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How does high street retail bounce back?

Precarious pre-pandemic, the future for bricks-and-mortar retail now looks even more bleak. Here’s how we can return it to health

Author: Noella Pio Kivlehan

09 September 2020

COVID-19 has had close to an apocalyptic impact on global retail.

With the pandemic spreading across the globe, governments ordered non-essential retailers to close. As a result, sales for bricks-and-mortar retailers plummeted as consumers were confined to home and asked to make only essential trips to those shops that remained open.

In the US alone, data from CBRE shows retail sales fell by 8.1% year-on-year in Q2 2020, the worst decline since Q2 2009. As a result of lockdown, shoppers turned to on-line shopping, boosting sales figures phenomenally. Amazon was a clear winner, posting better-than-expected second-quarter results, with revenue up 40% to $88.9bn.

“We have seen crazy figures – 20%, 30%, 80%, 100% in online sales for certain sectors,” says Eri Mitsostergiou, European research director at Savills. In the UK, the share of ecommerce has jumped from 19.1% to 31.2%. Pre-pandemic figures estimated it would reach 25% in the next three to four years. 

But what will this look like over the coming months now retailers have re-opened?

“There will be a rebalancing,” Mitsostergiou adds. “It will change because people will go back to physical space. It is a natural human need to be socialising, to be having fun outside of home”.

And with shop shutters again rising as countries grapple with reopening and relaxing lockdown rules, retailers, landlords and local authorities are doing what they can to keep community-level shopping alive.

“The big question is the ‘phoenix out of the ashes’ one: will COVID-19 cause retailers to go back to ground zero and rebuild, or can you adapt your existing model to meet the new demands?” asks Matthew Hopkinson, director of retail real estate analyst Didobi. 

The answer for bricks-and-mortar retailers and landlords lies in adapting or accelerating changes to their pre-COVID-19 model. Here are five strategies that can help the high street fight back.

Rethinking rents

Late, reduced, or defaulted rent payments have been an international issue during lockdown. Governments in France, Portugal, Greece, and Sweden have stepped in to help retailers by supporting or regulating tenant relief measures, with rent free periods, or rent discounts.

But there are still issues.

In the US, for instance, landlord Simon Property Group announced in June it was suing the owner of Banana Republic, Old Navy and The Gap for $66m in back rent and other charges related to its 412 stores in Simon’s malls.

“The drop in rents has been well over 20% and it’s gotten worse in the last several weeks in New York,” says Richard Latella FRICS, executive managing director at Cushman & Wakefield in New York City. “The expectation is we could be back to 2011 rent levels in certain submarkets. Other high street locations are holding up better but rent drops are inevitable.”  

The question of whether turnover rents would work long-term is tricky, says Latella. “Every major tenant has requested some level of rent relief whether it be a deferral, or an abatement, or going to percent in lieu.

“[Turnover rents] will work for a short period of time, but they are not a long-term solution as neither lenders or investors would not be comfortable with that type of situation. It’s is going to take to at least 2022 to get back to some level of normalcy.”

“It is going to take to at least 2022 to get back to some level of normalcy” Richard Latella FRICS, Cushman & Wakefield
Omnichannel as a service

Retailers taking omnichannel retail to the next step has been significantly accelerated. One of the best, and most recent examples, is Burberry’s store in Shenzen, China.

Opened on 31 July in China Resources’ 860,000 ft2 (80,000 m2) Shenzhen Bay MixC mall, it blends the physical and social world by allowing customers to avoid crowds and queues by booking appointments, events and table reservations in Thomas’s Cafe, its in-store café and community space, through a bespoke digital WeChat mini programme.

The WeChat mini programme is, says Burberry, a bespoke companion the “adds a layer of digital discovery to the physical space, unlocking exclusive product content, audio guides, one-to-one appointments, table reservations and upcoming events”. Shoppers earn rewards through the Burberry social currency feature and unlock exclusive content, and services.

One analyst, quoted in VogueBusiness.com, said that although luxury brands already had “high adoption” of WeChat’s online-to-offline features such as store locators and reservations, the COVID-19 pandemic had “increased investments in building one-on-one connections and offering personalised services via WeChat”.

Within Burberry’s new Shenzhen store is Thomas’s Café, reservations for which can be booked through a bespoke WeChat mini program, thus avoiding the need to queue. Images: Burberry

Malls find a new purpose

Although the trend for repurposing malls started before COVID-19, shopping centres are now, more than ever, likely to become the new community centres. 

With consumers eschewing travel on public transport into city centres, local malls are ripe for reconfiguring into hybrids – if not havens – offering all amenities under one roof. 

The US is leading the way with repurposing dead retail space. Over the past decade 200 malls have or are being retrofitted or redeveloped, some into hospitals, others into university campuses.

Cinderella City in Denver, Colorado is a prime example. Empty and decaying since 1998, the failed mall has successfully been turned into the mixed-use CityCenter Englewood, the outcome of a long-term strategic urban renewal development. It now includes a city hall, 480,000 ft2 (44,600 m2) of office and retail space, 440 apartments, medical centres, education facilities and a light-rail station.

Other countries have been following suit. In Australia, the Scentre Group is investing A$500m (£273.5m) in the redevelopment of Melbourne’s Westfield Doncaster. While there will be an additional 463,000 ft2 (43,000 m2) of retail, the work will also add 194,000 ft2 (18,000 m2) of office space plus health and wellness amenities. 

Convenience is king

With all countries pushing the “stay home and only go out for necessary shopping” message, local retailers have flourished. This in turn has spawned a new investment class conceived off the demand for these near-by shops during lockdown.

Mitsostergiou says: “Before national lockdowns, we talked about survival versus success of retail, convenience versus experience, destination versus comfort and ease of doing shopping locally. 

“This has gone a step further. There was already a growing focus on ethical and meaningful consumption, supporting local produce, and with the pandemic accelerating this trend we see local community shopping becoming the winner. 

“Big cities such as London, Paris, Milan rely heavily on tourists, and they have suffered more, whereas towns with strong local populations have been quicker to recover their retail market,” Mitsostergiou concludes.

“There was already a growing focus on ethical and meaningful consumption, and with the pandemic accelerating this trend we see local community shopping becoming the winner” Eri Mitsostergiou, Savills
New leaseback of life

Owner occupiers are now looking to release some capital, and retail sale-and-leaseback transactions are expected to pick up again once the pandemic has passed, reports Savills.

Following on from a significant year for sale and leasebacks in 2019, when €2.4bn of retail properties were transacted, representing 6% of the overall retail investment volume, Savills predicts that activity will increase in the latter part of 2021 as the retail investment market as a whole starts to recover.

“As the next stream will be mainly driven by distressed sales, we anticipate sale-and-leaseback deals will be concentrated in countries most impacted by COVID-19,” says Lydia Brissy, Savills’ director of European research. 

“The direct impact will squeeze retailers’ revenues due to a sharp drop in domestic demand. We expect to see more retailers seeking to unlock capital from owned headquarters office buildings and, more importantly, from distribution centre and supply chain properties.”

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