There will be no reversion to the norm – much retail property will keep losing value. But the sector can be better than ever, thanks to
A recent conversation with a large retailer went like this:
“The market is tanking, opening up some real buying opportunities; do you want to get involved with a distressed asset fund we are putting together?” … “Are you kidding? We are murdering our landlords on rents, there is no way we’d buy any retail real estate.” That’s where we are: the ‘retail apocalypse’ is in full swing.
In the US some 8,200 store closures have already been announced this year, with an expected shuttering of 150m+ sq. ft of space. On top of the 155m sq. ft closed last year. In the UK a net 1,234 stores shut in the ﬁrst half of the year, according to the Local Data Company. More than the same period last year and the highest since 2010. Of course you can, and many in retail real estate do, slice the numbers in diﬀerent ways and argue the situation is not in any way an ‘apocalypse’. For me, ‘we’re murdering landlords’ rather trumps that Panglossian viewpoint.
What no one can deny, though, is that the world of retail, and therefore as sure as night follows day, retail real estate, is changing dramatically. The only valid variance of opinion is in the degree of change. In my mind the degree is very large indeed.
This is why. First oﬀ, we have to accept that physical retail is no longer just, or even primarily, about shopping. Historically, physical shops were the distribution channel for manufactured goods. As the Industrial Revolution developed, and factories enabled the production of large quantities of identical goods, the only way to sell them, at scale, was through physical shops in every village, town and city across the land. Sure, there was mail order way back when, but that was very slow and useless for anything perishable. Sears had its famous catalogue back in the 19th century (where incidentally one of the best-selling items was self-assembly homes), but that served a huge market, the US, with very limited infrastructure. Shops were it… if you had products to sell you had to have shops. Lots of them.
Today shops are not needed as distribution channels. There are other ways to get goods into the hands of customers. Shoppers no longer need shops, to shop. In this world a physical shop has to perform one or more of four functions:
First, you have to be a ‘destination’. Somewhere that is just so exciting, or attractive, or fulﬁlling, or intriguing, or beautiful that it will attract people of its own accord. This might be in town or out of town; there are examples of both. It might be newly built or old, high-brow or low-brow, low-end or high-end. There are many ways to create ‘destinations’. There are also successful and unsuccessful
‘destinations’. Economics still applies; create a ‘destination’
in the wrong place, or where local purchasing power is low, and even the best places can fail. But a great place in the right location is a pretty solid asset.
Secondly, you can be a fulﬁlment centre, somewhere
that helps retailers get over the ‘last mile’ problem. Many retailers still stick to the fantasy that their customers want ‘click and collect’ services. They do, but only in the absence of being able to get their orders quickly some other way. Why did Amazon buy Whole Foods? Because their stores
get them close to a large percentage of prosperous shoppers. All of the best retailers are working on getting delivery down to as short a timeframe as possible. Shops can obviously help, but they do not need to be open to the public. Urban logistics, vertical warehouses, micro warehouses, car parks, sites awaiting development; all of these are pieces in the fulﬁlment puzzle. Build a network that oﬀers two-hour delivery to the largest, richest customers and you have another solid asset.
Thirdly, you can win by having shops particularly well-tuned to local particularities. These would be areas that are the antithesis of the clone high streets we are too familiar with. Hard though it is to believe, not everyone wants the same 50 brands. The days of the same old same old are as dead as thinking of stores as distribution channels. Think of a high street more like a smartphone – everyone’s home screen is diﬀerent. We might well ﬁt into cohorts of like-minded people but we certainly do not all want the same. And critically, today we do not have to accept all being sold the same. Personalisation at all levels is the name of the game. Curating places with a deep respect for, and insight into, the locality and the locals is the third way to build solid assets.
And fourthly, you can supply the cheap and everyday needs of people. Either people who do not use online very much, or goods that are fast-turnover, or too cheap to deliver. Places where convenience and price trump all else. These are the ﬁnal solid assets.
Whichever category you choose, though, everything you do must be data driven. In conception, design, build and ongoing management there is no success in retail real estate that will not be data driven. And this means real-time data, not quarterly reports of out-of-date information. As Larry Page has said, “At Google we trust in God; everyone else must bring data.”
The upshot of the above? There is going to be a lot less physical retail, but it is going to be much better retail. Obsolescence will be bountiful in the next ﬁve years. There is a wildcard item ﬁve to the above typology.
And that is creating great retail spaces and places, not
to generate any great intrinsic growth but to make surrounding residential assets more attractive. Creating and curating really interesting, attractive retail locations as loss leaders to entice people to pay more to live in
an area is a valid goal. Clearly, this only makes sense when a large owner controls enough real estate to really be able to leverage this strategy, but those places do
exist. King’s Cross and Marylebone in London are great examples of this.
So where does tech, or proptech, come into all of this?
At a macro tech level it is the development of the cloud, smartphones, connectivity, robotics and automation that has propelled the growth of ecommerce and the rise of Amazon, Asos, Boohoo et al. Infrastructure matters; for years people laughed at how pets.com raised hundreds
of millions and then collapsed in the dot-com bust of 2000. What they tend not to mention is how chewy.com
(essentially the same thing) ﬂoated last year and is now worth nearly $10bn. Selling pet food online does work after all. But only when the necessary infrastructure enables it to work.
Physical retail is suﬀering today because technology, in the widest sense, has enabled all manner of competitors, and competition, to ﬂourish. Mostly the real estate industry has been caught out by this because mostly the real estate industry pays little attention to, and has little understanding of, developments within the technology sector. You cannot see a huge obstacle in the way if you keep your eyes focused elsewhere.
The ﬂip side to the tidal wave of change largely driven by technology is the ability of more targeted technology, in the guise of proptech, to come to the rescue. There is a great deal we can do to build and grow great retail assets.
Let’s start with localisation. KYC is the name of the game here: know your customer. Nothing works without this. Fortunately we live in a world of ever-growing data with rapidly advancing tools to analyse that data. So instead of just proﬁling a location based on crude (and inevitably out-of-date) demographic data, we can today utilise the following:
• Psychographics enables us to understand consumers based on their psychological attributes, and focuses on activities, interests and opinions.
• Socioeconomic data enables us to understand the behaviour of people, through the lens of economic drivers. How does the economy of this location impact on how our customers are likely to behave?
• Data from mobile phones (just about everyone has one of these and they are ‘broadcasting’ all of the time) helps us understand who shops where, where they live, where they work, the other brands besides ours that they visit, and the way they tend to move around an area.
• Married with transaction data, an increasingly rich picture of purchasing behaviour can be developed.
- Whether from retailers directly, or via credit card companies, we can build enormously deep geospatial models based on this transaction, mobility, economic and behavioural data.
And here artiﬁcial intelligence, with its subset machine learning, is very much our friend. The three areas where AI and ML can, and do, excel are:
• personalised product recommendations
• assortment optimisation
• pricing optimisation.
That means: what are the broad product categories our customers are most interested in, how can we optimise the mix we stock, and then how can we ensure pricing is set just right? Not too hot and not too cold. This of course works at the individual shop level, the centre level, the street level and across a wider area.