Despite the impact of e-commerce, physical stores remain a cornerstone of consumer engagement, says Justin Taylor
The rise of technology has often been said to be a potential fatal flaw in the retail model of bricks and mortar. The ability to shop anywhere at any time has irrevocably transformed our retail engagement, experience and, importantly, expectations.
As a result, many have questioned the future viability of physical retail as we know it today and point to what the knock-on effects are for commercial centres and ultimately the beloved high street. Governments have commissioned studies into the subject and the arguments persist that technology could ultimately undermine − and even fully disintermediate − the physical stores model.
Yet while technology has undoubtedly changed the way we work, live and shop, there is still enormous appetite for retail space. It is worth noting that, even though over the past decade e-commerce has grown so rapidly, permanently altering industries such as book selling, music, travel and banking to name a few, it still represents a relatively small proportion of overall retail sales. Indeed, the highest level of online penetration in Europe was in the UK, at 12.2% in 2014.
Technology clearly provides enormous benefits to both retailers and consumers; however, there are also drawbacks from an experiential perspective, which is a huge element for many people looking to make a purchase. Thus it really is not as simple as ‘clicks or bricks’. Physical stores remain a hugely important part of the retailing mix as they offer the ability to interact with merchandise, instant gratification for consumers, personal service and professional guidance.
Traditional retailers are not the only ones who want prominent store locations. Innovative US car brand Tesla’s decision to open a flagship store on London’s Oxford Street shows that the opportunity for people to experience a brand in high-footfall retail locations is compelling for many international companies. Thus the need for a physical presence remains clear, and the onus will be on experiential and entertaining stores that increasingly compete for customers’ attention.
Focusing on the present, one measure of the current health of the physical space, and its continuing role, is the rise in demand for space and rents for the most sought-after worldwide retail locations. Cushman & Wakefield’s annual ‘Main Streets across the World’ report tracks more than 500 retail streets worldwide, ranking them by their prime rental value using our proprietary data. The 2015 report shows that rents have risen in 35% of high streets around the world. This is set against a backdrop of increased global uncertainty experienced over the past 12 months.
New York’s Fifth Avenue retained its position as the most expensive global retail location. By the second quarter of 2015, rents reached US$/3,500sqft per year – an increase of 3.6% year-on-year and 46% above the second-placed Causeway Bay in Hong Kong (US$2,399/sqft per year). Elsewhere, the Avenue Champs Élysées in Paris retained its crown as the most expensive retail location in EMEA, followed closely by London’s New Bond Street.
Our research reveals that the strongest rental overall growth was recorded in Dublin’s Grafton Street and Covent Garden in London, as well as in the top high streets in Milan and Rome. At the other end of the scale, high streets in Russia and Ukraine experienced sharp falls linked to the conflict between the two countries that caused economic growth and retail sales to slow down.
The outlook for Asia’s overall retail market was also largely positive, with retail sales growth averaging 8.5% over the next five years (in US dollar terms). Rising tourist numbers are spurring robust and sustained retailer demand – albeit focused on prime, well-located space.
In the US, strong footfall in Manhattan helped keep New York’s position elevated, with overseas tourists attracted to the vibrant retail environment and luxury retailers still dominating the high street – with no slowdown in sight. The gateway cities of Chicago and San Francisco also witnessed healthy growth rates and are expected to continue expanding, bolstered by solid international retailer demand.
From an investment perspective, the case is also strong for retail assets. For example, European retail investment market activity has doubled in the past two years, with shopping centres particularly providing intense competition.
So with demand for the best locations continuing to attract premium rents, and investors seeing clear returns, how will the role of technology complement rather than complicate the physical store model? As technology advances, new opportunities emerge: a prime example is the growing use of big data to analyse consumer patterns and behaviour to inform everything from store location and product range to marketing strategy.
According to McKinsey & Company, those that use big data and analytics effectively demonstrate productivity and profitability 5-6% higher than their peers. Some technological advances are likely to be more radical than others – such as Amazon’s drone delivery concept – but they will all help shape consumption patterns that, over time, will influence the built environment in which we shop.
So with rents and demand rising in the best locations, the debate around technology versus a physical presence is far from a binary one. The focus for the retailer is not a choice of one over the other but instead a view to how the two models collaborate more closely to reflect the benefits they both deliver.
We have seen the migration from bricks to clicks, and the pattern in some instances is now heading the other way as brands born online are now seeking physical space.
The future lies in how retailers manage the challenge of both, optimising not only their physical footprint to meet consumer behaviour but also using technology to define and drive the experience in shop and online.
Justin Taylor is head of EMEA retail at Cushman & Wakefield