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In several parts of the world, including the US and certain European countries, the crisis has blown over and consumer confidence is returning, together with a strengthening housing market. Retail property has the wind in its sails once again. And yet the storm does not yet seem to have fully abated, given the many bankruptcies of retailer after retailer: RadioShack, MEXX and HMV, etc.
Although the background to each bankruptcy is different, there is one underlying disruptive factor that is changing the retail landscape and also the real-estate sector for good: e-commerce. This article describes how the internet is transforming the current retail environment and the role that omni-channel is playing in these developments. An omni-channel strategy uses different channels to serve clients and improve the shopping experience. The good news: physical real estate will continue to play a dominant role in retail distribution. The bad news: many thousands of square meters of retail property are at risk of becoming redundant.
Online sales – e-commerce – began in the 1990s, mainly with the sale of books and CDs, and have expanded over the years to almost all retail sectors. With an online penetration of around 70 percent, the sale of music and books has become predominantly digital. Clothing and even daily groceries are also increasingly being purchased online.
The potential and success of an online strategy depend to a large extent on the degree of complexity and commoditization of the product and on the efficiency of distribution. The penetration of online sales is growing annually by more than 10 percentage points, compared with just a few percent at the beginning of the century. The rise of purely online retailers, such as Amazon.com and Bol.com, has reinforced this growth. What's more, the penetration of mobile internet has led to a strong increase in online sales. Mobile internet represents around 20 percent of all online sales, but with growth percentages of between 20 and 30 percent, it is gaining market share by the day.
Yet, not all online growth comes at the cost of physical retail. Some online sales are cannibalizing sales from direct selling and catalogs, for instance. One good example is Dutch company Wehkamp, which stopped as a catalog business in 2008 and now sells only online. Other forms of retail, such as direct selling and vending, have also declined in strength. It is often thought, incorrectly, that the declining success rates or even disappearance of certain retail formulas is due solely to the rise of the internet. But that's not the case. Wal-Mart, for instance, is feeling the heat from other new discounters such as dollar stores. And does anybody remember the shops-on-wheels that were a common sight in the burbs before the internet era?
Omni-channel is a counter-intuitive offshoot of successful online strategies that actually reinforces physical real estate. And it's not just Amazon.com that's opening physical stores or collection points: almost all pure-play online retailers are jumping on the bandwagon. But for more traditional retailers, too, physical real estate remains a key part of their omni-channel strategies. Leading retailers with an omni-channel strategy often need fewer stores, but the stores they do need usually require larger surface areas and commonly function as 'flagship stores'. Good examples are the Apple stores: large store formats at prominent retail locations.
Consulting firm AT Kearney (2014) believes that the customer purchasing process involves five steps: discovery, trial, purchase, delivery and return. Although the discovery phase takes place online for many products, there is often a large preference for a physical location for the trial and purchasing steps. But for delivery, the percentage drops again, while in the case of returns most consumers prefer to take a trip to the store. It goes without saying that there are major differences, depending on the type of product. More standard products like computers are often viewed online in the discovery phase, while interior items are more commonly tested offline.
In addition to a purchasing process that takes place either entirely online or offline (via a store), omni-channel options offer as many as 30 other possible combinations for consumers to complete their purchases. AT Kearney estimates that around 35 percent of all sales are entirely physical and 10 percent are entirely online. This means that over 50 percent occurs via omni-channel processes. The expectation is that in the future, too, a major portion of all sales will be carried out via omni-channel processes and that the share of fully online sales will remain limited to little more than 10 percent.
Retailers will have to factor the type of product they are selling and their end client into their omni-channel strategies. The use of e-commerce varies per customer type and depends on gender, income, age and locality. Research by UBS, for instance, indicates that in the US men make more online purchases than women and that people with higher incomes spend more online. Not only is the age category an indicator of buying habits; locality is also a key factor. Urbanites spend relatively more time online than people outside big cities.
In an omni-channel environment, the function of physical locations (bricks & mortar) will change from a pure sales channel to a brand showroom with support and order processing capacity. The impact that an omni-channel strategy has on this will depend strongly on the specific retail category.
One key disadvantage of a purely online model is that, besides delivery, it costs a lot to process returns. Research by ICSC indicates that an omni-channel strategy can lead to higher sales. In 100 percent online stores, 23 cents of every dollar spent online are returned. In a model where items can be returned via the store, this is just 5 cents. Customers often buy other items in the store at a value of 18 cents per dollar. In a fully omni-channel model, where goods purchased online may be collected (pick-up-model) from and returned to the store, an average extra 30 cents is spent. So, on balance, for every dollar spent online, an extra 7 cents is generated.
IPF research based on data from the UK indicates that in addition to having an online platform, physical presence can increase total productivity. Retailers experience a 'halo' effect – a sort of positive influence – if they open a physical location to complement a purely online presence. The strongest effect is measured in prime retail property and (super) regional shopping malls. For more secondary real estate, little or no positive effect is measured. The effects of e-commerce for this type of real estate would therefore be negative.
The fact that top locations provide a better outlook in terms of productivity is also expressed in demand and pricing. According to CBRE, the required initial yields for prime retail space or high street (HS) and prime shopping centers (SC) have fallen, or the price of this type of real estate has risen. We see the same trend worldwide, with demand for and price increases in secondary real estate lagging those of prime real estate.
Physical locations will continue to play a key role within omni-channel strategies in the future. It’s not just the purchasing process described above that is a key factor here: apart from the social aspect, shopping also has entertainment function for consumers. In more and more retail malls, the mix of tenants will change and the percentage of restaurants and other eateries will increase. Given that consumers always want to be surprised by something new, the mix will continually change. Right now we are seeing a rapid increase in the presence and popularity of foreign retailers in the Netherlands. And discount formulas are also gaining ground rapidly, while typical warehouse formulas are losing ground.