By: Bill Speer, Principal

February 1, 2013

Synopsis: The global real estate market is rapidly changing – faster in Europe than in the U.S. – as a response to intensive competition from Internet retailing. The new name of the game is “multi-channel” retailing, essentially the art of doing whatever is necessary to compete! Winners and losers are being defined, but surprisingly, bricks and mortar retailing will survive by operating more efficiently, sometimes in smaller spaces, and usually with an emphasis on top-level customer service. It is a very resilient sector.

During the last week of January I was a delegate at the International Council of Shopping Centers (ICSC) – Thomson Reuters Global Retail Real Estate Forum and the subsequent winter meeting of the ICSC European Research Group in chilly London, England.  The former was the first international conference of its type (it was a research-oriented gathering), and it was attended by senior shopping center professionals from throughout the world (all of Europe, the Middle East, North and Latin America, and Asia).

Themes of the conference included the state of the global industry; tracking international retail real estate capital flow; the real estate legacy of the sovereign debt crises; the impacts of the growing middle class in emerging markets; urban retail planning, development challenges, and opportunities; tracking consumer movements within centers using mobile wireless technologies; the prospective oversupply of bricks and mortar (B&M) retail in the expanding online age; and the importance of non-retail tenants within shopping centers.

A recurring theme within these two gatherings was the impact of multi-channel retailing on the shopping center industry.  In the United Kingdom, an estimated 12%-14% of all retail sales currently are generated online, the highest level anywhere on the planet  (as a matter of comparison, online sales in the U.S. now account for an estimated 5% of total retail trade, according to the U.S. Department of Commerce, up from 2% in 2005 and 1% in 2002).  In the UK, online sales are projected to account for a full 20% to 25% of retail trade by 2020.

Music store giant HMV was declared insolvent in December 2012 and expects to expand its online presence as it shutters high street and shopping center-located stores.  UK electronics retailer Jessops also went into administration last year and going forward will only be selling its goods online.  Amazon.co.uk sales now exceed those of venerable UK department store giant John Lewis.  Retail consultancy Javelin predicts that the amount of retail space occupied by UK B&M stores will decline by more than 20% by the end of this decade.

The expansion of online retailing brings with it pressure on B&M retailers to operate more efficiently, generally in smaller spaces, although “click and collect” sales – discussed below – will require more on-site back room space for inventory storage.  Now that major online retailers like Amazon have succumbed to pressure from states to collect sales taxes on transactions from their residents, the impetus to locate their inventories in warehouses in low- or no-tax states diminishes.  As a result, Amazon has announced plans for construction of at least three major warehouse facilities in the state of California alone.  Their presence will cut delivery times and reduce shipping costs for both regular and Amazon Prime shoppers, reducing pressure on their already low margins, perhaps putting additional competitive pressure on B&M retailers.

Is this a harbinger for the U.S. shopping center industry?  Perhaps the trend will not be as dramatic as that experienced by our cousins across the Atlantic, but online sales in the U.S. have consistently increased annually by double digit rates since data were first published by the Commerce Department in 1999.  With Amazon.com offering its Prime members expedited two-day delivery of its items for a $79 annual fee, I often find myself ordering online many items I once purchased only at local retailers (and no gas to pay for!).

The solution for many European retailers is an aggressive “click and collect” program, where customers order online and pick up their ordered merchandise at local stores.  These programs are reported to be much more profitable than pure online retail sales, which frequently come with free delivery and often free return shipping that can be costly to the seller.  Many shopping center owners are actually seeking to turn online sales into an advantage, locating Amazon.com pickup lockers within their properties to drive customer traffic they might otherwise miss.

What is the take away from all this doom and gloom for B&M retailers?  In the expanding digital age these retail shops will need to feature convenience, a unique product offering, or an exceptional shopping experience (either attentive or informative service, or a pleasant, attractive, entertaining shopping environment) to compete with lower-cost online merchants to hold their own or thrive.

As one example, while in London I visited two super-regional malls that opened in the past five years, Westfield London and Westfield Stratford.  Both had throngs of shoppers and reportedly are generating sales productivity levels at the highest end of the range in their portfolios despite the rise of online retailing.  Westfield Stratford offers six dozen eating/drinking establishments and I thoroughly enjoyed dining at an Indian eatery in their gourmet “dining court”.  The shopping experience is unlike anything available online or in the greater London area.

Bill Speer is Principal at The London Group Realty Advisors, specializing in commercial retail development and investing.  Contact him at bspeer@londonmoeder.com.