As we near the halfway point of 2023, we thought we’d take a step back and look at some bigger picture trends across the retail, restaurant, and commercial real estate categories. The recently-concluded Q1 2023 retail reporting season raised broader macroeconomic concerns, as there was a long list of retailers that lowered their sales growth and profitability outlooks for the year, typically owing “an increasingly challenging macroeconomic environment.” Consumers’ shift away from discretionary goods and services, and increasing emphasis on value has cemented itself as the overarching theme in 2023 – as we’ve touched on several times in the Anchor this year. However, the reality is that there is much more nuance across the various retail sector categories, something that Placer.ai data can help shed some light on.
As a starting point for this week’s analysis, we’ve looked at year-to-date visits per location for 20 retail and restaurant categories (below). It's important to remember that our visit per location analysis includes visits to chain locations, but not independent locations. This explains why a category like fitness–which saw 22% of its locations permanently close during the pandemic, according to IHRSA–is the top performing location with respect to category visits per location. Over the past two-and-a-half years, larger fitness chains like Planet Fitness have benefitted from the industry’s permanent closures, which were concentrated within small gyms and fitness studios. These larger chains not only absorbed the visits displaced by smaller locations that closed, but they (and often their franchisees) also had the capital to continue unit expansion plans. The number of locations in our fitness category index only decreased by 2% from 2019 to 2023, yet chain visits per location are up more than 20% because of industry consolidation, new unit expansion among larger chains, increased visit frequency among younger cohort groups, and business model changes that have left fitness chains in better position to withstand economic volatility.
The next top performing category on a visit per location basis–beauty & wellness–also seems to run contrary to the idea that consumers are increasingly seeking out value. We’ve written about the continued strength of beauty this year–which itself is partly a byproduct of the consumer behavioral shift toward experiences and services and away from physical goods that we discussed in our midyear theme report last year–but beauty continues to perform well across all tiers.
Beyond fitness and beauty and wellness, the next top performing retail categories were gas stations, auto parts retail, and dollar stores. Like fitness, the overall gas station category was a beneficiary of industry consolidation, but many operators like Wawa also benefited from expanded food offerings that have started to impact restaurant visits, particularly within the evening/dinner daypart. We’ve covered auto parts retail extensively in the Anchor this year, where O’Reilly Auto Parts and AutoZone continue to disrupt Advance Auto Parts and capitalize on the secondary effects of an aging vehicle stock, the high prices for vehicles, and increases in the average age of vehicles on the road. We’ve also spent a lot of time on dollar stores, which continue to see visit per location growth compared to pre-pandemic levels despite lower-income consumers being pressured by inflation and lower tax refunds.
On the flip side, we’ve seen weakness among the home furnishing, department store, and casual dining sectors (Movie theaters are also among the weakest performing categories on a year-over-four-year basis, but one of the strongest on a year-over-year basis–more on that later in this report). We’ve previously covered why the home furnishing category has been one of the weakest performing categories in discretionary retail and why expect more industry consolidation and store format rightsizing in the years to come (IKEA’s growth plans notwithstanding). Department stores and casual dining restaurants are additional retail categories that saw a high number of permanently closed locations coming out of the pandemic, especially regional department stores and casual dining chains. The number of chain locations for department stores and casual dining shrunk by about 10% from 2019-2023, and when combined with the number of visits per location being down 10%-20% by category due to consumers’ increased focus on value, it gets us to the declines in visits per location that we’ve presented above.
As we did this time last year, we thought we’d recap the key trends and themes that executive teams at retail, restaurant, and commercial real estate owners need to keep in mind as we look to the back half of 2023 and beyond. We’ll also be covering these topics and more on next week’s Retail at the Halfway point webinar (more info can be found here).
Inflation and Retail Malaise: 2H 2023 Unsettled
In addition to services (including travel, movies, restaurants) recovering share of wallet from goods, persistent high food inflation wreaking havoc on households and retailers has been an ongoing narrative in the Anchor. Starting in February 2022, we began to see a sizable shift by pressed consumers moving from premium specialty and conventional grocers to hard discount and value brands in an effort to stretch their dollars and get their needed calories. That shift persisted for the remainder of 2022 and built, or extended, starting February 2023.
From there, the consumer malaise became more pronounced as the consumer got worn out by higher prices on everything: food, insurance, rent, car repairs, vacation travel, etc. Piled on top of these were: (1) horrible spring weather; (2) reduced SNAP payments; (3) lower tax refunds; (4) the media frenzy over the California banking crises and the stability of the banking system and an inevitable recession, and (5) the debt ceiling debate. Additionally, the pandemic pull-forward effects were revealed as larger than was realized, be it large flatscreen TVs, washers & dryers, or casual athletic footwear (we've included year-over-year visitation trends for several discretionary retail categories below). Households have plenty of these goods for a long time to come and consumers, generally, are only shopping when they absolutely need something (for example, holidays like Easter and Mother’s Day are working). These conditions have made it very difficult on retailers’ sales mix and gross margins as food and consumables are the only growth categories and these categories have meaningfully lower merchandise margin. For example, Target’s non-consumables business is down -11% from Q1’21 and its gross margin is down -370 basis points.
On an absolute basis (not versus expectations or some other nuanced comparative), the only retail brands producing overall strong Q1 2023 results that built upon strong 2022 results were TJX Companies, Five Below, Lululemon, Sam’s Club, and Grocery Outlet. That’s the narrowest list that we can recall, outside of a recession. We would also highlight strong traffic for thrift stores and our Holiday 2022 & Beyond Outlook where we said that 1H 2023 would be dominated by the "hourglass consumption pattern", distinct value, and "treasure hunt" retail. At the higher-income top of that hourglass, trips to Europe and the banking crises shot the top bell off. High food inflation and the five aforementioned reasons, shot the bottom bell off. And so, for 1H 2023, there wasn’t much of an hourglass, it was just filled with a lot of broken glass.
Yes, U.S. retail has a large and unmitigated theft problem, which was most clearly quantified by Target on its earnings call; however, it was a topic on nearly every one of the 50+ earnings calls that we listened to for Q1. The industry doesn’t have an easy solution and so that brought a litany of store closing announcements by brands that can’t make a profit from a trade area due to rampant theft and where their employees are in danger. Obviously, pulling out of a market is a disaster for all stakeholders and while a retailer’s losses are prevented, profits are also forgone.
For weaker retailers, all of these compounding headwinds are severely detrimental, which we see in the news on Bed Bath & Beyond, David’s Bridal, and others as well as the reductions in dividend payments for Big Lots and Advance Auto Parts. We expect more retailers in both buckets by year end. Supporting that view is that most retailers are backing a stronger 2H 2023 compared to the 1H 2023 in their guidance. Should that strong 2H 2023 not appear, trailing-twelve-month profit figures and forecasts will drop sharply. A stronger 2H 2023 could happen should the job market remain strong and food inflation suddenly break lower (we are seeing some encouraging signs on this front). However, risks to a positive 2H 2023 outlook are more tangible at the moment and those include: (1) more Fed interest rate hikes; (2) the delayed effect of this past year’s monetary tightening; (3) higher interest costs on revolving cards and refinancings in the 2H; and (4) the restart of student loan repayments (roughly 30M individuals at roughly $330 per month). That last factor will impact those retailers that have high exposure to discretionary spending by college-educated Millennials.
Gas Stations & Convenience Stores: More Consolidation Ahead
While convenience store and gas station visits were able to initially shake off the shock of gas price through much of 2022, we’ve ultimately seen visitation trends stagnate compared to other consumer staples retail categories this year and it appears that consumers are being more selective with gas station visits in 2023.
However, the negative year-over-year visitation trends for the gas station category do not necessarily reflect the overall health of the category. As presented above, year-over-four-year visitation trends (pre- versus post-pandemic) for our gas station chain index (which represents roughly 47K locations across the U.S.) remain solidly ahead of pre-pandemic trends. We attribute the pre- to post-pandemic gains for our gas station index to (1) unit growth from many of the largest gas station chains; (2) an uptick in the number of grocery store and warehouse clubs with a gas station; (3) changes in consumer behavior (i.e., more gas station visits taking place closer to home due to work-from-home); (4) improvements in gas station and convenience store food and beverage platforms, which have driven increased non-gas visits; and (5) industry consolidation.
Consolidation is likely to continue in the years ahead and has been one of the key themes thus far in 2023, including Maverik’s acquisition of Kum & Go and BP's $1.3B planned acquisition of TravelCenters of America (which appears on track despite a last-minute bid for TravelCenters from c-store operator ARKO), and Alimentation Couche-Tard’s acquisition of 112 gas station locations from Mapco Express. What’s driving this consolidation? The most obvious reason is rising operating costs catching up with smaller operators, but there is certainly more to it than that. According to a BP release highlighting its rationale for the acquisition, “TA’s strategically-located network of highway sites complements bp’s existing predominantly off-highway convenience and mobility business, enabling TA and bp to offer fleets a seamless nationwide service”. However, geographic/location synergies are only part of the story, as BP plans to utilize its global scale and reach to “provide options to expand and develop new mobility offers including electric vehicle (EV) charging, biofuels, renewable natural gas (RNG) and later hydrogen, both for passenger vehicles and fleets.” We’ve spent time in the past looking at how EVs might change the commercial real estate market, but it’s already starting to have an impact on the retail category as well. Additionally, advertising and Retail Media opportunity played a part in Shell's recent $169M acquisition of Volta. Looking ahead, we expect consolidation to become a larger trend across the broader gas station and convenience category, driven by evolving consumer behavior, the shift to alternative fuel options, and other non-traditional synergies like advertising potential.
Home Improvement: Slowing Pro Customer Demand Raises Concerns, but Lowe's Still Capitalizing on Smaller Projects, Smaller Markets
Home Depot’s 1Q 2023 update seemingly sounded alarm bells for retail industry, residential real estate operators, and the economy in general, as the retailer reported weaker-than-expected results. We had previously looked at the moderation in demand among Home Depot customer’s due to increased price sensitivity, but the company acknowledged that demand fell below expectations during the quarter, which is evident in year-over-year visitation trends (compared with Lowe's year-over-visitation trends below).
Like a lot of discretionary retail categories, we observed a shift in behavior in March, after the company’s Q4 2022 update and coincidentally right around the time of the Silicon Valley Bank failure (which, when coupled with other regional banking issues, may have had a larger psychological impact on the U.S. consumer than many analysts have acknowledged). On its Q1 2023 update, management called out weakness in a number of big-ticket discretionary categories (including patio, grills and appliances that likely reflects deferral of these single item purchases and pull-forward). Big-ticket comp transactions or those over $1,000 were down 6.5%, compared to the first quarter of last year.
However, it has been Home Depot’s Pro contractor customers that have garnered the most attention since the Q1 2023 update. Management noted that Pro backlogs are still healthy and elevated (relative to historical norms), but that there were a lower number of Pro projects than there were a year ago. Moreover, the types of projects in these backlogs are changing from large-scale remodels to smaller projects (Pro sales also experienced a disproportionate impact as a result of lumber deflation and a wet start to spring negatively impacted both customer cohorts).
Historically, we’ve used weekday versus weekend visits as a way to evaluate Pro versus DIY visit trends, with weekday visits serving as proxy for Pro customer visits and weekend visits serving as a proxy for DIY visits. While this approach has directionally squared with Home Depot’s reported results in the past, 1Q 2023 was a bit more distorted because of the impact of inclement weather, particularly in western markets like California during March and April. According to management, “We didn't have many good weekends [in March and April] but when we did, sales were incredibly strong.” We see this in Home Depot’s daily visitation data presented below, where the weekends during March substantially underperformed the year-ago period. Adjusting for the Easter calendar shift in early April, we started to see weekday visits underperform weekend visits later in the quarter, reinforcing management’s comments about a lower number of Pro projects and changes in the size of the project.
For Lowe’s, we also observed that weekday visits started to underperform weekend visits around mid-April (below), but the gap was much narrower than what our visitation data showed for Home Depot. We largely attribute this to the fact that Lowe’s core Pro customers are typically smaller-to-medium sized professional customers, although retailer-specific initiatives like a Pro customer rewards program and CRM platform and improved Pro assortment and inventory depth likely played a part. Against a rising interest rate backdrop, it’s reasonable to assume that larger-scale projects will be put on hold for the near future, but smaller home projects are likely to persist amid elevated household wear-and-tear.
During its 1Q 2023 update, Lowe’s also touched on a theme we’ve been discussing for over a year now: retailers are increasingly finding fertile ground for growth in smaller and even rural markets. According to Lowe's CEO Marvin Ellison, “our penetration of rural stores gives us an opportunity to drive sustainable profit growth due to the much lower expense base that's required to operate these stores. As an example, what we spend to operate our store in Philadelphia, Mississippi is significantly less than the cost to operate one of our stores in Philadelphia, Pennsylvania. While in years past our penetration of rural and remote stores was viewed as a competitive disadvantage, we now expect that these stores will be a key component of our operating profit growth over the next three to five years.” Placer.ai data supports this viewpoint, as visit per location for Lowe’s stores in the Top 25 designated market areas (DMA) in the country were roughly 5% below its non-Top 25 DMAs in 2022.
With migration trends supporting growth in smaller markets, it’s not surprising that Lowe’s announced it is scaling its rural framework to add a wider offering of farm, ranch and outdoor products (including pet, livestock, trailers, fencing, utility vehicles, and specialized hardware) to an additional 300 stores by year-end. This strategy will put Lowe’s in more direct competition with Tractor Supply Company, which is among the visitation market share winners in the home improvement and rural lifestyle retail categories the past several years.
Restaurants: IPO Activity Indicates Future Unit Growth Acceleration
One of the key themes across the broader retail real estate industry thus far in 2023 is that many restaurant chains are ready to accelerate expansion plans. While several operators have noted that restaurant construction remains a challenge–including 25%-30% higher per unit construction costs and a shortage in construction personnel that is pushing many openings into the latter part of 2023–the increase in restaurant chains exploring public equity offerings indicates that management teams are likely gearing up for more aggressive expansion plans as operating conditions potentially normalize. Mediterranean fast-casual concept CAVA became the first restaurant company this year to execute an initial public offering (IPO)--soaring 117% in its debut and valuing the company at almost $2.5B–while GEN Korean BBQ House, Panera Brands (the parent company for Panera Bread, Caribou Coffee, and Einstein Bagel), and Fogo de Chao all continue to explore potential transactions to help accelerate their unit expansion plans. This marks the most activity for restaurants looking to tap the public equity markets for funding since 2H 2021, when Dutch Bros, First Watch, Portillo’s, sweetgreen, and Krispy Kreme became publicly-traded companies.
We continue to believe that CAVA is poised to become the first Mediterranean concept to succeed at a national level because of (1) its emphasis on suburban locations (helped by early adoption of digital drive-thru lanes similar to Chipotle’s Chipotlane locations); (2) throughput, staffing, and inventory management technologies; and (3) employee retention rates (which has helped to keep CAVA’s speed of service ahead of category averages). CAVA’s registration statement confirmed that 80% of its locations opened for at least 13 months as of April 2023 were located in the suburbs, which aligns with consumer work-from-home and migration trends that we’ve highlighted in past editions of the Anchor.
In our past analyses, we noted that CAVA was narrowing the gap with the rest of the fast casual category with respect to visits per location. This trend has continued over the past several months, with CAVA exceeding the category visit per location average by almost 9% during the quarter (below). According to its registration statements, the company posted comparable-store sales growth of 28.4% in Q1 2023. While some of this growth was driven by high-single-digit menu price increases, the underlying transaction growth during the first quarter was impressive given the slowdown we saw across the broader restaurant industry the past several months.
As we noted last week, GEN Korean BBQ House is also bucking the overall visitation trends across the restaurant category. Below, we’ve presented visit per location for GEN Korean BBQ on a quarterly basis going back to Q1 2019. During 2019, GEN averaged roughly 20% higher visits per location than its casual dining peers. However, the chain appeared to reach an inflection point coming out of the pandemic (starting around Q2 2021) and has outperformed the average visits per location for the casual dining category by almost 45% the past eight quarters.
We attribute the visit per location to a unique experience, something we’ve discussed already this year when looking at concepts like Kura Revolving Sushi Bar or “eatertainment” concepts. Broadly speaking, the success of experiential restaurant concepts is also tied to the shift of consumers moving away from physical goods toward services and experiences, which began around this time last year and has continued despite a more challenging macro backdrop. GEN Korean BBQ has distinguished itself from the crowded casual dining market through its unique concept featuring an interactive and communal dining experience where customers grill their own meat at the table. Much like CAVA, we believe GEN is likely benefitting from the evolution of consumer taste preferences due to the influence of social media, access to a wider variety of food options through third-party delivery services, greater spending power among minorities, heightened demand for better-for-you offerings, increased television programming devoted to food, and the globalization of restaurant concepts and sharing menu innovations across borders. In its IPO filing, GEN notes that its “unique culinary experience appeals to a vast segment of the population, particularly Millennials and Gen Z”. Our data supports this as well, with the collective trade area for GEN’s existing stores having a median age of roughly 34-35 years of age compared to the national average of 38.
Eatertainment: Visitation Outperformance Trends Continue in 2023
Sticking with eatertainment for a moment, the category has remained one of the strongest in restaurants this year, with our eatertainment index (made of companies like Dave & Buster’s, Main Event, Topgolf, and others) outperforming full-service restaurants with respect to year-over-year visits for much of the year. As we’ve discussed in the past, eatertainment visitation trends are likely a function of several factors: (1) an ongoing shift away from physical goods to out-of-home services–including fitness and spas; (2) pent-up demand for experiences following the pandemic; and (3) less competition from smaller entertainment-focused concepts that went out of business during the pandemic.
The popularity of Topgolf has increased manifold. What’s particularly interesting is the sharp rise in the number of visits that take place during the weekday during prime work hours. Total weekday visits have nearly doubled compared to 4 years ago.
What’s more--players are coming from further afield with the trade area almost doubling in size between 2019 and 2023 (below).
If you were invited to an outing at Fowling Warehouse, it might conjure up images of running around catching chickens, but in reality, this portmanteau of football and bowling (pronounced with a long O like “foaling”) is an example of an innovative eatertainment brand, with locations in the Midwest, Georgia, and Texas. The play involves throwing a football at a lineup of bowling pins. If Tom Brady can throw a football into a drone on Mr. Beast’s yacht, imagine how impressive he'd be at this game.
Born from a lightbulb moment at a tailgating party, it combines multiple American passions: football, bowling, and beer. This angle means that interest in this recreation cuts across multiple segment profiles and income levels, per Spatial.ai Personalive. For example, while a location in Hamtramck, MI appeals primarily to Urban Low Income and Small Town Low Income residents, this same concept attracts Upper Suburban Diverse Families and Ultra Wealthy Families in Grand Rapids, MI. Meanwhile, the location in Indianapolis caters to Upper Suburban Diverse Families, Young Professionals, and Blue Collar Suburbs alike. You could say that this is a winning All-American approach.
Box Office Update: Tracking Towards A Happy Ending
The box office has continued its post-COVID recovery journey, bolstered by a large number of very strong releases. The industry is on track to near $3B in receipts for the quarter. We expected a strong quarter, but $3B is up +80% from Q1 2022. For comparison, pre-pandemic Q1 box office receipts averaged roughly $3B (with approximately +10% quarter-over-quarter growth). That’s right--we could be back to a full recovery this quarter thanks to the creators of and stars in Spider-Man, The Little Mermaid, Guardians of the Galaxy, Fast X, Super Mario, John Wick, Ant-Man, and more. Cinemark leads the recovery for the reasons that we cited in the past--more upgraded and maintained theaters, advantaged locations, and in-migration to their markets--and we see that in our visitation data and their reported results. (For additional context, box office revenue versus 2019 is ahead of attendance as it’s complemented by premium large format (PLF) screens like IMAX and higher ticket prices.)
While Cinemark leads, the rising tide lifts all boats including AMC and Regal. That rising tide is more important to these two as their financial situation is more precarious. We previously noted that AMC’s Q1 2023 results were much improved, and that we would expect Q2 2023 to be even more so with strong profitability and cash generation. Regal’s parent Cineworld is expecting to emerge from bankruptcy in July, and says its proposed restructuring has the backing of most of its lenders; it also recently received court approval to raise $2.26B to increase its operating funds. (These developments likely reflect the stronger box office recovery.) Should the tide continue to rise in 2H 2023, as we expect, that will allow for increased investment in the theaters of AMC and Regal, In other words, expect more PLFs, higher theater standards, and enhanced food & beverage offerings, which in turn will raise the consumer appeal of returning to their theaters and further lift the industry in 2024-2025.
As we previously shared, these years should see approximately 15 more big budget wide-release films than the prior year and put 2025 on par with 2019 for such releases. Should those films perform well, it would put the box office above 2019 and the industry into growth. As a reminder, we expect to see more tentpole releases from the new “studios” including Amazon, Netflix, and Apple as well as a recovery by Warner Bros (i.e., new films for Harry Potter, Game of Thrones, Superman, Batman, and Lord of the Rings). The Warner Bros recovery will likely begin in late-2025 and continue through 2026-2027 given storytelling and production timelines; hopefully, the ongoing writers’ strike gets settled soon as it is hindering our positive outlook.
Over the past year, we have written that the major media companies would come to change their view on streaming and re-prioritize the theatrical window as this "legacy business" has strong monetization synergy with their streaming, consumer product licensing, and theme park businesses; moreover, it was how blockbuster talent wanted to “first show up.” That re-prioritization would demonstrate itself in more blockbuster production and marketing investments and a 45-day theatrical exclusive window. (A recent research note from Morgan Stanley noted that Netflix’s enterprise value is now the same as the combined value of Paramount, CBS, Showtime, Fox, Discovery, HGTV, Food Network, Turner, HBO, Warner Bros., ESPN, ABC, Hallmark, The Disney Channel, Disney+, Disney Studios, Pixar, Lucus, Marvel, 20th Century Fox, and many smaller networks and TV and film studios.)