Physical retail has been in a downward spiral for years and the number of permanent store closures will continue to rise in the post-pandemic period, compelling Business players to rethink their retail footprints. Amplified by a potential power shift from landlords to retailers and the need to seamlessly embed digital, companies will need to make tough choices to improve ROI at the store level. For those who dismissed the “retail apocalypse” as an exaggeration, 2020 will be remembered as the year that gave them food for thought. In the US alone, some 20,000 to 25,000 stores are likely to shut this year, which is more than double the number in 2019. Even retailers that actively addressed the retail disruptions of recent years have been forced to reduce their store network significantly. Macy’s, Zara, J.C. Penney, John Lewis, Onuma, and Isetan Mitsukoshi are among those to have announced closures around the world. One exception to the rule is China, where, according to Business Scenarios (based on information available September 2020), the offline market is expected to grow by up to 5 percent in 2021 versus 2019, in the Earlier Recovery scenario. However, 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.
The pandemic is, of course, the predominant recent source of stress for physical retail, but there are also significant long-term challenges, including sometimes punitive operating costs. Rent alone can often account for 25 to 40 percent of operating expenses in the physical space. In times of crisis, these fixed costs quickly become disproportionate to revenues, leaving retailers with limited options to reduce the cost base in the short term. Many retailers have embarked on strategic reviews of their store networks and launched initiatives to improve the productivity of remaining stores, leveraging digitization, automation, and more flexible working practices. With respect to the latter, they are both cutting staff costs to align with lower turnover and training staff across diverse skill sets. These kinds of decisions are often accompanied by budget and capital reallocations across channels to better reflect revenue potential.
Digital is often the beneficiary. According to the survey, 37 percent of Business executives expect to close more than 10 percent of their stores by the end of 2021, compared with pre-Covid plans. Zara’s owner Inditex has announced it will close up to 1,200 stores over two years and invest €2.7 billion (approximately $3.2 billion) in digital transformation and online-offline integration. Nike has promised to accelerate its digital strategy and invest in high-potential areas, which it said would lead to job cuts in stores and new jobs in digital. Similarly, some executives in Asia-Pacific markets are focusing on increasing online sales capacity rather than investing more in physical retail. The role of in-store employees is evolving, as companies retrain or redeploy people to add a human touch to digital experiences — and vice versa. For years, futurists have predicted these so-called “bionic” retail services across a variety of sectors. Now the conditions are right for the idea to become a reality. The ultimate goal is to deliver a stimulating and rewarding shopping experience that caters to individual needs across channels.
We expect these kinds of hybrid roles to increase exponentially, with in-store employees requiring high levels of skill to help deliver an omnichannel offering. Activewear brand Fabletics is among the companies that are responding, experimenting with “Omni-associates” who both guide clients in-store and interact through online channels. “The lesson… for all brands is that we don’t build our lives around retail. Retail builds itself around our lives. In 2021, there is a growing sense that landlords have more to lose than tenants, leading to the potential for a relative power shift in the relationship. As a result, while some real estate firms are taking retailers to court, others are considering a possible transformation of lease models. New Look and All Saints are among tenants to have requested turnover-based rents for their stores, while some landlords are experimenting with rent models indexed to store performance, alternatives to upward-only rent reviews, and lease renewals with shorter terms.
To gauge the ROI of their retail networks, some brands are using new key performance indicators that measure the stores’ contribution to omnichannel profitability. Through this lens, the ROI of a flagship store is often considerably higher than it would appear to be. Alongside this trend, a number of companies have invested in hybrid flagship spaces, tapping demand for digitization, localization, and personalization. Burberry, Nike, and digitally native Arias have recently invested in hybrid flagship spaces. Nike’s latest House of Innovation store opened in Paris in July. The format deploys technologies such as apps and body scans to create a richer shopping experience and leverages data analytics to predict footfall and sales patterns. Burberry’s boutique in Shenzhen, China, offers a customized WeChat program in partnership with Tencent, which delivers to customers exclusive content, rewards, and personalized experiences.[Currently, luxury] e-commerce is used as a complement to flagship stores, not a substitute. In the future [however], this trend will be reversed and physical stores will be a complementary experience to e-commerce.
New store formats will continue to emerge in 2021, offering a range of omnichannel services, such as BOPIS (buy online pick up in-store) adapted for in-store returns, in-store ordering, and customization. Among recent examples of innovative initiatives, French footwear brand Veja has opened a “services” concept store in Bordeaux that features a shoe-repair corner, and Brazilian luxury mall group JHSF Participações allows customers to remotely chat and browse with in-store personal shoppers via WhatsApp and receive their purchases at home. Another way to improve store ROI is to convert strategically located but underperforming (or closed) stores into digital fulfillment centers, following examples from other retail segments. In April, Bed, Bath and Beyond in the US said it was converting a quarter of its locations into dark stores. At the height of the pandemic, players experimented with repurposing closed stores as warehouses. US department store Nordstrom, for instance, rapidly increased the share of online orders handled by its full-price stores and its off-price Nordstrom Rack stores, which were both closed to the public at the time, in order to reduce inventory levels.
For some players, these temporary strategies could become permanent as online order volumes continue to grow. At the same time, as retail localization trends evolve, we are likely to see increasing numbers of small stores, enhanced with hand-picked inventories, and neighborhood stores designed to forge local connections, as seen with Macy’s and Harrods’ experiments with smaller, out-of-town formats. The relative importance of these new formats compared to large downtown stores will be a factor of how long the health crisis continues to restrict movement and of how long consumer preferences for local retail endures after that. In addition to the repurposing of entire stores, brands will trial new uses for parts of their retail floor space, moving beyond co-retailing to alternative models such as space sharing.
French sports retailer Decathlon, for example, has opened boutiques in stores of grocery chain Franprix. The move reflects the growth of retail as-a-service models, in which businesses lease out space to generate revenue and boost footfall. In the US, Neighborhood Goods and Showfield are prime examples. Some brands and retailers are capitalizing on demand for independent workspaces, creating blurred boundaries between work and leisure by opening up retail floorspace to remote working. Selfridges and Westfield London are among those to have announced plans. As companies aim to boost store ROI in 2021, many will focus their store footprint on high-growth markets. Brands including Montblanc, Hublot, and MSGM are targeting Asia for new store openings, reflecting the region’s economic growth potential and the fact that China is ahead of the global recovery curve. Still, a precondition of success in the region is likely to be the ability to offer a mature digital-physical hybrid, reflecting Chinese consumers’ high levels of digital engagement.
Uniqlo is among the brands with major plans, having reaffirmed in March 2020 its pre-pandemic announcement that it would open 80 to 100 new stores in the market next year. In 2021, Business leaders must finally resolve long-standing structural issues, closing unproductive stores and renegotiating rent terms across their portfolios. The challenging real estate landscape will create opportunities to engage landlords in conversations about ways to improve productivity, both overall and at individual sites. At the same time, executives should evaluate their presence in fast-growing regions such as China to optimize retail strategies to capture market growth. While spearheading the many changes to the store footprint and function, Business executives will also need to develop new models to measure store ROI. Fundamental to these will be their alignment with emerging ideas about store economics and the use of data to make every square meter generate as much value for the omnichannel model as possible.
“It’s the system behind it that is broken, and that’s where I see that we have such a big responsibility to change it. The pace we’ve had the last decade cannot be the pace that we have in the coming decade.”
First of all, what we have done has definitely made a difference. We see a positive tendency, but I couldn’t say that salaries are high enough. In a dream world, it would be fantastic if you could see more collective agreements, industry-wide agreements between employers, between workers, unions, governments, as there are in some parts of the world. It’s all about making industrial relations work in a better way. It takes to do smaller tests but scaling it is what will actually have an impact. Our take has been to do a lot of things in parallel. We need to try rentals, try remakes, and try resale. [But], we don’t have much time in [this] exploration phase. We need to have courage, we need to have more knowledge, and we simply need to find those ways going forward.
If you look at the number of initiatives we are doing, it’s amazing, but to scale those up, that’s the nut we have to crack. One, produce what we can sell. That’s where you also need tech as an enabler to get to that point. Two, it’s about sustainable products, and of course, you want to make that circular. We really have to speed this up so that we get fibers back in the system again and again and again. Three, I think it’s about new revenue streams that are circular in themselves or at least contributing to becoming climate-neutral, and then climate-positive, going towards the vision of becoming fully circular. You can look at rentals, remake and resell. We have to find quickly what can we scale up faster than others. And of course, you also need to make sure that it’s profitable because otherwise, it’s not sustainable. So how do you make sure you can scale it up and that after a while it can become profitable? Here it’s more on the big players to find new start-ups and new technologies, and be part of supporting that, because we have resources to do so.
The people who have been hit hardest by this crisis are garment workers in low-cost production countries like Bangladesh. What happens to these workers? You want to protect their jobs, but some of them are already out of work and they have nothing. We have a joint responsibility to look at this holistically and understand that economic growth helps people, in the sense that it can bring them out of poverty… It’s about building resilient systems in these markets. If I look at it in Sweden, you have a whole social protection network where if you lose your job you still have a system there to rely on, at least for a while until you find another job. In countries where there’s a lot of production, it’s not the same kind of system, so we have to work with governments and the ILO [International Labour Organization]. We have to work with unions so that workers always have a voice, and so that they can go to their employer to negotiate and to really have that kind of social dialogue that is so important and that they have someone to turn to. We have to [help] build social protection systems in those countries.