CIScount: The Evolution of Pricing Retail Space

Not too long ago, the only retail space was physical retail space – commonly and misleadingly referred to as “brick-and-mortar.” These spaces range from high-end boutiques to big-box stores to everything in between.

Today, there are two types of retail space: the physical retail space and the virtual retail space – aka the websites and mobile applications where so much of modern commerce takes place. Stakeholders value retail space, regardless of whether it’s physical or virtual, because it provides a venue for customer decision-making, brand loyalty-building, the showcasing of products, and the selling of goods.

However, most methods the real estate industry uses for deriving physical retail space value don’t take virtual transactions into account. Instead, they base physical retail pricing exclusively on transactions that are completed inside the physical store. Traditional retail leases utilize either base rent (which is supply and demand oriented) or percentage rent (where a landlord takes a certain percentage of in store sales), which are generally not adapting well to the age of virtual space.

These methods don’t necessarily recognize where new value creation opportunities exist or spaces where value already exists that is not being captured. Commercial real estate stakeholders including retailers, real estate owners, investors, lenders, and brokers who are all involved in structuring leases are all negatively impacted by this problem.

Quantifying the value of physical retail space is especially important in the post-COVID real estate market. During the pandemic, traditional retailers pivoted, enhanced their digital presences, and found a new balance between virtual and physical retail spaces. In the post-COVID world, most retailers who were not able to adjust to changing times either broke their leases, went out of business, or both. As a result, there is now a greater amount of vacant retail space in the marketplace than there has been in more than a decade.

But change is on the horizon. New systems for pricing retail real estate are gaining popularity.

One new method, CIScount, measures customers-in-store via technological innovations such as in-store foot traffic trackers. CIScount is an innovative way of determining retail rent that can work better than either traditional base rent calculations (which have fairly fixed methodologies) or percentage rent calculations (which have difficulty in attribution).

CIScount is inspired by Bizydev’s work with client Dor Technologies, who have developed a cost effective thermal sensing, battery-operated, peel & stick foot traffic counter for retail stores.

Bizydev, which created CIScount, actively works with clients in the PropTech and Retail sectors on business development and growth initiatives. Co-founder Jonathan Fishman has a long history of creating value and growth opportunities for partners in the real estate sphere and of utilizing technology to help traditional industry norms evolve.

Here’s a little bit about what Bizydev sees around the corner:

Better Determining The Value of Physical Retail Space

Steve Dennis, author of the 2021 book Remarkable Retail, notes that digital channels are now a key part of the consumer’s journey. However, Dennis notes that--contrary to the naysayers--people are still shopping in stores.

Even after the disruptive year of 2020, when many customers switched to digital venues, customers still flock to retail stores for practical (seeing products in person, returning purchases, in-store only sales) and experiential (having an experience they can’t have at home or remotely) reasons. This means that in 2021 and beyond, stakeholders must understand just how interconnected virtual and physical retail spaces are.

For traditional commercial real estate stakeholders, the ultimate measure of valuing retailer health was the correlation between base rent, exterior foot traffic, and gross in-store sales. However, with the rise of virtual spaces, traditional metrics for understanding physical space wellness like exterior foot traffic have been thrown by the wayside.

Furthermore, gross sales are increasingly unrealistic for determining physical retail value because we live in a post-omnichannel world. Customers frequently begin their purchase journey in physical retail spaces before completing their transaction virtually, and vice-versa. But this customer behavior doesn’t necessarily translate into how commercial real estate is priced and valued.

While today’s retailers generally understand the impact of customer value on their virtual space, they may not understand the impact of customer value on their physical space. Retailers working in virtual spaces are better able to determine customer acquisition cost, and price their online advertising and marketing spend in systematic and deliberate ways. By comparison, most of the lease structure methodologies used for physical retail pricing don’t afford retailers or retail owners the same flexibility that exists in the online world.

Despite the fact that 71% of shoppers spend more time in physical retail space versus virtual ones (First Insight, 2019), accurately tracking in-store foot traffic, customer in-store behavior, and in-store decision-making has been extremely difficult until relatively recently. But thanks to technological advances like Dor, it is far easier.

This is especially important in the contemporary retail real estate landscape as retailers and landlords determine new rent lease payment structures that they believe better aligns with each of their interests. In 2020, many retail leases were modified to accommodate the pandemic situation by replacing base rent with percentage rent as the premier methodology for calculating rent payment.

For instance, the Wall Street Journal says retailers and landlords are currently clashing over the definition of a “sale” with customers increasingly browsing in-store but completing purchases online. Landlords who modified leases and thought they had drafted the right lease language were surprised to see shortcomings in their attribution methods due to omnichannel.

However, CIScount helps resolve this shortcoming by striking a better balance between physical and virtual retail spaces. While existing metrics and pricing models used in virtual spaces already take conversion rates and non-converting online traffic into account, CIScount is a physical metric equivalent that helps determine both visitor activity and true customer lifetime value. As a metric for lease pricing, it works well for both sides and provides added flexibility for the post-COVID world.

The CIScount not only has the potential to add to gross sales measured by a store’s POS, but also represents future sales for both physical and virtual retail spaces. Whereas an individual store’s gross sales represent just POS sales and nothing more, the CIScount applies to future sales across all of the retailer’s spaces whether physical or virtual. CIScount is simple, straight-forward and not subject to negotiation, interpretation and differing interpretations.

According to retail real estate lawyer Buddy Flateman, landlords and retailers have been struggling for years attempting to properly value retail real estate.  While “sales volume” will always be the defining metric, there is an awakening of a new generation of retail professionals to the dual facts that (1) physical retail space and virtual retail space not only play on the same team, but need each other to generate sales, and (2) it is no longer possible to pinpoint how, when and where these sales are generated.  So while store sales were once a fairly precise measure of the value of physical retail space, that measure is today not only inaccurate but often misleading.  And though CIScount may not tell the whole “value story”, it will not only tell an awful lot on its very first day, but tell more and more over time as retailers learn to correlate the CIScount with their other value metrics.  And moreover, just like POS sales figures from our “prehistoric” past, CIScount is straightforward math – there is no argument over definition or audit over application.

CISCount, Physical and Virtual Retail Spaces

Traditionally, retail foot traffic has been measured outside stores and not inside stores. Heavy foot traffic on busy urban avenues or in shopping malls is viewed as a reliable estimation tactic for customers going in and out of stores, but in-store foot traffic has not generally been used as a metric for retailers or real estate owners determining rent pricing.

Technical innovations change that. Dor’s product, for instance, is a thermal sensing, battery-operated foot traffic counter with peel-and-stick backing for easy installation in retail stores. Retailers place Dor sensors above their entryways, and the sensors then track foot traffic into the store. Depending on individual customer needs, users can track foot traffic stats and trends across store locations, track conversion rates (via simple one click integrations with most POS systems) for purchases based on day or time, and combine Dor’s data with other retail tools. In addition, CIScount data can be shared by retailers and real estate owners so both can better understand the current health of a store and forecast potential rent for the month.

This applies in a wide range of physical retail settings. For instance, Bizydev has a close relationship with Storefront, a company which matches brands with temporary physical spaces.  Both established and newer direct-to-consumer brands selling primarily over the internet have found pop-up stores useful for both generating buzz on social media platforms and boosting sales from customers who would otherwise be on the fence. For pop-up tenants pricing temporary spaces, CIScount is a methodology which can emphasize customer exposure or experiential marketing as opposed to in-store sales.

CIScount in pop-up use cases is especially useful because temporary store openings are often just as much about presence and marketing as they are about selling products in the physical space. If an Ecommerce brand leases a pop-up space for an in-person experience, stakeholders using CIScount are the most equipped to understand the value of a customer-in-store.

As retailers head into a post-omnichannel future where virtual and physical retail spaces integrate seamlessly and delineating specific channels becomes challenging, CIScount makes it easier to price commercial rent and gain market traction.

In addition to retail real estate valuation, Flateman finds an even more compelling justification to focus on CIScount:  A new universe of operating information for the retailer.  For example, CIScount will facilitate decisions involving staffing levels, efficacy of store management and personnel, marketing efforts, signage, store appearance, and merchandise offerings.

As the retail real estate market rebounds post-COVID, value-add acquirers of real estate could end up valuing properties with CIScount-based retail leases in place in a unique way. Instead of underwriting rental growth simply tied to fixed escalations or market improvement, a new owner could project various creative marketing strategies they could implement to drive more customers to the stores and ultimately generate more lease revenue.

Methodologies like CIScount allow retailers and real estate owners to both test out new marketing strategies for driving customers into stores and allow creative teams to retrofit their stores in ways that make brand presences more experiential.

Fixing the Attribution Problem

The retail and real estate industries are at a crossroads where both must find solutions that better align with their interests. CIScount creates that balance, meaning that brands which have calculated the value of a customer online can now begin to determine the value of a customer in store.

Naturally, physical retail isn’t going anywhere. Customers want to touch, try on, and experience merchandise in-person. This has always been physical retail’s advantage, and will always be something that draws customers in. That said, using CIScount, stakeholders can negotiate retail rent which more accurately reflects the value of their properties.

Bizydev is at the forefront of introducing new concepts and methodologies that allow the retail and real estate industry to evolve and adapt. Our work with clients centers on helping technology, product, and service companies accelerate growth and develop the right types of opportunities. We'd love to find ways to work with your organization.

by The Bizydev Team