The UK retail sector has repeatedly hit the headlines recently, with fierce debate about the state of its health.
There has been the recent collapse of the department store chain BHS and reports of falling profits at some of the UK’s biggest clothing and footwear retailers, despite surprisingly robust overall retail sales growth following the UK referendum vote in June. In addition to this, there is the increasing impact of online sales in a fast-changing and highly competitive retail environment.
So what is actually happening in the sector and what role does retail property play within this market? How are retailers responding to the diverse range of structural and disruptive digital changes taking place and what are they doing to prepare for the future?
A SEAMLESS CUSTOMER JOURNEY
The sector is constantly evolving as it adapts to changes in economic and socio-demographic trends, as well as rapid advances in the use of technology. These changes are blurring the boundaries between online and physical retail sales, making it increasingly difficult to differentiate where and how a particular sale took place.
But far from viewing the impact of online shopping as a competitive threat to physical retailing, as the property industry did in its early days, we have now moved on to look at the retail environment in a more holistic way – where the boundaries have become so blurred it is almost becoming seamless. We have not reached that point yet, but the transformation is well underway.
Consumers are now shopping whenever and wherever we want, whether by browsing products online and then buying in store, ordering on smartphones or iPads and collecting in store, or simply buying in store. Retailers now talk about mapping a customer’s ‘journey’ to the sale, which has become more like a meandering path, rather than a simple sale.
So the myth the internet was ‘killing off the high street’ has now been well and truly debunked. In fact, according to a recent White Paper consultant Verdict Retail produced for British Land – entitled ‘The True Value of Stores’ and based on the analysis of survey responses from 30,000 shoppers, 89% of all UK retail sales by value touched a physical store. The findings show the ‘True Value of Stores’ goes beyond sales through the tills to include both click & collect sales and online sales from store operators where consumers first browsed in store.
REINFORCING THE ROLE OF THE STORE
Far from online taking over from physical retail, they have blended together, reinforcing the role of the physical store. In fact, the analysis revealed click & collect and store browsing – excluding the food and grocery sector – boosts physical sales by 9%. However, it varies considerably by sector, from +32% for electricals, to only +3% for health & beauty (Chart 1 below).
Chart 1 The True Value of Stores boost by sector
*Note: The 'True Value of Stores' boost includes the uplift from click & collect and online sales browsed in-store
While the ‘The True Value of Stores’ is predicted to grow by +16% by 2021, click & collect is expected to double over the same period. As it costs the retailer to deliver goods ordered online to customer homes and customers increasingly want to pick up ordered goods at a convenient time, click & collect services offer a more cost-effective, convenient alternative for shoppers living or working close to a store – while also encouraging further in-store browsing.
Another key finding was that online sales growth is now maturing, following double-digit growth over the twenty years or so since it first emerged (Chart 2). Verdict is therefore fairly optimistic about the role of the physical store in this omni-channel environment.
Chart 2 Online market is maturing gradually
Stores also have an inherent ‘halo effect’, which is difficult to quantify, but relates to factors such as increased brand awareness and customer service provision – as well as the trust that comes from having a store portfolio.
However, not every retailer is adapting to the changes caused by digital disruption well or at the same pace. The retailers embracing it by enhancing and personalising the customer experience both in-store and online, in a seamless manner and investing in customised new software and IT infrastructure, are likely to thrive in the future. Department store retailers John Lewis and House of Fraser, for example, are investing heavily in an omni-channel retail offering, which is creating a successful edge over competitors.
PHYSICAL STORES PLAY A DOMINANT ROLE IN RETAILING
Physical stores also have many advantages over online retailing. Consumers like to experience good customer service in-store, interact with the product, such as trying on clothes or testing out furniture, shop as a leisure activity, or meet friends and family for a drink or meal out. People also like to visit shops for impulse buys and local convenience shopping.
These experiences cannot be replicated online and this problem of tangibility is a major reason why pure-play online retailers such as Amazon, as well as furniture retailers such as Oak Furniture, are opening stores in select geographic locations as showrooms for customers to be able to engage with staff and try out products.
For retailers, this requires creating an attractive, innovative store environment to keep the customer engaged and ensure it is a place worth returning to. Retailers also need to use targeted, personalised customer marketing and social media strategies to engage the customer with product offers and promotions, raise awareness of the brand, increase customer loyalty and attract people to a local store.
YOUNGER MILLENNIALS SHOP MORE IN STORES
Perhaps surprisingly, the Verdict/British Land White Paper’s findings also showed younger millennials aged 16-24 and 25-34 years use physical stores more than older age groups, as do people living in London compared to the rest of the country. Younger people are more familiar with blending online with offline channels – with many using shops to socialise with friends and have a drink or a bite to eat. This bodes well for the future of bricks and mortar retailing, as well as the continued growth of the food and beverage sector.
However, UK high streets and shopping centres remain highly polarised in terms of the quality of their tenant mix and attractiveness of the physical environment, leading to big differences in retailer demand, vacancy rates and investment performance. The economic uncertainty created by the UK referendum vote is likely to exacerbate these differences, making the role of strategic asset management by landlords even more important.
The biggest and best retail assets in London and more affluent towns in the South East and major regional cities have outperformed smaller assets in secondary locations, which tend to have higher vacancy rates.
In this highly competitive environment of winners and losers, retailers cannot afford to be complacent. They need to embrace the opportunities and challenges presented by omni-channel retailing and differentiate themselves by investing in a unique and seamless customer offering – with perhaps fewer stores in key strategic retail locations. If not, they risk a steady decline.
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