Smart Malls: The Response to the Retail Revolution

By Scott Michaud, Chief Operations Ofcer

Its a new day in commercial real estate.

REITs global market capitalization is now over $1 trillion (up from $300 billion in 2003). REITs are more mature as an industry and constantly look for ways to improve net operating income (NOI). In general, REITs are quite effective at improving income. Un-depreciated book value of property has risen by 35% since 2007, while the cost of operating the portfolio has risen by only 22%.1 To reduce costs and provide returns to investors, most leadership groups focus on operational effectiveness, efciency, and risk management. Shopping centers, in particular, have seen overall vacancy signicantly better than its 10-year average at 6.7 percent, and virtually all markets are expected to see rent growth.2 Despite their many successes, many REITs and ownership groups continue to miss a signicant opportunity to generate NOI: their network. In not fully optimizing the deployment of their networks, property owners fall behind the curve of tenant demand, operational efciency, and cash ow. This failure may be manifested in the emerging gap between competitive shopping centers (those with occupancy rates well above 80 percent) and non-competitive centers. With a noticeable shift toward specialty lifestyle centers,3 shoppers have demonstrated a preference for amenities such as high-performance Wi-Fi - to improve their shopping experience. As retailers ock to competitive centers, it can be difcult-toimpossible for non-competitive centers to ll space.4 So while a high performance Wi-Fi network might be an amenity for shoppers, it is a non-negotiable requirement for retailers and the shopping centers hoping to attract them.

89%
of consumers think its important for retailers to make cross-channel shopping easy.

The Retail Revolution

Three shifts in the retail environment illustrate a dramatic about-face in the importance of technology to tenants. No longer subtle, these shifts are here and they demand urgent attention. Shift #1: Commercial retail tenant demographics Ten years ago, Apple and Microsoft did not have retail outlets. Now, technology companies are a major component of the retail real estate sector - and they have insatiable appetites for data bandwidth. Shift #2: The shopping experience is different - Shopping malls are about entertainment. After ownership identies the best space, they need to make it appealing to shop there. High speed Wi-Fi is a big requirement. When Millenials go shopping, their smartphones are as important as their credit cards in terms of both entertainment and ability to get the best price. And with mobile payment platforms emerging, credit cards may not even be required. The lines between physical and online retailing are blurred. Shoppers go to stores, checkout a product, and shop online for the best possible price. This is a signicant threat to brick and mortar retailers, and this threat will only grow. In the United States today, more than 50% of cell phone owners have smartphones, and more than 70% of these have used their US Retail Mcommerce Sales by Device, 2011-2016 devices for compariBillions and % of total son shopping.5 80% 2011 2012 2013 2014 2015 2016 Tablet $5.45 $13.86 $24.00 $34.33 $46.44 $61.06 of smartphone --% of total 40.0% 56.2% 62.5% 65.8% 68.0% 70.3% owners want more Smartphone $7.5 $9.86 $13.44 $16.69 $20.49 $24.32 mobile-optimized --% of total 55.0% 40.0% 35.0% 32.0% 30.0% 28.0% product information Other Mobile Device $0.68 $0.94 $0.96 $1.15 $1.37 $1.48 --% of total 5.0% 3.8% 2.5% 2.2% 2.0% 1.7% while theyre shopTotal $13.63 $24.66 $38.40 $52.17 $68.29 $86.86 ping in stores6 (see Note: excludes travel and event ticket sales Source: eMarketer, Jan2013 Table 1).
Table 1

Mobile applications are getting in on the entertainment and shopping act. Amazons Flow app lets shoppers point a smartphone camera at a product to see Amazons price and customer reviews. With newer technologies, such as Google Glass, consumers access a mixture of ofine and online information to purchase products from either traditional or online channels. And, of course, there is social media. Shoppers use applications like Pinterest to nd the products just right for their individual needs and interests. Pinterest now generates more dollars per user than Facebook, and some retailers use Pinterest to display products as a way to attract shoppers with a showroom experience.8

Shift #3: Retailers strategy morphed with their customers Clearly, the physical space of a shopping center will play a different (yet critical) role in distribution of goods than it has in the past. Retail tenants are deploying their omni-channel strategy across ecommerce, mobile and physical sites. To prevent people from shopping around from their stores, they are unifying inventory across all their sites, shipping same day delivery from local sites, and sending discounts to customers smartphones as they step on property.9 REITs and ownership groups responsibility is to make sure tenants are extremely productive in order to maximize revenue. To aid tenants in competing with pure online retailers, several REITs seek to make the Bagless Mall a reality. Shoppers can have their purchases shipped same day or people can pick up their purchases on the way out of the mall at a main distribution hub.10 Data extracted from the Wi-Fi network is a tremendous aid that they can provide to tenants. Retailers can now see what their customers do at the mall. Which of their customers have been to the mall but havent visited their store in a month? Which of their customers are price shopping from inside the store? Can we use Wi-Fi signals to determine a pattern to in-store customer behavior? Smart retailers are already using predictive analytics to make location- and time-specic offers to their customers and prospects. For REITs, there are two ways to look at this: 1) Stay on the defensive; wait and see what the retailers do. 2) Partner with innovative retailers and shape the future. Boundary pushing REITs want to drive the next generation of retail strategies to maximize revenues. They want to know how far they can push it. Five Problems with the Defensive Approach However, not all REITs and ownership groups want to shape the future. In many shopping centers, the tenants simply get their data and telecom services through major carriers. This is tried and true, a safe play. But from an ownership perspective, there are ve key problems with this approach: 1. The tenants monthly telecom spend goes right out the door and straight to the carriers. 2. Tenants receive a low quality of service from the carriers. 3. The ownership group owns neither the network, nor the data. Tenants are unable to learn what their customers are doing in the mall, and their ability to make smarter decisions is compromised. 4. Existing (often copper) networks cannot support the high-speed bandwidth needed to execute an omnichannel strategy based on data analytics, logistics, and customer engagement. 5. As a result high quality tenants look for centers with better bandwidth and service. None of these problems are acceptable. Forward-thinking REITs and ownership groups are already signing on to a new solution.

The Solution: The Smart Mall

A smart mall is one that maximizes technology to ensure that tenants (and mall owners) maximize revenue. The solution begins with the network itself. The network infrastructures in many shopping centers are made of copper. Its difcult to provide good quality data or telecom services over copper. So the rst step in building a state of the art network is to replace the existing copper with a complete ber optic backbone. Installing this ber connection enables the REIT to become the Last of shoppers consult 3 or more Mile provider to tenants for data and VoIP services. The ber goes directly channels before purchase, compared to 10% in 2002. to Intermediate Distribution Framess (IDFs), which are strategically located within 300 feet of stores to enable the right level of voice and data services to tenants. A Technical Communications Backbone (TCB) is then implemented throughout the shopping center. The TCB integrates energy management systems and provide new analytics. Now, instead of multiple networks throughout the mall energy management systems, escalators, security systems, public address systems there is one network that runs all mall systems and tenants. This provides tremendous cost and efciency gains. Finally, dense Wi-Fi networks are installed throughout the mall to provide free Wi-Fi for shoppers and to enable marketing programs and additional sponsorship opportunities for tenant.

40%

What Makes A Building Smart? Would you buy a smartphone that just allowed you to make phone calls and surf the web? No, of course not. We buy smartphones for the access they provide to a wide array of applications. Similarly, the networks in Smart Malls provide access to many value-added applications beyond just voice and data. Through their private, dedicated circuit to Single Digits data centers (their SmartCircuit), the mall and tenants connect to private cloud services. As the operator of the network, Single Digits connect the mall and tenants to many third parties carriers, social media applications, advertisers which improve shoppers experience and mall revenue. Why Invest in a Smart Mall? In short, REITs invest in Smart Malls for return on their investment and to maximize the asset they own. In SmartMalls property owners own their network. This opens up new streams of revenue. Single Digits builds and manages ultra-fast, secure, and highly reliable ber optic networks across the property. This network provides high speed, scalable internet bandwidth and voice in the cloud to tenants, and the REIT or ownership group now collects all of the money tenants previously paid to AT&T or Comcast. (And tenants will appreciate the signicantly higher quality experience theyll receive than with major carriers.) In addition to recurring voice & data sales, of smartphone owners want more they open up a whole range of possibile revenue streams (e.g. Wi-Fi mobile-optimized product information while theyre monetization, 3G/4G ofoad from carriers, and advertising). The SmartCircuit shopping in stores. provides more choices to tenants in terms of carriers and provides the data retailers need to deliver advertising messages to customers with pinpoint accuracy. Their network becomes a differentiator and a source of competitive advantage to secure the highest quality tenants.

80%

In the case of REITs, you may wonder how you could sell the voice and data services to your tenants, given the strict laws against this activity. As the preferred provider, Single Digits handles everything from selling your voice and data services to your tenants, to installation, billing, and support. We simply lease the network from you and sell it to your tenants. The REIT is now able to: Deliver all stores via single network connection

Create at, secure LAN connecting all malls

Provide Last Mile network services

Routes trafc over high-speed, low latency and metro-Ethernet connection Eases turn-up of service by using cross-connects in the cloud
Provide access to state of the art ber backbone, engineered for 1 gbps and capable of expanding to 10 gbps Have dedicated support team monitor customer service metrics, outages, and installations Provide access to venue-wide data for analytics Provide Wi-Fi for stores and integrate with mall data
High Speed Internet & Voice in the Cloud Capture your tenants' telecom spend - an new revenue channel

Condition monitoring, traffic utilization, reporting

24/7 Monitoring

Tenants build closer relationships wth customers

Gather Shopper Data

Monetize Wi-Fi used by shoppers

Wi-Fi

Smart Malls: Smarter Technology for a Competitive Edge

Technology has advanced to the point where omnichannel retailing is here to stay. The successful retailers (read: the desirable tenants) demand sophisticated and integrated infrastructures, the right levels of bandwidth, and access to the robust data necessary to implement their strategies. Forward thinking ownership groups are implementing the Smart Mall solution. It provides the technology that top tenants need to execute on their strategies and that shoppers need to enjoy their experience. The right technology is the lynchpin that makes it all work. For more information on how Single Digits can implement this solution across your properties to help you attract and retain top tenants, maintain rent, and drive new income streams, please email SD-Info@singledigits.com or call 603.580.1539.

Sources
1. SNL Financial, analysis by EY 2. Retail Outlook. United States Q2 2013. A tale of two centers: the yawning chasm between competitive and non-competitive retail. Jones Lang LaSalle 3. http://nielsen.com/us/en/reports/2013/brick-by-brick--the-state-of-the-shopping-center.html 4. Retail Outlook. United States Q2 2013. A tale of two centers: the yawning chasm between competitive and non-competitive retail. Jones Lang LaSalle 5. comScore, comScore Reports February 2013 U.S. Smartphone Subscriber Market Share, April 4, 2013, www.comscore.com/Insights/Press_Releases/2013/4/comScore_Reports _February_2013_U.S._ Smartphone_Subscriber_Market_Share; and Nielsen, For U.S.Consumers, Different Stores Mean Different Smartphone Shopping Behavior, May 4, 2012, www.nielsen.com/us/en/newswire/2012/for-u-sconsumers-different-storesmean-different-smartphone-shopping-behavior.html. 6. Digital Metamorphasis: 10 trends that are transforming the retail landscape. Jones Lang LaSalle, May 2013 7. Competing in the Age of Omnichannel Retailing. Brynjolfsson, E., Hu, Y.J., & Rahman, M.S. MIT Sloan Management Review, Summer 2013, 54 (4). 8. Digital Metamorphasis: 10 trends that are transforming the retail landscape. Jones Lang LaSalle, May 2013. 10. http://www.ggp.com/about-ggp/press-releases/deliv-partners -with-ggp-to-bring-same-day-delivery- to-mallshoppers

Single Digits is the white label network operator for property owners. We help our clients connect consumer devices to their private networks and position them to take advantage of emerging revenue opportunities. Based on our partnerships with clients and innovative solutions, Single Digits was honored to receive Gaming and Leisures 2013 Platinum Award in Gaming & Hospitality.

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