What is the impact of e-commerce on Retail Real Estate Industry?

It is hard to isolate just e-commerce from other factors such as economics, demographics, income, technological advancements and judge the impact on overall retail performance.  E-commerce is growing at a fast rate, but a turnover in brick-and-mortar stores remains positive. There is also a sense that online shopping is becoming the dominant way majority of people shop. In reality, even with a significant share change, e-commerce still represents less than 10% of total retail turnover and is expected to remain under 20% in the next five years.

The last recession and technological advancements encouraged many shoppers to compare prices and buy online rather from conventional stores. Because internet search and price comparisons are fairly easy to do, it made online shopping appealing for a wide range of goods. Retail focus on the increasing use of mobile devices is another factor in making online shopping alluring and convenient while costing shopping centres operators part of the turnover rent.

Online shopping is the fastest growing retail market in EU and US. Online sales in Western Europe grew +15.6% in 2016. After final numbers for 2017 come out, online sales are forecasted to rise +14.2%. Further growth of +13.8% in 2018 is expected. In contrast, the annual growth rates for entire retail (including stores sales and online sales) were between 1.5% and 3.5% per annum depending on the source.

The EU online market is dominated by the UK, Germany (DACH) and France. These three countries are responsible for 75.1% of European online sales. This can, in part be attributed to efficient postal service and free shipping/returns policies, the cornerstones of online shopping. While the Post Nord remains to be inefficient as it is, and Amazon is not directly present in the Swedish market, but rather delivers from Germany, Swedish retail chains have a minimal amount of time left to come up with strategies that will keep them in long-term play.

Everything that e-commerce needs are well-organised and strategically positioned (robot run) warehouses and fast delivery to the customer’s doorstep, as opposed to the classic brick-and-mortar store with great investments in retail space and an army-sized sales force. Shopping in slippers is appealing because the customer does not have to go to the store, spend money on transportation, or lose time in the crowds in front of the cashier desk.

The incredible growth of e-commerce in the US and UK, and the failure of the incumbent brick-and-mortar retailers to adapt has meant mass store closures can no longer be delayed to save reputation. US and UK downtowns are losing their small shops, big retail chains are bankrupting, and suburban shopping centres are closing, and nervousness is also widening amongst the retail chains in the EU. Among others, one of the reasons for the crisis is ‘Amazon effect’.

By the end of the year, the traditional American retail chains like Sears, Walgreens, and Gap will close 11,000 stores.[1] The closure of stores was announced by JC Penney and once the world’s largest department store, Macy’s. The game ended in bankruptcy for Toys’R’Us with 1,600 sales outlets and 64,000 employees.

In the United Kingdom last year, a record 5,800 stores were closed, and it is predicted that another 10,000 will be closed by the end of 2018[2]. Nervousness is also spreading among retailers in the EU. German Karstadt is having downturn with stores to be closed in Hamburg, Stuttgart, Paderborn, Göttingen, Cologne and Frankfurt with more than 2,000 jobs lost.

While retail sector is experiencing significant disruption causing many classic brick-and-mortar stores to close and a considerable number of shopping centres to undergo radical renovation or becoming a brownfield, the reality is that shopping in physical stores continues to grow, truth be told at a far slower rate than online. Further growth of online sales in mature markets such as US, UK, and Western Europe is expected not to come from new users but rather from an increase of transaction volume of existing users.

That would indicate that the low hanging fruit has been picked for the e-commerce. Depending on the market, almost 91% of all retail sales last year were still done in classic brick-and-mortar stores, and it is expected that more than 80% of all retail sales will likely still be done in actual brick-and-mortar stores in the year 2025.

If we take a closer look at retailers focused on enabling convenience, efficiency and exceptional value for money, together with those who differentiate themselves with unique products and excellent customer service, vibrant stores, and digital channels, there should be no cause for concern. We see their brands growing, store numbers rising and staff increasing.

On the other hand, retailers that offer nothing but mediocre service, over-distributed and uninspiring goods, lack of digital presence, one-size-fits-all marketing, look-alike promotions and boring stores with lack of care for environment or workforce are struggling to stay afloat. A close look at their rent to sales performance reveals retailers in distress with high sales-force turnover and defaulting on their financial obligations.

Further, retailers and shopping centres that embrace new trends in the shift to service and entertainment will stay ahead of Amazon effect and offer experiences that cannot be bought online. For example, Cirque du Soleil Entertainment Group plans to open its first family entertainment centre inside a shopping centre near Toronto in September 2019. Similarly, the Mall of America in Minnesota has an underwater aquarium, a theme park, and a dinosaur walk museum[3]. This is not applicable to every neighbourhood shopping centre but rather indicates a general direction away from commoditised shopping experiences and toward a broadened value proposition for shoppers.

On the back-office side, adoption and utilisation of advanced analytics tools beyond spreadsheets to run and manage their retail Real Estate portfolio will enable a positive shift in value and performance. Increase in value of Commercial Real Estate portfolios through business intelligence, machine learning, predictive and prescriptive analytics is the norm rather than novelty and e-commerce is using them all.

One good example of readymade machine learning solution already available on the market and its purpose is to help retailers identify solid markets for growth and maximum return on investment.[4] Other is using business intelligence to manage Retail Real Estate Assets and Portfolios.[5]

To recap in short, e-commerce is a significant disruptor in classic brick and mortar retail, and it cannot be ignored. However, if the retail portfolio is actively managed, trends taken into account and employees actively educated there is a hard-working but bright future for the industry.

[1] https://www.dw.com/en/as-us-uk-retail-apocalypse-deepens-eu-chains-grow-nervous/a-44271346

[2] http://www.retailresearch.org/retailatbay2018.php

[3] https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/the-future-of-the-shopping-mall

[4] https://www.bisnow.com/national/news/technology/cbre-puts-machine-learning-to-the-task-of-figuring-out-good-retail-locations-89846

[5] https://catalystbit2.azurewebsites.net/portfolio-asset-management/

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