The retail landscape was in flux even before lockdown forced all ‘non-essential’ shops to close due to COVID-19. Lockdown has only increased the growth of e-commerce as we become more and more comfortable buying almost anything online rather than in-person. The question now remains whether COVID-19 will accelerate the decline in the bricks and mortar high street and, if it does, will this result in increased demand for warehouses and ‘last-mile delivery’ options?
The ‘new normal’ of social distancing will likely bring queues outside shops as customer numbers are limited, changing rooms and toilet facilities closed and limited customer service interactions. For now, at least the ‘shopping experience’ on the high street will not be quite the same. We have experienced the ease and time-saving benefits of e-commerce and in the short-term we will see reduced footfall on the high street, but this may continue as our retail habits are changed forever.
Many national retailers are also expecting this change to continue and have already announced the closure of a large number of stores in an attempt to cut costs in wake of the losses sustained during lockdown. This trend is expected to continue as retailers consolidate their high street presence to just those shops that see the biggest turnover and continued footfall.
Rethinking the High Street
One thing that might entice the customer back to the high street is the ‘shopping experience’ – which is difficult to replicate online. However a new trend for virtual shops would combine the benefits of online shopping from home together with the shopping experience. Customers may not want to take the risk of visiting the high street when they can get the same shopping experience from a virtual shop.
“Phygital” (bringing a digital approach to bricks and mortar shops) and “omnichannel” (making the purchasing process fluid between different shopping methods (e.g. in-store, online etc)) solutions aim to counter the effects of e-commerce and improve the ‘shopping experience’. This will require a lot of investment by retailers in technological solutions, such as good WiFi to browse online whilst in store and to see current stock availability at other stores and warehouses; digital mirrors where customers can experience an item without trying it on or touching it. Retailers may also want to completely re-think their bricks and mortar shops, using them as part of the distribution network to satisfy click-and-collect orders rather than just as window displays for products, and so allowing customers to start their shopping online and finish it seamlessly on the high street.
But all of these ideas would need to be backed-up by good stock levels in conveniently located and well organised warehouses so that customer demand can be met in the smooth way that they have come to expect from e-commerce options.
The Role of the Landlord
Landlords (and their funders) will want to ensure their properties remain attractive to potential tenants and future investors in order to maintain the asset’s capital and investment values (as well as to avoid empty rates liability). Retaining tenants and keeping footfall as high as possible will be important, but some tenants may need to be offered incentives to re-gear their leases in order to remove tenant breaks or extend lease terms. The landlord’s role in place setting will become even more significant as the ‘shopping experience’ will become more and more important in attracting consumers to the high street.
Turnover rents (and even total occupational deals where rents, rates and service charges are based on store turnover) have been increasingly used so as to share the benefit and pain of the high street between landlord and tenant. Lockdown and post-COVID-19 reduced footfall will undoubtedly result in reduced turnover for retailers from their traditional stores. Landlords may need to rethink the use of turnover rents if they require a regular income stream and a well drafted turnover rent provision will want to capture as much turnover as possible for each shop, including click and collect and internet purchases completed from the shop.
Landlords may also want to think about other ways that they can assist retailers in re-purposing their high street shops in the post-COVID-19 economy and so retaining value in their assets – for example, permitting alterations to shops that either make social distancing more effective or enable “phygital” solutions; consider permitting uses that include click-and-collect services; ensuring good access to WIFI and broadband connections; permitting more flexible delivery and servicing of shops.
The Rise of the Warehouse
The growth of online shopping has seen the role of the warehouse evolve from a stockroom to a fulfilment hub dealing with e-commerce orders every day. In the post-COVID-19 world this is only likely to continue. E-commerce is also a lot more cost efficient for the retailer than leasing and staffing individual shops in numerous locations. Retailers who do not currently have an extensive warehousing network will probably be seeking new warehousing as soon as possible in order to survive the change in habits.
Lockdown has also highlighted the issue of supply chain risk mitigation and resilience with retailers potentially moving away from ‘just in time’ stocking strategies to increased inventory levels. The empty shelves at the supermarkets at the beginning of lockdown is a good example of where the supply chain was unable to react fast enough to changing customer demand. This will result in additional regional demand for warehousing space to house the increased stock and lower the risk of being unable to meet demand due to issues with the supply chain.
But the traditional warehouse lease is usually for 10 years or more – demand may be for more flexible terms or sharing arrangements so that retailers can react more effectively to changing consumer demand. Additionally, the specification of warehouses will become more important – highly automated, energy and cost efficient buildings that are purpose built for e-commerce operations will be attractive. We might also see a change in the design of warehouses – more technologically sophisticated warehouses can be taller with a smaller footprint and less space for parking than previously may have been built.
The Last Mile
Last-mile delivery is the most expensive part of the supply process with retailers spending a lot of time and money trying to find a solution. Last-mile delivery options, which by-pass the need for bricks and mortar shops – such as parcel lockers, kerbside pick-ups, autonomous vehicles and drones – will become more and more important to help keep retailers profitable. Retail landlord and developers may want to find new ways to incorporate these options into their schemes in order to stay ahead of demand, for example utilising rooftop space to install landing ports for drones.
With COVID-19 likely to result in the accelerated decline of the high street and growth of the importance of e-commerce we will see a change in the retail landscape. There are various ways that retailers can rethink their bricks and mortar shops to retain a presence on the high street, and landlords will be key to permitting those changes and retaining value in their assets. However, e-commerce is here to stay and demand for warehouses will increase as retailers address the supply chain issues that have been exposed by the lockdown. Developers would be well advised to consider the changes to the retail landscape that have been accelerated by COVID-19 when devising new schemes to ensure that they remain as attractive to investors and tenants as possible.
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