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Axe Throwing Bars. Dating App Cafes. Furniture Store Hotels. Shopping Center Coworking. Food Halls. Banking Cafes. Float Rooms. Escape Rooms...

Is the experiential retail trend more than just a knee-jerk reaction to a challenged retail landscape? Our response to that question is a qualified “yes.” We suggest that the increased drive for experience-based retail reflects a deeper economic trend with implications that go far beyond shopping centers and the shifting tastes of millennial consumers. It is a trend that plays out most visibly in the retail arena because of the current disruption in the retail industry.

In addition, the rise in popularity of experiential retail concepts may be the first manifestation of a larger trend—one that is impacting, interacting with, and increasingly driving, most of the major commercial real estate trends at play in the U.S. Those commercial trends range from urbanization to the drive for live-work-play projects and encompass wellness and lifestyle brands to coworking—the sharing economy and the workplace itself.

You have to have been living under a stone not be aware of the flood of new experience-based concepts that are transforming the retail industry. Closures and bankruptcy rates for traditional retailers have been reaching record levels. Despite a robust economy, there have been more than 7,500 store closures from major retail chains from January through May 2019. With half of the year remaining, the number of closures has already surpassed the peak number of 5,000 recorded in 2010 following the Great Recession.

On the surface, it would be easy to simply chalk up the rise of experience-based retail as a reaction to the challenges traditional retail has faced from eCommerce. Savvy entrepreneurs are looking for eCommerce resistant concepts to lure consumers. Retail landlords are looking for relevant new concepts to backfill an increasing number of vacancies. While these trends make sense on the surface, they don’t speak to whether or not any of them have long-term viability.

For example, two years ago, there were less than a handful of such “experience-based” establishments. In today’s retail world, we are aware of more than 100 axe-throwing concepts across the country (nearly all of which mix craft brewing, entertainment, community and corporate team-building exercises)—with more on the way.

Is this simply a short-term fad, driven by an often misunderstood millennial consumer that “values experiences more than stuff?” The short answer is “yes.” Axe-throwing bars hit a number of cylinders that resound with millennial consumers; they offer an exciting, visceral physical activity that embraces communal gathering and offers craft beer as well.

The answer regarding the longer term is “maybe.” Could it be a replay of the “cupcake craze” of a few years ago that saw a mass proliferation of concepts within a short timeframe, only to see all but the best-in-class operators survive as the fad waned? Perhaps… but ultimately that depends on what drives consumers to embrace any trend in the first place. That is the question behind much of the experiential retail trend: Is the experiential retail trend more than just a knee-jerk reaction to a challenged retail landscape?

Our response to that question is a qualified “yes.” We suggest that the increased drive for experience-based retail reflects a deeper economic trend with implications that go far beyond shopping centers and the shifting tastes of millennial consumers. It is a trend that plays out most visibly in the retail arena because of the current disruption in the retail industry.

In addition, the rise in popularity of experiential retail concepts may be the first manifestation of a larger trend— one that is impacting, interacting with, and increasingly driving, most of the major commercial real estate trends at play in the U.S. Those commercial trends range from urbanization to the drive for live/work/play projects and encompass wellness and lifestyle brands to coworking— the sharing economy and the workplace itself.

In other words: Welcome to the Experience Economy.

The blueprint for much of what is transforming the current retail real estate world today was largely laid out over 20 years ago. In their seminal 1997 book, The Experience Economy, economists B. Joseph Pine and James Gilmore theorized that global economies were continuing to evolve. The economy was moving from a service-based one to an experience-based one. They argued that there was a natural evolution of economies. Over the previous 200 years the economy had moved from an agrarian—which produced commodities from natural resources—to an industrial one which refined those commodities to standardized goods. That evolved into a servicebased economy which customized those goods. The service-based economy was pivoting once again, into an experienced-based one. Pine and Gilmore posit that all economies eventually reach limits on output as they mature, particularly as technology drives greater efficiencies.

Pine and Gilmore also suggested that the industrial economy had largely had its day. “… Today it’s very difficult to invent—and therefore rare to encounter— a truly new good; most differentiation of goods now involves the enhancement or modification of items within existing product categories and not the creation of wholly new categories.” This may seem counterintuitive [sic] considering the ongoing rapid pace of technological advancement, but the authors noted that the two exceptions to this rule were consumer electronics and medical technologies. Still, they suggested a critical differentiation is that “when buying these items, consumers most value not the goods themselves but the experiences and transformations they enable.”

Meanwhile, the service economy (which has accounted for more than 50% of U.S. jobs since the 1950's) also has its own natural limitations. “…The service economy, too, has justifiably faltered. Any growth we saw in true services largely came from financial services, and most of that from artificially propping up a world of goods with increasingly desperate attempts to devise financial instruments… all this incessant financing creates precious little tangible value.”

Chilling words, particularly uttered a decade before the financial crisis of September 2008.

Pine and Gilmore argued that the rise of the “experience economy” was the natural extension of a service economy that had little room to grow with goods and services becoming increasingly commoditized. In a commoditized world businesses increasingly become interchangeable, competing solely on the basis of price. This model of competition eventually erodes growth and profitability for all but the largest players that can compete on economies of scale. The new idea they articulated was that experiences represent “an existing, but previously unarticulated genre of economic output.”

Remember that Pine and Gilmore’s treatise was published during the height of the first tech boom. The challenge for most retailers at that time wasn’t yet eCommerce—it was the rise of discounters in the midst of the Big Box Era. Still, malls were packed and developers couldn’t build big box-focused power centers quick enough. Most retailers at the time responded to the challenge of race-to-the bottom discounters by slashing prices and looking for efficiencies to offset those lower costs.

1997 was also the year when a new online bookstore called Amazon—launched only three years earlier in founder Jeff Bezos’ garage, filed its initial IPO with an initial stock price of $18. (As this report went to press, AMZN stock has been consistently above $1,800 per share). This was one year before the launch of Google and two years before the release of the Blackberry. Apple was just starting its comeback; the first iPhone wouldn’t come for another decade.

Yet, despite the fact that eCommerce was just a blip on retail’s horizon, Pine and Gilmore surmised that the mass commoditization of goods—driven by both bricks-and-mortar discounters and online technologies—would not only result in the need for a new category of economic output, but it would also resound psychologically with consumers.

Fast forward 20 years. The millennial generation is the largest age demographic cohort in the country and the subject of constant study and innumerable white papers. Its consumer habits have been scrutinized, analyzed and dissected endlessly. Dozens of articles have been published from trade journals to the mainstream media on the trend of millennials [sic] preferring to spend money on experiences, rather than things.

And, indeed, polling backs this. In 2016, a study by Eventbrite and the Harris Group found that 72% of millennials [sic] prefer to spend money on experiences over material items.

The predictions of Pine and Gilmore not only appear to have startling relevance 20 years in advance, but have been supported by numerous studies from economists analyzing the disposable income spending patterns of millennials [sic]. Notably was their seemingly prophetic conclusion that “experience-focused economic output would resound with consumers.”

In 2010, Travis Carter and Thomas Gilovich published a groundbreaking work entitled, “The Relative Relativity of Material and Experiential Purchases.” Their analysis sought to answer whether experiential purchases made people happier than material ones. Their findings, based upon multiple in-depth surveys, found that, indeed, people (not just millennials) [sic] find greater long-term satisfaction in experiential purchases.

Millennials [sic] have been touted as the poster children for the rise of experiential retail and the experience economy itself. But this is likely more than just a generational quirk. Millennials [sic] may be the first “digital” generation, but this trend has deeper implications. Is it any wonder in a frenetic, tech-driven world where social media substitutes for community, where connections are increasingly digital and not physical, where skilled workers are working longer hours than past generations and where goods have increasingly become commoditized online or via discounters, that the craving for experiences has been heightened?

Make no mistake: experiences matter. They matter emotionally to consumers and they matter financially, and not just to retailers looking to survive.

The Experience Imperative in the Age of Retail Reinvention

For those active in the retail arena, the last few years have seen seismic changes in the industry. Those changes include a new set of terms and concepts that didn’t exist until just a few years ago.

The terms “retail apocalypse”, omnichannel, curated retail, personalization, authenticity and experiential retail haven’t just become part of the vernacular of retailers and real estate professionals alike; they have become common buzzwords among the general public as well.

The problem with buzzwords, of course, is that more often than not, their widespread use ends up diminishing in meaning and importance the very important concepts that they initially were meant to convey. Complex concepts, instead become relegated to a kind of shorthand, all too often used with little context or depth, and often without deeper understanding. We would argue that perhaps nowhere is this truer than in the case of two simple words: experiential retail.

The previously cited entertainment-focused retail concepts—axe throwing bars, dating app cafes, furniture store hotels, shopping center coworking, food halls, etc.—all qualify as examples.

But retail in the modern era has always been an experiential art form. Customer service remains at the center of consumer experience, although in the aftermath of the Big Box Era many retailers seem to have lost sight of this. The challenge has been the very real market pressures between commodity and experience.

The retail industry is always evolving and therefore must be forward looking. The downside is that retail often has a limited view of its history. Just as “experiential retail” has become a buzz phrase often misunderstood or used without context, another, darker term attached to retail has created just as much confusion in the public’s view: “retail apocalypse.”

With every closure or bankruptcy announcement, the phrase “retail apocalypse” raises its ugly head. The term has its own Wikipedia entry. It’s the most-talked about storyline in retail. Yet, at times, it is the most misunderstood. At its core, “retail apocalypse” is the overly simplified narrative of eCommerce disrupting bricks-and-mortar retail. But the term is problematic on a number of counts.

First, it paints the entire retail sector with an inaccurately broad black brush, despite the fact that the challenges of retailing in the newCommerce [sic] era have not played out equally across all retail categories, shopping center types or retailers. While it would be foolhardy to suggest that the challenges created by digital retailing haven’t been the most disruptive force the market has experienced for the better part of the 50 years, some bricks-and-mortar categories have actually thrived.

Secondly, the term “retail apocalypse” conflates all of the challenges facing retail and retailers into the very real disruptive issues posed by the rise of eCommerce. Many of the iconic brands that have failed in recent years were already troubled and losing market share when phrases like “next-day delivery” were still a pipe dream. The rise of eCommerce has been the catalyst behind current disruption. But there were already plenty of challenges in play that made retail vulnerable to disruption.

Many of these challenges were self-inflicted; unsustainable debt loads, outdated financial growth models that led retailers to over expand and underinvest [sic] at a time during which a formidable challenge was brewing on the horizon. For example, since 2010 nearly 60% of all major U.S. retail bankruptcies have been by retailers that were shouldering leveraged buyout debt. This includes some chains that were still leaders in their respective categories. Unfortunately, this obscures many problems that are, indeed, teachable and avoidable.

Lastly, the “retail apocalypse” narrative obscures the fact that what is actually happening in the marketplace: retail reinvention. Retail has reinvented itself a number of times over the centuries; from the rise catalog sales in the 1800s, to the emergence of the department store, the Age of the Mall and the Big Box Era. This is just another reinvention, albeit a very painful one for many retailers and landlords. And the disruption is far from over. But, since necessity is the mother of invention, the rise of experiential retail, as well as the renewed focus on the consumer experience, is one of the solutions to the current bricks-and-mortar malaise.

Not all retailers are facing the challenges laid out in this report. Convenience as a real estate model still is critical and, depending upon the retail category and its level of eCommerce-driven disruption, the challenges can be quite different. But ultimately, there are only three reasons why a consumer visits a store or a shopping center to purchase goods or services: convenience (location), value or experience. In the “Age of Amazon,” convenience of location is no longer a sufficient driver for a significant (though not all) number of retail categories. It’s hard to beat the convenience of ordering goods on your smartphone while watching television.

For a large number of retailers caught in the middle, the choice is simple: either find a way to compete with discounters—a very challenging task for chains without the size and scale to build the kind of buying power needed to execute successfully—or to stake out a consumer niche and provide an unparalleled experience.

Luckily, the demand for authentic experience is real and bankable and it extends beyond retail alone.