The rise of ‘omni-channel’ is having massive repercussions for retail and logistics. But it is a complicated picture that varies across Europe, writes Christine Senior.
E-commerce is having a huge effect on retailers. The UK’s Christmas shopping period showed that the most successful retailers had adopted an omni-channel model – defined as a seamless approach to selling to consumers through all channels – including physical stores, the internet, mobile phones and other forms of media. Yet just a matter of months ago it was the multi-channel model – where shops and online would operate independently – that appeared to be the future for retailers.
Jones Lang Lasalle’s (JLL) report in November 2013 on the effect of e-commerce on retail logistics highlighted this development. According to JLL, the key to making this move successful is the integration of a retailer’s processes, information systems and infrastructure, to enable it to meet customer demand. Omni- channel is behind changes to both retail and logistics real estate.
“Large dominant schemes that offer experiential retail will continue to do well”
Having online and stores functioning together in an integrated way to fulfil customer expectations means retail property and logistics warehouses have to function in harmony. The idea that investors should consider the two sectors of retail and logistics real estate in tandem is gaining ground.
Legal & general Property (LGP) is a strong advocate of this. Bill Page, LGP’s industrial research specialist, says the way the property industry works – with retail and industrial experts working in different departments – needs to change. “The industry needs to bring these two disciplines together,” he says. “It’s about understanding the entire process between the point of sale and the point of collection. our logistics experts are talking a lot more with our retail experts. We are trying to work out common ground in terms of common clients.”
Henderson Global Investors reported that, as the boundaries between store and internet are being blurred, so are the roles of retail and logistics. Its report on the impact of technology on real estate said logistics had moved from being the unglamorous end of the property market to being “in the limelight”.
Alice Breheny, Henderson’s head of property research, speculates on where this might lead to. “I can imagine investors who want to invest in retail, buying shopping centres and shops, but also perhaps they could invest in logistics sheds or hubs because the tenant is a retailer perhaps,” she says. “I think we will see a new type of property, a cross between a shop and a distribution shed. You can imagine something like a supermarket, which is largely a dark store distributing to the home, which has a facility for customers to collect shopping ordered online, but where they can also get some fresh produce while they are there.”
One important way retail and logistics infrastructures are drawn together is through click-and-collect services, where customers order online but pick up goods in store. Customers like it because they do not have to wait at home for deliveries, while the retailers avoid costs for the ‘last mile’ of delivery to customers’ doors.
James Brown, head of retail research at JLL, says these customers have proved the ones to attract. “some of the most profitable customers are click-and-collect customers who do research online and come into the physical space to pick up products, then more often than not end up shopping while in the physical space.”
“People tend not to buy so many health and beauty products online”
The changing face of shopping is developing retail and logistics properties. For example, click-and-collect has implications for retail leases. Turnover leases based on store transactions do not reflect business as a whole, including goods that are just picked up in store after online transactions.
Tom Carlton, LGP’s retail research specialist, says leases need to evolve to try to capture that additional impact of the store rather than just the transactions that occur there. “In the market now we are seeing fewer turnover leases being negotiated because the turnover of the store is not really representative of the whole role of that store. Also, if a lot of purchases are made online but returns are through the store, that store could, in theory, have negative turnover if more is returned than is bought in the store.”
Although online trading poses a threat to the success or even survival of some retail real estate, it is not all bad news. Clearly, a physical presence can complement and enhance an online service. Although most development has been from retailers with a store moving to offer an online service, there have also been moves in the opposite direction. in the UK, Oak Furniture Land began life as an exclusively online retailer but went on to open stores in out-of-town retail parks, as did fashion retailer Simply Be in the north of England.
Chris Urwin, global research manager real estate at Aviva Investors, says: “A physical presence can help with brand awareness and with customer relations. Perhaps most importantly it can help with click-and-collect and provide retailers with a place to show their goods. The role of physical space [the shop] in allowing people to come and see, touch and feel their goods remains very important.”
But it is recognised that some markets are oversupplied with shops and shopping centres. The best shopping centres in the best locations – shops in prime shopping streets and regional and flagship shopping centres – will continue to do well. so too will the other end of the spectrum: well-placed convenience stores.
The middle ground – less favoured retail property in secondary locations – will struggle. Already there is a widening divide between the best and worst performers. retail property rental values have stagnated since the financial crisis, hit by both cyclical pressures resulting from the recession and structural changes due to the rise in online shopping.
Investors and asset managers are thinking about how to tackle risks such as exposure to retail in sectors that face more online competition – for example, consumer electronics or bookshops. Investors are having to manage assets more intensively, perhaps changing the retail mix, and bringing in different types of retailers.
Marije Braam, research analyst at CBRE Global Investors, says this can involve working with asset managers to make changes. “Consumers are spending more on health and beauty, and this is a growing sector in our shopping centres,” she says. “This sector is least impacted by e-commerce. People tend not to buy so many health and beauty products online. They prefer to go into stores where they receive service or information on the products they buy, and health and beauty products are somewhat protected from price competition online.”
Online competition is forcing other changes on shopping centres. Carlton says LGP is increasing the proportion of floor space dedicated to leisure activities and restaurants. “Large dominant schemes that offer experiential retail will continue to do well,” he says. “They tend to have large flagship stores; they offer product launches and customers can see the full product range. These types of centres tend to offer a day out. You go for an experience, spend three to four hours there, have lunch, do shopping and go to the cinema.”
Another risk to the retail sector is from changing demographics. Andrew Allen, director of global property research at Aberdeen Asset Management, is concerned that the real estate industry has failed to grasp the impact of demographic and wealth changes on shopping habits. He argues that the more mature age groups have money to spend while younger adults struggle with a limited job market, high housing costs and student debt.
“Those who could spend money tend to be older,” he says. “Those who want to spend money have challenged personal finances. Furthermore, we expect that younger adults have a higher propensity to spend through a personal digital device. They have not grown up visiting town centres, as their parents and grandparents did. And we are forced to question the interest and dependency that consumers will have on traditional forms of retail in future.”
It is not just retail real estate that is adjusting to the effects of increased online shopping. Logistics warehouses also have to adapt.
The definition of what constitutes prime logistics product has changed, according to Page. Flexibility is needed. “Externally, it needs to be expandable in car parking and access for trucks,” he says. “Internally, it needs flexibility for storage. storage sounds dull, but a lot of technology goes into storage. Are the columns and aisles too closely spaced? Can workers walk to the goods they need to pick? Can picking be automated, etcetera? We see a lot of demand for cross docks – a truck comes in one end and a transit van goes out the other.”
The internal configuration is more likely to be the responsibility of the occupier than the landlord. “if somebody is spending a lot of money internally they are likely to accept a long lease,” adds Page.
Logistics properties have to services orders, not just to shops and shopping centres but also direct to customers. Larger logistics properties will still be needed to act as regional centres of distribution, or to be sited close to ports and airports to receive consignments of goods. But servicing home deliveries will demand more and smaller distribution centres closer to cities.
Alan Patterson, head of research at AXA Real Estate, says obsolescence is an issue for logistics real estate. “Many units were originally built to deliver to retail units. Obviously, some are still needed for such purposes, but delivering to households changes things: you need different locations, a different configuration, a lot more small-van-type operations as opposed to bigger lorries. It means delivering direct to homes, probably throughout the whole day as opposed to very early morning deliveries to shops.”
Globally there are big differences on penetration of e-commerce. Figures from Euromonitor show that the Nordic countries of Norway, Denmark and Finland occupy three of the top four places for online per capita spend, with the UK in third place, all ahead of the US.
CBre’s e-RISC tool, which measures the effect of online shopping on their European retail real estate, has thrown up some striking results. it measures the online share of shop- ping by country, and it predicts change over the next three to five years, showing which retail sectors are most affected, and how active different retailers have been in e-commerce.
Startling differences have emerged. It found that germany’s online fashion sales are around 20% and might reach 25% or 30%. By contrast, online fashion sales in Italy are only 1-2% of total sales, and are very unlikely to reach German levels. Retailers’ online activity also varies enormously across the continent.
Braam says: “There are huge regional differences. Some international retailers, such as H&M and Intersport, do not have webshops yet in Italy or Spain, not even in Belgium. These retailers are not ready to penetrate those markets with online shops. The reason is partly cultural and partly that the market is not yet ready.”
in France, shoppers have been enthusiastic adopters of the drive-through model for collecting groceries ordered online from a warehouse. “This works well because the shopping transaction doesn’t happen there,” says Breheny. “You don’t need retail planning consent and trading hours aren’t limited.”
German shoppers have embraced internet shopping, particularly for certain kinds of goods, such as clothes, electronics and books. Prospects for its future growth are good – German shoppers have long enjoyed catalogue shopping and from this to online ordering is a short step. But this has not dented investor confidence in retail property.
Hahn’s latest retail real estate report in conjunction with CBRE and GfK GeoMarketing found investors were generally confident about retail properties, although around two-thirds thought conventional department stores and shopping centres were most likely to suffer from online competition. only a small proportion (3%) thought high streets would be affected.
German shoppers retain a fondness for their local high street, which seems to a large extent immune to the effects of e-commerce.
Thomas Kuhlmann, a member of Hahn’s management board, says: “Tenants feel safe in the high streets of bigger cities and in large shopping centres. They face competition from e-commerce, but the properties offer more than just shopping, they also offer entertainment of a shopping centre or a lively downtown area. That gives them an advantage over e-commerce. Another safe haven is retail warehouse centres. They offer the benefit that their anchor tenants are generally food retail or drug stores. These are classic goods for stationary trade with a high barrier of entry for e-commerce.”
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