Retail – a post-pandemic lease of life?
2020 was considered the retail sector’s annus horribilis as COVID-19 led to a global consumption shock as shops closed their doors because of national lockdown policies. While uncertainty remains, successful vaccination programmes are hopefully ensuring that the worst is behind us and the retail sector can start to look forward. But what does a post pandemic retail future look like?
A retail bounce?
Expectation for a post-pandemic spending boom is gathering pace. Even though 2020 increased inequalities between socio-economic groups, many of us feel better off with limited outgoings on commuting costs, leisure spend and annual holidays. Unlike previous downturns, the consumer is emerging from this with more savings and a larger spending pot which will facilitate pent-up demand.
When (or if) a consumer boom occurs is unknown. As the last 18 months have shown, predicting when the pandemic will be truly over remains unclear with infection rates continuing to vary across countries. The recovery in retail sales has been particularly volatile but in the early part of 2021 we witnessed extraordinary growth albeit from a low base. Will this momentum continue? Recent evidence shows that while April data broke all records in terms of sales performance, momentum slowed during the preceding months possibly because of the increasing delta variant and a rise in cases.
A post-covid bounce will positively impact the markets that suffered the most. The prohibition of travel in 2020 will likely see a surge in demand for postponed and cancelled holidays, business travel and reuniting families. Humans are social creatures with ‘zoom fatigue’ now well and truly set in and the desire for social contact ever growing with the lure of busy restaurants and bars. The reopening of hospitality venues in greater numbers and larger audiences will remove growth caps, further driving output.
But the actions and outcomes of the pandemic will not be forgotten and changes to work and living patterns will have lasting impacts that affect our retail environment. Longer-term changes in retail need to be considered such as the acceleration in online spending and work-from-home patterns.
Online – friend or foe?
COVID-19 has accelerated the dominance and growth of online shopping, a trend well underway for decades but which exploded during the pandemic, given it was the only channel connecting retailers and consumers amid lockdowns. While differences exist across geographies, e-commerce penetration, measured by sales as a share of total retail sales, has grown two-to-five times faster globally in 2020 than before the pandemic.
We expect online penetration to fall over the short term as retail stores revert to normal trading conditions, but online rates to remain above 2019 levels. They will continue to move upwards as technological advances allow for a greater ease in terms of cost and delivery of products, and find support from growing demand for online retailing through new innovative channels such as live streaming and social media.
Expectations for online spending growth varies across country and sector. GlobalData forecast online clothing and footwear sales to increase 75% over the next five years and equate to 37% of the total clothing and footwear market by 2025. This percentage is expected to be higher in Asia and the United States at 46% and 43% respectively.
The grocery sector has been relatively immune from online penetration, although it saw a pandemic surge especially in markets where infrastructure allows for adequate and timely delivery of produce. In the U.K. for example, (where most areas of the country can receive next day online food deliveries), channel shift from offline to online was dramatic with 2020 growth estimated to be 86%, although this still only equates to 12.5% of the sector total.
From a real estate perspective, online retailing has been a lifeline for retailers. It allowed many occupiers to remain in business despite store closures. The well-versed omni-channel argument states retailers do best when they have a multi-channel approach which ensures stores provide brand experience, marketing, a halo impact (CACI state online sales increase 106% when a store is present) and click-and-collect functionality. As an example, e-grocery has accelerated but their remains a strong reliance on the physical store. High costs of delivery and logistics combined with rising cost of cold storage make the physical store the ideal last-mile delivery mechanism.
78% of online (grocery) orders involve the physical store (28% buy online, pick-up instore + 50% ship from store)
However, the pandemic and growth of online has and will continue to lead to retailers adapting their strategy. Examples include the global fashion-retailing brand Inditex, which is targeting an increase in online sales, from 14% in 2020 to 25% of their total sales share by the end of 2022, while closing 120 stores. Gap is another example. It is moving to an online-only business in the U.K.
Structural changes have a bigger impact on the fashion sector as online takes a larger share and we expect consolidation to continue. Retailers who require a smaller number of stores to cover a local market will focus on the best assets, and it is our belief that core retail assets will benefit from less competition as weaker retail centres die out and reduce physical competition. In the meantime, assets that are overexposed to fashion will need to diversify and introduce new occupiers. Retail centres will become more mixed use, which will provide new investment opportunities.
The grocery sector will remain stable in terms of post-pandemic structural change, with online rates remaining low, but this doesn’t mean the sector will stand still. Grocers will innovate through new delivery methods, enhanced in-store pick-up and conversion of oversized retail space to last-mile logistics. Physical retailing which offers grocery anchors and convenience have demonstrated resilience through the pandemic and have qualities which we believe will win out over the longer term as consumers spend more time at home.
We have spent a lot of time at home over the last 18 months and many of us are fed up with working, eating and socialising in the same space. As we emerge again into society, one element which will not disappear is home working given how effectively technology has enabled remote work. While this seems like an office sector debate, it also has implications on retail.
From a retail perspective, what does this mean? More time spent at home adds to the increased convenience of home deliveries and continued support for online retailing. Working from home drives local consumption patterns which will benefit grocery, food and beverage, independent retailers and power centres/retail parks. The ability to work from home allows for decentralisation where your residential locality is less influenced by the proximity to major cities or central office hubs. This will lead to increased demand for attractive or cheaper towns which may have natural landmarks or spur the upsizing of homes in cheaper cities.
Where and how we live have been brought under the spotlight during the pandemic, along with debate around the 15-minute or walkable city concept. The concept, developed by Professor Carlos Moreno at the Sorbonne in Paris, suggests “la ville du quart d’heure” is based on daily needs (work, shops, entertainment, education, healthcare) being accessible within a 15-minute reach on foot or by bike. This has environmental and community benefits by reducing the number of cars on the road and freeing up commuter travel times. Arguments for and against the 15-minute city are for another article, but we recommend readers to explore these ideas. We believe the pandemic has given way for our cities to be reimagined more than ever before, which in turn will have ongoing consequences for retail real estate.
It is too early to understand the full implications and reality of working from home or reimagined cities, but in terms of retail investment, it potentially leads to a more dispersed retail model. While consumers will increase demand, occupiers are less likely to provide smaller retail footprints to service locations (as we discussed above, many are in consolidation mode). Investment will mean smaller lot sizes, less established covenants, lower rents but increased volatility. Despite challenges we should be mindful of value-add opportunities for higher-income products which have strong fundamentals.
The retail sector should come out of the pandemic with soaring consumer confidence and spending levels. Many occupiers will breathe a sigh of relief having got through retail’s annus horribilis. But a short-term bounce should not overshadow longer-term implications of structural change. This includes developments which the retail sector is very familiar with, such as online retailing, as well as new factors which may change where consumers spend their time and their route to market.