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MAPPING THE FUTURE RETAIL PORTFOLIO

In the post-pandemic world, conventional approaches to store network optimization are no longer enough. Business brands need to urgently scrutinize their global retail footprint or risk further financial blows in 2021. There is no doubt that the year ahead will be one that is enormously difficult to navigate and plan for. But for Business brands that are highly exposed to physical retail, Covid-19 provides the impetus they have long needed to chart a new course for their store network — one that experts say must be a sprint, not a marathon. With store inventories and real estate costs weighing heavily on their cost base, Business retailers have been in a race to capture e-commerce spend as consumers’ uptake of the channel skyrocketed during the pandemic. But no matter how sophisticated and seamlessly integrated their digital strategies are, omnichannel won’t resolve a bigger issue that many players face in the run-up to 2021: Most global store footprints are no longer the right size, shape, or scope for the times in which we live. More to the point, the tool that companies have traditionally used to fix that problem — store network optimization — now needs a major rethink too. So much so that some commercial real estate experts have begun to encourage retail clients to examine their global store portfolio as though it doesn’t already exist. 

“Global store footprints are no longer the right size, shape, or scope for the times in which we live.”

Nothing is taken for granted in this kind of approach; no locations are sacred, and no store is given a free pass. Indeed, every store is put under the microscope using key performance indicators that go far beyond conventional four-wall analysis. Store profiles and locations are then scrutinized in the context of the retailer’s global, regional, national, and city footprints. The answers to these questions will, of course, differ by brand and — given the pace of change in the industry — many of the considerations that are relevant now may be different in 2021. With disruptions and uncertainty likely to be constant in the year ahead, how can global Business brands practically map out their retail portfolio for the future?

Adapt Retail Spaces for Post-Pandemic Purpose

Traditionally, the return on investment of a retail store was measured in terms of how much product was sold within the four walls of that physical space. But when a growing percentage of sales occurs online or through omnichannel strategies, that calculation no longer adds up. Instead, retailers should think of physical store investments as they have traditionally considered media investments — as a vehicle for customer acquisition, rather than purely as a distribution venue for products. We need to determine what the value of an impression in a physical store is, much like we have determined a market value for views and clicks in the digital space. Then you wind up with: here are the four-wall sales, here’s what we can reasonably attribute to that store in terms of online sales, and here’s the media value we can attribute to that store, and that gives you a full picture of what a store is worth.

Far from diminishing the role of the physical store network, online shopping can actually elevate the importance of some physical stores. This trend has already become apparent in Asia, particularly in China, where “New Retail” (a term coined by Alibaba founder Jack Ma back in 2016 to describe the seamless merging of retail’s online, offline, and logistics arms) has seen the integration of digital into all manner of offline store experiences. At Intime, a department store chain was taken private by Alibaba in 2017 which is at the forefront of the Chinese tech giant’s “New Retail” experiments, the store’s Miaojie app not only promises two-hour delivery for local consumers, it also tracks stock on shelves and in storage in real-time, allowing merchants to adjust supply and pricing swiftly. Far from diminishing the role of the physical store network, online shopping can actually elevate the importance of some physical stores.

Physical stores such as this are acting as hubs of discovery, places for entertainment and gathering, and, increasingly, as fulfillment centers. Even before the pandemic, a significant number of underperforming retail outlets were converted to fulfillment centers. A CBRE study from 2019 found that, in the US, 7.9 million square feet of retail space had been turned into 10.9 million square feet of new industrial space (mainly warehouses and e-commerce distribution centers) since 2016. Covid-19 has only accelerated this shift. Major US retail players like Walmart, Kohl’s, and Target have been working to convert their retail spaces into mini distribution hubs to shorten the last mile for customers. In other markets, physical retailers are swiftly reimagining and repurposing their valuable real estate assets, including those in markets that had less-developed e-commerce infrastructure and lower rates of internet penetration prior to the pandemic.

According to Thiago Alonso de Oliveira, chief executive of JHSF Participações, the parent company of luxury retailer Cidade Jardim in São Paulo and several other upmarket shopping malls across Brazil, the firm’s revamped online platform CJ Business has helped temporarily transform their malls into de facto fulfillment centers for wealthy clients ordering by WhatsApp. “It’s more like a marketplace [as] our data is integrated to the inventory of the physical stores, so we know in real-time what products are available in which sizes, and so on.”

Physical stores in this context become hybrid shopping destinations, community-building centers (for consumers), and logistics and distribution centers (for brands) — a combination of duties that is unlikely to fade even after the Covid-19 emergency subsides. One reason for this is the trust that some legacy retailers have built with their clients over generations. While some department stores and shopping centers will continue to serve an important role in brands’ overall retail network as anchors for concessions and other formats, the locations for future large-scale developments could be very different if footfall in city centers does not return to close to pre-pandemic levels. Consolidate in Most Markets Except in China/ Nowhere will the store footprint change more than in the rebalancing of store numbers and locations across the world, as some markets prove to be more resilient than others. In 2021, Europe is likely to see an 8 to 13 percent decline in offline sales and the US will likely see a drop of 22 to 27 percent, compared to 2019 levels. This suggests that store networks in these regions will need to be significantly reduced. Retail consolidation has been happening in the US and other mature markets for years, but the crisis amplified the sense of oversupply.

Indeed, as travel retail and outlet centers in Europe are starved of all-important Chinese consumers, and where travel restrictions (alongside geopolitical strife) have decimated destinations once favored by mainland shoppers like Hong Kong, new hubs such as Sanya and Haikou on the southern Chinese island of Hainan are attracting investment. In October 2020, Chinese department store operator Youa announced a 1 billion yuan ($148 million) investment to further improve the island’s luxury offering, creating even greater interest in the cluster of resorts located there for conglomerates like LVMH, Kering, and Richemont.

Indeed, one of the biggest retail stories of 2020, particularly for luxury, has been the repatriation of Chinese spending as the sector’s most important consumer group stayed home and, as such, there is now an even greater imperative for brands to re-balance their mainland store networks against their global footprint. Store numbers for top luxury brands in China rose 4 percent in the first half of 2020, while those for cosmetics brands jumped 8 percent, according to a report by property consultancy Savills. One notable addition to China’s luxury scene will be Harrods’ first outpost, which is scheduled to open in Shanghai in late 2020. Rather than follow the ambitious roll-out strategies of international competitors like Galeries Lafayette,

Harrods will open a format called The Residence, which is more akin to a private members’ club than a traditional store. Though plans for this were in the works prior to the pandemic, it highlights the need for global brands and retailers to reconsider how they serve their consumers by fostering community in a physical space. “It’s now cheaper to convert offline in China than it is to convert online,” he said, referencing the skyrocketing costs of customer acquisition on the major e-commerce platforms that international retailers use to penetrate the Chinese market. “Chinese landlords will take rent share, so you can activate your brand almost instantly through their networks. Everyone is just looking for a business.”

Brands should, however, approach expansion with caution. At the luxury end of the spectrum, retailers have been burned in the past by over-ambitious physical retail rollouts across China. After a slowdown in spending attributed to Chinese President Xi Jinping’s crackdown on corruption in the early 2010s, more than 80 percent of luxury brands, including Prada and Gucci, closed some of their stores in China in 2015. The years since have seen Chinese spending come roaring back, but luxury brands will likely be more prudent this time around. Nevertheless, the reshoring of spending could see new store openings, particularly in key locations, such as Changsha, Shenyang, Wuxi, and in China’s virus epicenter of Wuhan. The store network proposition is rather different for the mass market Business segment, with Japanese fast-Business giant Uniqlo going all-in for physical retail in China, even as rivals Inditex and H&M Group slash global store counts. Unlike many Western Business chains, which have largely struggled to gain significant market share in China, Uniqlo has been winning in the country in large part due to its flexible approach to physical retail formats. A look at the current situation in the Middle East suggests a potentially similar pattern to China, albeit on a much smaller scale. Stores in the region are benefiting from the repatriation of domestic spending as luxury consumers were unable to travel to Europe for much of 2020. The very wealthy consumers… have stayed in those markets and there is significant spending trapped there.

If the crisis leads to more permanent shifts in shopping patterns, then one implication could be that brands start to value their local stores in cities like Riyadh, Jeddah, Doha, Abu Dhabi, and Kuwait City more than they did before the pandemic. Travel has had a big effect on us here [in contrast to the other Arabian Gulf consumer markets] that depend [more] on their local populations.” Anticipate the Changing Nature of Cities People all over the world have been forced this year to change the way they live and work. As a result, both the function of cities and the relationship that consumers have with them are in a state of flux.

Eight weeks after all shops were allowed to reopen in England after a three-month lockdown, footfall in London’s prime retail neighborhood in the West End remained 63 percent down compared with 2019 levels, according to data from New West End Company, which represents 600 businesses across Oxford Street, Bond Street, Regent Street, and Mayfair. Conversely, edge-of-town retail parks such as South London’s Brocklebank, have seen much better bounce-back, with customers finding the convenience of easy parking more appealing than using public transport. Fast Business retailer Primark said its retail-park sales were up in 2020 significantly compared with the previous year. Suburban retail was already gaining ground over central locations, as affluent people preferred shopping centers and malls in well-off residential peripheries of emerging market megacities such as  Moscow, Istanbul, Mumbai, Lagos, and Jakarta. According to Alexander Pavlov, chief executive of Tsum department stores in Russia, which are managed by Mercury Group, the Barvikha Luxury Village has seen high rates of growth in 2020. The retail complex, which features stores including Valentino, Celine, Chopard, and Ralph Lauren, is located on the fringes of Moscow close to many of the dachas (second country homes) where the group’s wealthy consumers have been spending more time since the pandemic. Business brands should put more focus and attention on the local market to increase their market share. Once the borders are open, clients will keep buying the brands that they got used to buying locally.

In Shanghai, 98 percent of the 2.65 million square meters of the total new physical retail space supply expected to be developed over the next few years will be in secondary and decentralized areas of the city, according to figures from CBRE. This would leave only 2 percent for traditional “prime” retail areas. Highly anticipated new developments in the pipeline, such as Swire Properties’ 120,000-square-metre Taikoo Li Qiantan in the outer regions of Pudong district, are spread wide across Shanghai’s fringes.

The people who live in a community [now] tend to live, work and play in that community. The same pattern is playing out in other parts of the world, where some of the most exciting new retail developments are being constructed outside of city centers, to cater to middle-class consumers with cars looking for shopping, dining, entertainment, and community services in one place. The much-anticipated Capital Mall development in South Africa’s Pretoria West region, located at the intersection of several major motorways, is just one example. Though this race to the suburbs may appear to be a mere replication of the outbreak of suburban malls in more developed markets, especially North America, the next generation of spaces could be markedly different if they are specifically designed to cater to their local communities in the post-pandemic era, rather than just taking advantage of cheaper land on the city fringes. If you look at the complexion of shopping centers in the mature markets of the US and Europe… oftentimes they are monolithic centers [with] no real sense of authentic place. But [nobody needs] 200 of the same stores cookie-cut across the land.

However, the increasing importance of suburban and satellite city locations doesn’t necessarily mean that city center locations become less attractive. “We are advising some clients that are looking to enter the New York market [to now] consider some more high-profile locations than they could have before because the terms available are better and they can get more incentivized deals”. Not long ago, ideas about the use of built environments seemed permanent, but events in 2020 have taught us all to question any preconceived notions of permanence. The notion that a brand should always select permanent locations for its retail portfolio — or even relatively permanent ones, locking itself into five- or ten-year leases before carefully re-examining its priorities — now feels antiquated. The new formula is about flexibility and maneuverability, which is a concept that is often hard to square with the solid nature of bricks and mortar. But with the only alternative being rows of empty storefronts marring the faces of cities around the world, landlords are likely to become more receptive to experiments and accept ephemeral concepts. In some markets, transient retail formats will probably move from being a peripheral part of the retail environment to the very core.

As consumers’ shopping priorities changed in 2020, executives realized that there is a degree of insecurity in every physical retail store, experience, and format. No one knows for certain how long consumers’ new order of priorities will last or how they may evolve in 2021 and beyond, but a return to the pre-pandemic status quo is highly unlikely. Whatever happens next, the key to building a successful physical retail portfolio will hinge not only on sophisticated and seamless digital integration for ultra-connected consumers but on the ability of brand leaders to seize the moment in terms of location, format, and next-generation strategies that generate a good return on investment. We think, going forward, brands will and should become far more opportunistic in terms of where the brand appears, where it pops up, where it delivers experiences. It may be a question of having fewer stores, but fundamentally better stores.

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