James Brown, Head of European Retail Research at JLL, examines the changing space and location requirements by retailers for stores and distribution as predictions say that 20% of total stock is likely to become surplus to requirements.
OVER THE last decade retailers have, to a certain extent, continued to do what they do best: sourcing new or ‘better’ goods, delivering these to store with ever more efficient logistics, driving down operating costs wherever possible, as well as finding customers and endeavouring to keep them happy.
However, we have started to see a shift in the way that both retailers and shopping centre owners and managers operate. Attracting and retaining customers now requires a degree of ‘thinking outside the box’, whether via new technologies to ensure stock is always available in store, or by improving the customer connection or experience.
Innovation in shopping centres now means leisure and catering outlets sitting next to retail in most new build property – perhaps at the heart of a retail place. The catering offer in particular has gone from strength to strength (Westfield Shopping Centre provides a good example of this), with new shopping centres as well as some high streets starting to become places where customers happen to shop because they are already out and about, rather than because they have gone there purely to shop in the first place. That said, on the whole the picture is fragmented: there are still very few large ‘destination’ attractions in Europe’s shopping centres, and this is largely due to the cost of space, exacerbated by the lack of long-term guarantee of income security.
Within London, international retailer demand for the right space in the right location has fuelled record rents in the city centre, and the capital continues to benefit from its sought-after position as a prime global destination for those retailers looking for a platform to expand further into Europe. In fact, rents in more than a third (39%) of the top 200 UK retail locations (including London) are at, or exceed pre-crash levels in 2008. Some areas, described as ‘pockets of gold’ – such as Oxford, Bath, Brighton, Colchester, Winchester and Edinburgh – have strong fundamentals and constrained supply and are seeing focused demand from retail and food and beverage operators looking to make the most of these conditions.
The last decade has also witnessed a growth in the number of UK retailers increasing their cross-border expansions in Europe, and consumers are also much more likely to make cross-border purchases than they were a decade ago. According to the European Commission, a quarter of EU consumers made at least one cross-border purchase during 2009, and this is likely to increase as more and more people travel to different locations. Consumers have begun to expect to see familiar brands regardless of where they are. Retailers are, for the most part, successfully moving into new territories and there are a large number of global cities for retailers to exploit.
SHIFT UP & DOWN
Despite a clear on-going demand for desirable retail property, the general view is that most legacy UK retailers are likely to be looking to adapt and potentially reduce their physical space in the future, partly due to the demands of consumers increasingly shopping online, but also in response to economic conditions and with retailers looking to change their retail business models and distribution channels accordingly. It is really important for modern retailers to build a strong and consistent brand – both online and in store – and to ensure both they physical and virtual space they occupy reflects the brand.
Interestingly, retailers will increasingly have to consider not only where they place their stores, but also, in particular, how they effectively manage their back-end operations to adapt to multichannel requirements. For example, there may well be a requirement for the creation of new distribution centres with online pick-up points, dark stores servicing large areas, existing stores servicing direct retail, whilst also acting as distribution points for ecommerce operations. These developments are pushing up demand for quality logistics space; at least 25% of logistics space secured by retailers in 2011 (5.6 million sq. ft. of Grade A logistics space) was related directly to internet retail, according to JLL data.
Click and collect has implications on storage requirements as well, both for goods to be collected and to be returned. It is estimated that up to 25% of existing UK retail sales will go online by 2020 and JLL believes that over time, up to 150 million square ft. of space across the UK (20% of total stock) is likely to be surplus to modern retailing needs in its current form. This means that there is a percentage of existing physical retail space which is currently obsolete across the UK in certain locations. While it might not mean that there is too much space in total, it is certainly the case that existing space is not optimised; in terms of how it is used or where it is located. That said, stores are not going anywhere and they will continue to play an important role in terms of marketing and showcasing the brand, developing and maintaining customer loyalty, delivering great service and perhaps most importantly, selling products. Not all retailers are looking to downsize; they are considering solutions that are ‘fit for purpose’ in this new increasingly virtual world.
At JLL, we are seeing some retailers walking away from underperforming locations, instead prioritising capital expenditure to build ecommerce platforms designed to bring online and in store retail together, or allocating capital to new store expansion, where economic fundamentals are attractive – ultimately this is good business practice. The plight of the high street has come under much scrutiny in recent months, and it must remain a priority, but the good news is that opportunities do exist, both online and physically.
It is important for businesses and government to work together to find solutions that support the changing form and function of UK shopping, as well as the evolving requirements of towns and cities more broadly.
