The property impact of e-commerce
This year in the US, November 30, also known as ‘Cyber Monday’, was the largest online sales day in history. Retailers raked in approximately US$3 billion (A$4.2 billion at the exchange rate at time of writing). The preceding four days that began with the annual Thanksgiving holiday generated another US$8 billion (A$11.1 billion) of e-commerce sales.
Each of the 18 days following Cyber Monday are expected to yield more than US$1 billion (A$1.4 billion) of e-commerce sales. For some perspective, Australian retailers pull in just under $900 million from both offline and online operations on an average December shopping day.
None of those numbers should scare the property side of the retail industry. But one probably should – it’s that while e-commerce was growing at 15 per cent year over year during that five-day period from Thanksgiving through to Cyber Monday, store sales were probably decreasing. MasterCard reports that total retail sales grew by just 0.3 per cent during the whole Thanksgiving week.
What this means is that stores are depending ever more heavily on the last six days before Christmas, when e-commerce delivery times become too compressed and shoppers need to get off their backsides. However, with retailers increasingly using rapid delivery times as a competitive weapon, that period of dependency on physical stores will become compressed as well.
Many of us who have been working in and around shopping centres for a long time recall the palpable sense of unease – even panic, in some quarters – that seized the industry when e-commerce emerged as a serious competitor to retail real estate some years ago. That angst has yielded over time to a kind of low-level brooding, punctuated by occasional hyperventilation over un-level playing fields and the like.
Part of the reason that the property side of the industry has become generally less exercised over the whole e-commerce phenomenon is that shopping centre operators themselves have actively sought to co-opt the technology revolution.
Among other things, they have brought wi-fi into their centres, signed up for Uberified home delivery services, and are experimenting with beacon, geo-fencing and other technologies to enhance the shopping experience and generate more revenue per customer.
In short, they’ve claimed the technology revolution for themselves, saying – shrewdly – that whatever is good for the retailer is good for the landord. At the same time, they’ve quietly been upping the number of non-retail stores in shopping centres and made liberal use of the phrase “experiential retail”.
Also helping to lower the unease over e-commerce in Australia has been the fact that retail analysts by and large have been distracted by other matters, such as the effects of internationalisation, the wretched state of the department store and discount department store sectors, and the unusual volatility of global financial markets.
Only the property brokerage firms have preserved any kind of consistency. They continue to spruik industry conditions with their usual vigour, just as they’ve have done for decades, and will continue to do until they draw their last breath.
Facing up to realities
But e-commerce itself has always been the subject of spruiking, primarily from tech firms, whose clear self-interest is tied in with skyrocketing online sales. So an honest researcher is always searching for the truth somewhere along that continuum between playing down e-commerce and mindlessly boosting it.
What can we say from the experience this year about the property impacts of e-commerce, short of hyperbole and short of the usual platitudes such as, “we’ll always need stores” and “shoppers will always want to touch and feel merchandise” (the latter of which is being increasingly challenged by augmented reality technologies)?
First, the overall e-commerce share of retail sales is growing, but not faster than many of us in the industry had anticipated. For Australia, using data from the NAB Online Retail Sales Index, e-commerce probably accounted for approximately 7.8 per cent of retail sales (excluding cafes, restaurants and takeaway food) in the 10 months to October, up from 6.8 per cent in 2014.
This is significantly under the comparable figure for the US, which was approximately 10.3 per cent for the first three quarters of 2015. This, in turn, is well below the UK, which has passed the 15 per cent threshold.
My intuition – shared broadly by a lot of industry professionals – has always been that in a steady state situation e-commerce would account for maybe 25 per cent of total retail sales. That is now starting to look a little conservative given the experience of the US and Western Europe.
The second thing to note is that, partly because of e-commerce, retailers with whom I speak and consult are increasingly taking a harder line in their negotiations with landlords. This is manifested in much greater reluctance to do the usual horse-trading over portfolio-wide store openings. For example, it used to be that a landlord could pressure a retailer to accept a ‘B’ or ‘C’ location as part of a package deal for getting space in an ‘A’ location. Retailers are now more willing to simply walk away from these deals.
In other words, every location must now stand on its own feet from a profitability standpoint. The exception, of course, is a franchise situation, where the incentives are different because the franchisor is trying to sell franchises, not operate the stores.
The implications of this are, of course, not that cheerful for many second-tier and third-tier shopping centres. A way must be found to make those locations attractive for good retailers, rather than just hapless franchisees being thrown off the deep end.
The problem can be solved, but certainly rent flexibility will have to play a greater role than it has in the past.
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