02 June 2016 #Commercial Real Estate
The UK is known as a nation of shoppers. Over the last few decades shopping has become a leisure activity and shopping centres have become the place to spend at least part of each weekend – an opportunity to look at the latest stock and to try out various dining options.
But retailers are under pressure on many fronts. On one they face a loss of market share to Amazon and other on-line groups. On another many retailers have failed to adjust to discount retail chains such as TK Maxx and the discount food retailers. These operators have slashed prices while keeping many of their products very close to those sold in mainstream retailers.
These pressures are becoming a major issue of concern for retailers in both shopping centres and high streets throughout the country. And when the main retailers close, the rest of the shopping centre or high street will suffer.
We asked in our article of July last year whether e-retailers needed a high street presence. The converse of this is whether old-style retailers, particularly those with no on-line presence, can afford to remain in their existing retail units.
Our experience is that some retailers are keeping branches open because landlords are unwilling to accept early surrenders or to negotiate reductions in rent. But another more interesting reason why branches are kept open even when trading has reduced is because, in general, when stores are closed, larger retailers also see a reduction in their on-line business. There is a connection between the amount of retail branches that a retail operator has and the amount of trade on-line. Visibility on the high street and in shopping centres increases a retailer’s on-line trade.
Some retail experts believe that the future for retail may lie in developing physical and on-line presences in tandem as many on-line customers prefer the ability to pick up on-line goods and return unwanted on-line orders to a physical store. This has been seen in the development of “click and collect” by such operators as John Lewis, Waitrose and Boots the Chemist.
For retailers who solely work on-line, returns, which are a significant proportion of goods bought on-line, are a cost to the business whereas for physical stores, a return is always a potential new sale. Many customers who return goods bought on-line to a physical store will make a new purchase while they are there.
We have also recently heard the view from on-line retailers that their sales will rise in a locality if they open a physical branch there. Evidence of this is Amazon opening its first retail unit in New York in 2014 and other units since then.
Will more and more retail units become vacant or change to dining options, charity shops and discount retailers if conventional retailers, especially those who do not have an on-line presence, decide that the costs of a retail unit are too large to carry? Landlords of retail units may need to review their rental levels and be prepared to consider even shorter lease terms.