Despite the rise of e-commerce, retail space still has a role to play, especially in a decentralised market like Germany, writes Iris Schöberl

Cities are marketplaces – for ideas and ideals, but especially in the real economic sense. But city-centre retail is facing a huge challenge from the rise of online shopping, and there is now a need for ideas to allow them to thrive.

Many European cities were founded at the crossroads of historic trade routes. But will the strong link between city and trade still hold true in the future? The rise of online shopping means that buying or exchanging goods is no longer necessarily linked to a fixed place. For books and electronic goods, online shopping already accounts for 30% of the market in Germany, and for clothing it is around 20%. Even for bigger goods such as furniture, the share of products ordered online and delivered directly to the home is rising, according to the German association of e-commerce and mail-order companies (BEVH).

While the growth of online retailers, such as Amazon, was initially solely at the expense of traditional mail-order catalogue companies, city-centre retailers have also been significantly affected. For example, you would be hard pressed to find a bookshop in a German city street. Alongside the structural shift in retailing, demographic changes also present a challenge for many cities and communities; the average age of the population is rising while the population growth is falling. Rural areas and regions with poor infrastructure are mainly affected today, but eventually this will become relevant everywhere.

The negative scenarios based on this development are falling purchasing power and population, and retailers withdrawing their businesses from the remaining big cities. In contrast, smaller and medium-sized towns are threatened with the decline and gradual demise of the city centre. For retail property owners this means it will become more difficult to find tenants and properties could lose value.

However, retail stores are not about to fade into insignificance. Most people still use shops, while the majority of sales are generated in stores. Even internet-savvy consumers buy the majority of their consumer goods offline. According to a survey by the research and consultancy company EHI, 80% of total retail sales in Germany are still made in city centres.

Retailing now has the task of upholding the strengths of store-based selling and combining it with electronic sales channels in an intelligent way. First and foremost is the shopping experience. The internet cannot simulate the touch and feel of the product. Also, the emotional appeal to clients and the brand experience often work better in-store than on the web. It is no coincidence that Apple has set up stores in prime locations in German cities.

Retailers try to make shopping more of an experience in a number of ways – for example, using elaborate store design. Using digital and multi-sensory elements – such as the use of fragrances, light and music – is no longer restricted to flagship stores of large brands. Medium-sized retailers are also moving in this direction.

An additional approach is to link the real and virtual worlds. First of all, there is the click-and-collect concept: the client places the order online but picks up the goods at the local branch. The customer will then notice other products, leading to spontaneous purchases. Augmented reality works in the opposite direction by enhancing the in-store experience: clients can, for example, try on clothes virtually, see themselves in different surroundings and share images with friends on social media.

This means that retail space continues to be necessary, and not only in big cities. This is particularly the case for a decentralised market like Germany. Anyone wishing to reach more than just a small proportion of consumers must also have a presence in medium-sized towns. However, the requirements for retail property will change and become more differentiated. For example, it is likely that chains will increasingly develop different shop types for their sites: from the flagship store offering the full range and presenting the brand image in an emotional way to the simple collection point. For the first type of outlet, large stores where the space can be used flexibly, located in prime spots in the main shopping street or inner-city shopping malls are ideal; the latter should be widely distributed.

A 2013 survey of visitors to Leipzig’s city centre on behalf of the centre developer MFI showed that only one in five visitors had a single reason for the visit. More than half of those asked had at least three different things to do in the city: a professional or private errand, a doctor’s appointment, a stroll in the city, a get-together with friends, or sightseeing. 

Everything that applies to retailing also applies to cities themselves. If they want to survive the competition, they must work harder to provide a top-quality experience. Proper design and management are important in making outdoor spaces lively and attractive. Improving accessibility and, for example, providing enough places to stop and sit down also encourages older people to come in for a stroll and potentially spend money. Places taking good care of their environment and tourist attractions will find it easier to position themselves in the fast-growing city-breaks market.Greater flexibility and willingness to compromise on issues such as product ranges, the use of public spaces for events and opening hours can also play a role. 

The belief that city-centre retailing is in competition with shopping malls and retail warehouses – and that gains by one will automatically weaken the other – is still widely held but no longer in keeping with the times. The fact that city centres featuring small retail spaces offer no suitable property for retail formats requiring larger premises is often deliberately overlooked.

Alongside the cities, retail property owners must also play their part in strengthening store-based retailing. Even if it is more profitable in the short term to rent space to a pound shop or a betting office rather than a book store, yields will fall in the medium term if inner cities become less attractive and people stay away. It is important that companies, politicians and retailers work closely together to find a sensible long-term solution.

How digitalisation and demographic shifts will change society and the economy cannot be easily predicted. Cities, retailers and property owners must therefore respond to these issues on a case-by-case basis. Those who best manage to join forces and bring together the various conflicting interests under one roof will have the greatest success. 

Iris Schöberl is managing director of F&C REIT

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