How the mighty have fallen – the future of retail

22 / 06 / 21 - 4 minute read

What will the retail landscape look like when COVID has passed? In this, the first of two articles, Daniel Herrmann, Head of Fund Management Retail, takes us through some of the possibilities.

For decades, John Lewis was the high-end department store of choice for the discerning British middle-class shopper. The launch of the John Lewis Christmas advert marked a highly anticipated date in the festive season. John Lewis toasters, kettles and cutlery featured heavily on wedding gift lists. And shoppers spent Saturday afternoons busily browsing the goods lining the store shelves.

But how the mighty have fallen. Since the onslaught of the COVID-19 pandemic, the British shopping giant has axed a third of its UK stores, placing thousands of jobs at risk. John Lewis isn’t the only retailer to be dealt a blow by the global crisis. The economic repercussions have been swift and widespread, triggering high numbers of retail bankruptcies, with clothes retail and department stores particularly badly hit.

Even as restrictions ease and shops start to open their doors once more, retailers are unsure about what’s waiting for them outside. How many customers will they welcome back into their stores? What will customers want to buy? And how should they expect this new breed of consumers to behave in these turbulent times?

Accelerating retail trends

However dramatic COVID has been for the retail industry, it’s important to remember that it has only accelerated trends that have been evident for years. A new generation of digital shoppers has grown up used to the one-click convenience of the likes of Amazon and the ease of interacting with touchscreens, rather than sales assistants. In effect, the industry has long been facing a moment of truth – the global crisis merely brought the question forward.

“COVID has led to a tipping point in the structural change of the retail industry and its real estate, which will lead to a lasting transformation,” comments Daniel Herrmann, Head of Fund Management Retail at PATRIZIA. “It’s likely that the experiences of the lockdown will have a lasting impact in some sub-sectors of retail, intensifying consumers’ e-commerce activities. In other words, there will be no return to the times before the crisis.”

As retail slowly emerges from the crisis, the key challenge isn’t just about shoring up profitability. They now must work out how many brick-and-mortar stores they need as shoppers shift further towards digital commerce, convenience, and service.

Different outlooks for different segments

Traditionally, the different retail segments have developed in parallel, with the high street at the top and food and convenience retail at the bottom of investor priorities. But the COVID crisis has turned the retail market on its head. Currently, food, non-food, discount, DIY and convenience retail are enjoying stable rents and returns. And investors are shifting their portfolios towards these sectors while reducing their exposure to the high street and shopping centres.

This spells bad news for some high street precincts and shopping centres, with significantly lower rent levels, devaluations and shrinking investor demand ahead, predicts Herrmann.  

The situation is grim for the mid-market fashion segment, which is suffering the most from the continued rise of e-commerce. Rents in Europe are already tumbling due to a surplus in supply, while investment levels are set to further deteriorate, adds Herrmann.

Some European countries will recover faster than others. Cash-strapped southern European countries will take the longest, particularly for non-food retail. Their northern neighbours, with more money in their pockets, are set to see spending recoveries spill over into stores.

Adjusting to the new normal

Regardless of the retail sector or location, a strong online presence is a prerequisite to survival. “The best suppliers can establish direct-to-consumer relationships, where retailers no longer serve as the gatekeeper to the customer,” according to “The future of retail” report by Oliver Wyman.

Hybrid, or omnichannel as it is also known, is one way forward, with physical stores complementing e-commerce. Already, 95% of all e-commerce derives from retailers with a brick-and-mortar presence.

While some major retailers are reducing their overall number of stores, they’re also boosting the brand presence of key flagship stores. Stores are striving to lure back customers with innovative concepts such as click & collect, BOPIS (buy online, pick up in-store) and easier in-store returns. They’re also adding feelgood and convenience factors, including measures such as bagless shopping and store-to-door services.

COVID has led to a tipping point in the structural change of the retail industry and its real estate, which will lead to a lasting transformation.

In future, brands may share space and work together to target complementary customer segments as part of the new ‘co-retail’ trend. At the same time, global demand is growing for personalised products and services, which build customer loyalty, generate higher margins and provide valuable consumer data. Standard products will lose further market share.

Out-of-town retail parks that are located in large consumer catchment areas are also set for a renaissance. Their size and space reassure shoppers, who are still nervous about crowds. Plus, retail parks can provide an easy place for returns, to showcase goods for customers to buy online, and allow for click-and-collect services.

To learn more about the market, download the PATRIZIA report, The future of retail: 7 distinct trends to watch.