There will be no reversion to the norm – much retail property will keep losing value. But the sector can be better than ever, thanks to proptech

A recent conversation with a large retailer went like this:

“The market is tanking, opening up some real buying opportunities; do you want to get involved with a distressed asset fund we are putting together?” … “Are you kidding? We are murdering our landlords on rents, there is no way we’d buy any retail real estate.” That’s where we are: the ‘retail apocalypse’ is in full swing. 

In the US some 8,200 store closures have already been announced this year, with an expected shuttering of 150m+ sq. ft of space. On top of the 155m sq. ft closed last year. In the UK a net 1,234 stores shut in the first half of the year, according to the Local Data Company. More than the same period last year and the highest since 2010. Of course you can, and many in retail real estate do, slice the numbers in different ways and argue the situation is not in any way an ‘apocalypse’. For me, ‘we’re murdering landlords’ rather trumps that Panglossian viewpoint.

What no one can deny, though, is that the world of retail, and therefore as sure as night follows day, retail real estate, is changing dramatically. The only valid variance of opinion is in the degree of change. In my mind the degree is very large indeed. 

This is why. First off, we have to accept that physical retail is no longer just, or even primarily, about shopping. Historically, physical shops were the distribution channel for manufactured goods. As the Industrial Revolution developed, and factories enabled the production of large quantities of identical goods, the only way to sell them, at scale, was through physical shops in every village, town and city across the land. Sure, there was mail order way back when, but that was very slow and useless for anything perishable. Sears had its famous catalogue back in the 19th century (where incidentally one of the best-selling items was self-assembly homes), but that served a huge market, the US, with very limited infrastructure. Shops were it… if you had products to sell you had to have shops. Lots of them.

Today shops are not needed as distribution channels. There are other ways to get goods into the hands of customers. Shoppers no longer need shops, to shop. In this world a physical shop has to perform one or more of four functions:

First, you have to be a ‘destination’. Somewhere that is just so exciting, or attractive, or fulfilling, or intriguing, or beautiful that it will attract people of its own accord. This might be in town or out of town; there are examples of both. It might be newly built or old, high-brow or low-brow, low-end or high-end. There are many ways to create ‘destinations’. There are also successful and unsuccessful 

‘destinations’. Economics still applies; create a ‘destination’ 

in the wrong place, or where local purchasing power is low, and even the best places can fail. But a great place in the right location is a pretty solid asset.

Secondly, you can be a fulfilment centre, somewhere 

that helps retailers get over the ‘last mile’ problem. Many retailers still stick to the fantasy that their customers want ‘click and collect’ services. They do, but only in the absence of being able to get their orders quickly some other way. Why did Amazon buy Whole Foods? Because their stores 

get them close to a large percentage of prosperous shoppers. All of the best retailers are working on getting delivery down to as short a timeframe as possible. Shops can obviously help, but they do not need to be open to the public. Urban logistics, vertical warehouses, micro warehouses, car parks, sites awaiting development; all of these are pieces in the fulfilment puzzle. Build a network that offers two-hour delivery to the largest, richest customers and you have another solid asset.

Thirdly, you can win by having shops particularly well-tuned to local particularities. These would be areas that are the antithesis of the clone high streets we are too familiar with. Hard though it is to believe, not everyone wants the same 50 brands. The days of the same old same old are as dead as thinking of stores as distribution channels. Think of a high street more like a smartphone – everyone’s home screen is different. We might well fit into cohorts of like-minded people but we certainly do not all want the same. And critically, today we do not have to accept all being sold the same. Personalisation at all levels is the name of the game. Curating places with a deep respect for, and insight into, the locality and the locals is the third way to build solid assets.

And fourthly, you can supply the cheap and everyday needs of people. Either people who do not use online very much, or goods that are fast-turnover, or too cheap to deliver. Places where convenience and price trump all else. These are the final solid assets.

Whichever category you choose, though, everything you do must be data driven. In conception, design, build and ongoing management there is no success in retail real estate that will not be data driven. And this means real-time data, not quarterly reports of out-of-date information. As Larry Page has said, “At Google we trust in God; everyone else must bring data.”

The upshot of the above? There is going to be a lot less physical retail, but it is going to be much better retail. Obsolescence will be bountiful in the next five years. There is a wildcard item five to the above typology.

And that is creating great retail spaces and places, not 

to generate any great intrinsic growth but to make surrounding residential assets more attractive. Creating and curating really interesting, attractive retail locations as loss leaders to entice people to pay more to live in 

an area is a valid goal. Clearly, this only makes sense when a large owner controls enough real estate to really be able to leverage this strategy, but those places do 

exist. King’s Cross and Marylebone in London are great examples of this.

So where does tech, or proptech, come into all of this? 

At a macro tech level it is the development of the cloud, smartphones, connectivity, robotics and automation that has propelled the growth of ecommerce and the rise of Amazon, Asos, Boohoo et al. Infrastructure matters; for years people laughed at how pets.com raised hundreds 

of millions and then collapsed in the dot-com bust of 2000. What they tend not to mention is how chewy.com 

(essentially the same thing) floated last year and is now worth nearly $10bn. Selling pet food online does work after all. But only when the necessary infrastructure enables it to work.

Physical retail is suffering today because technology, in the widest sense, has enabled all manner of competitors, and competition, to flourish. Mostly the real estate industry has been caught out by this because mostly the real estate industry pays little attention to, and has little understanding of, developments within the technology sector. You cannot see a huge obstacle in the way if you keep your eyes focused elsewhere.

The flip side to the tidal wave of change largely driven by technology is the ability of more targeted technology, in the guise of proptech, to come to the rescue. There is a great deal we can do to build and grow great retail assets.

Let’s start with localisation. KYC is the name of the game here: know your customer. Nothing works without this. Fortunately we live in a world of ever-growing data with rapidly advancing tools to analyse that data. So instead of just profiling a location based on crude (and inevitably out-of-date) demographic data, we can today utilise the following:

•          Psychographics enables us to understand consumers based on their psychological attributes, and focuses on activities, interests and opinions.

•          Socioeconomic data enables us to understand the behaviour of people, through the lens of economic drivers. How does the economy of this location impact on how our customers are likely to behave?

•          Data from mobile phones (just about everyone has one of these and they are ‘broadcasting’ all of the time) helps us understand who shops where, where they live, where they work, the other brands besides ours that they visit, and the way they tend to move around an area.

•          Married with transaction data, an increasingly rich picture of purchasing behaviour can be developed.

• Whether from retailers directly, or via credit card companies, we can build enormously deep geospatial models based on this transaction, mobility, economic and behavioural data.

And here artificial intelligence, with its subset machine learning, is very much our friend. The three areas where AI and ML can, and do, excel are:

•          personalised product recommendations

•          assortment optimisation

•          pricing optimisation.

That means: what are the broad product categories our customers are most interested in, how can we optimise the mix we stock, and then how can we ensure pricing is set just right? Not too hot and not too cold. This of course works at the individual shop level, the centre level, the street level and across a wider area.

This use of AI is more likely to occur amongst individual retailers, but for the landlord an awareness of the power of these tools is important. When judging the covenant of existing or prospective retailers, an understanding of how deeply said retailer is using these tools could be very instructive. Used well they give a retailer great insight, so one should be looking for retailers who are advanced data users. They have a much greater chance of surviving and thriving.

All the above gets us to the new reality of retail real estate. Physical shops are a ‘customer acquisition cost’ not a distribution channel. Sales, per se, are not the point (hence beware the allure of ‘turnover rents’). The aim of a shop is to inspire a customer and to learn about that customer.

This is how the smartest online retailers who are opening offline stores look at them. Unlike the retail real estate industry, which often sees online moving offline as a vindication and loudly exclaims “See, told you they needed ‘proper’ shops” to online retailers, a physical store is a way to acquire a new customer, who they can then service more efficiently and effectively online. An example of this is the US store Bonobos with its ‘Guideshop’ concept. Here you book an appointment to be introduced to the whole range, try on items, and order what you will. Which is delivered online, as the store holds no stock that is not on display. You get a very strong personalised experience while they get to know a great deal about you. With all that data, marketing to you online is cheap and very effective.

Doug Stephens, who writes brilliantly at retailprophet. com, has described this as ‘shops as media’ and he posits a different way of looking at the value of a physical store. If you combine the number of people who visit your store with for how long, and then compare this to the cost of being able to keep their attention online, in an immersive experience, then the value of that shop can be looked at in a very different way. How much does it cost to get a customer to watch a 20-minute branded piece of content online? Answer: a lot!

You absolutely have to design, stock and manage a shop in the right way to make the most of this (which is where AI and other proptech options come in), but if a retailer can think of its touchpoints with a customer in a holistic way, where online feeds offline, and vice versa, then you have a single channel to work with, not an omni-channel one. The problem with ‘omni-channel’ is that today it mostly means multiple routes to customer, segregated in data and fulfilment terms, and a morass of duplicating costs. Which explains why so many retailers are losing so much money; their fundamental business model does not, will not, work.

Which gets us to China, Alibaba and ‘new retail’. In their book New Retail: Born in China, Going Global, Michael Zakkour and Ashley Galina Dudarenok have this excellent line: “If you want to see the future of retail, you don’t need a time machine or a multi-million dollar research initiative. You just need airfare to Shanghai and a week to explore.”

‘New retail’ is a term coined by Jack Ma in 2017 and summarised as a way of ‘making it easy to do business everywhere’. As the founder of a company, Alibaba, through which 80% of all ecommerce in China goes, he has extraordinary insight into supply and demand within the retail sector, across the entire country. Alibaba also owns department stores, shopping centres and supermarkets, including the poster child for ‘new retail’, Freshippo (aka Hema).

The core proposition with ‘new retail’ is the merging of online and offline. This is achieved by arranging four capabilities into one continuous feedback loop:

• Starting with commerce, which incorporates social commerce, and marketing tools across B2B, B2Cand C2C channels. Whether you are marketing to companies, consumers or allowing consumers to market or interact with other consumers, you have to have capabilities that allow this in a frictionless way.

• Then onto digital capabilities, which include search and native mobile websites, underpinned by data science and AI, all resident in the cloud, and ideally incorporating mobile payments and financial services. Logistics is next, where you take advantage of automation, unmanned vehicles and warehousing that enables last-mile and cross-border fulfilment.

• And lastly media and entertainment, where you have sophisticated teams managing content creation, social media feeds, AR and VR experiences and localised services.

Put this together and you have places like Freshippo, where you can buy goods using your phone, pay for them with Alipay, select a live lobster and have it cooked to your preference in store, or simply order what you need online and have it delivered to you within 30 minutes if you live within 3 kilometres of the store.

And on it goes. Everything connected to everything else, predictive stocking, automated processes removing all the friction in shopping, and a deep understanding of every customer on an individual basis. Build, measure, learn, build, measure, learn… 24/7/365.

The question of course is: where does the real estate industry fit into all of this? Alibaba largely does it all itself. But would it, if it had the right partner? Is real estate part of its core competence? No. It is necessary, but not sufficient.

In the West we are a long way from this. Walmart and Amazon might have the data to work like this but it is unclear whether they want to. Or need to. However, it is clear that the service provided to the end customer from a ‘new retail’ approach is extremely impressive and generates amazing demand. The real estate industry needs to move closer to this mindset, regardless of whether or not it wants, can or should develop such deep ecosystems and networks.

In conclusion then, all of this is a big deal. Retail is changing and changing fast. And not in a linear way; we are not digitising the past. It is being reinvented. Technology is changing how we shop, where we shop, and how we want to be served. There is not going to be any great reversion to the norm when the ‘apocalypse’ abates. Much retail real estate is going to continue to lose value, even becoming completely obsolete. Many long-established centres, streets and areas will die. Don’t bring a knife to a gunfight: if your retail real estate is not suited to how the market is changing, then there is nothing you can do about it. Change the game, or get out.

What the above does show, though, is that retail, and retail real estate, can be much, much better than ever before. We have the tools and technologies (some broad tech, some narrower proptech) to know far more about our customers, far more about what they want, where they want to go and how they want to be dealt with than ever before. The next ten years are going to see many old-name retailers fade away but many new, quite brilliant ones take their place. Their design flair and human skills will be in a class apart from the norm today, but they will also be powered by a wide range of technologies, fed by incisive data, that enable them to delight us shoppers.

We are social beings, but increasingly only on our own terms. If the retail real estate industry wants to thrive it will need to develop new skills, particularly around technology and data and use these to work more closely with the best retailers to mutually create places we really want to visit. Retail real estate is still an area of great opportunity, but real estate skills alone will not be enough to make the most of them.

The game has changed.