entities;
• Optimizing the ratio of base and percentage rent deals that are more common among foodservice operators;
• Understanding the differences in desired lease terms (foodservice locations will typically demand longer lease terms in order to amortize and realize the benefits of larger capital/fit-out expenditures); and
• Strategically placing food and retail locations within the larger mall space, including considerations for interior/exterior access points and parking needs.

The report provides many examples of how foodservice can be successfully integrated within shopping centers of different shapes, sizes and formats; however, there is no “one-size fits all” solution.  What is clear is that savvy retail landlords and their tenants are those who will embrace the idea of incorporating experiential foodservice options into their business plans.