Retail's big bang

Opportunistic investors and strong demand for retail property assets are not the only factor forcing retailers to rethink their real estate strategies. The scale of expansion across Central and Eastern Europe as well as Southern Europe has also had an impact on how retailers are carving out market share. Rather than considering whether to purchase or lease, retailers are getting involved in developing property or taking the franchise route in response to the demand for new developments and shopping centres in these territories. But which option provides the best long-term benefits and how will retailers evaluate the market in the future?

According to Mike Simpson, head of international retailing at Colliers CRE, many retailers cannot manage the scale of the expansion that is currently occurring. 'It's almost a bit of a big bang in terms of retail, in that in property terms, you've got new shopping centre developments popping up all at once across Central and Eastern Europe, in Russia, as well as Spain and Italy. All of these markets are relatively new for conventional shopping centres. So it's very difficult for a retailer to manage an expansion process with all the infrastructure that it needs to put in, across all these territories.'

Retailers are divided as to which strategy to pursue with large supermarket operations such as Tesco and Carrefour choosing to develop stores on a country by country basis while department stores such as Marks and Spencers are making franchise agreements.

'The large supermarkets are choosing to get involved at the property level because it offers them certainty of delivery and exclusive positions,' explains Andrew Friend, director of retail property at Henderson Global. 'They realise that if they go to an existing development and take the leasing route, they will be up against their competitors. But if they build a scheme that the local authority is happy with, they will be the main anchor tenant, and have certainty of delivery.'
The disadvantage with this approach, however, is the huge level of investment required in terms of time, capital and human resources, particularly when a company is competing to gain market share in several territories at once.

'Rather than expanding directly, retailers like M&S are entering into franchise agreements with local partners,' says Simpson. 'This allows them to expand very rapidly using their management resources much more effectively. For instance, their international managers can run several countries at a time, as opposed to having to set up a team per country if they were doing it completely under the corporate banner. The benefit is that local entrepreneurs in Kazakhstan or Russia for example, identify that there’s a market for a particular Western brand in their country and they purchase or lease the property and run the business under a franchise agreement. And what you have in these countries as a result is the development of a number of entrepreneurial companies like Delta in Serbia. They are developing shopping centres, but they’re also involved in finance as well as supplying tenants for their own shopping centres and bringing in some of these brands.'

The full article by Brenda McNally appears in the November edition of PropertyEU Magazine.