Glynn Davis is one of the UK’s most knowledgeable and experienced retail journalists, founder of Retail Insider, and Ecommerce Age’s monthly columnists.
London’s Oxford Street might be suffering from an incredible 17% of its shops standing empty, according to Property Week, but the market for historically unfashionable warehouse buildings to fulfil the increasing volume of sales now transacted online is on fire.
Real estate firm Prologis has accumulated one billion square feet of warehouse space across 19 countries and private equity firm Blackstone regards ecommerce as its number one investment theme and to underscore its conviction it has stuck $100 billion into warehouse assets. Meanwhile, there are very few people willing to stick any money into property on the country’s most high profile shopping street.
This stark contrast in fortunes suggests the store is now dying a slow death while its ecommerce replacement represents the future of shopping. But this is far too simplistic and merely reflects a highly polarised view that has been driven by the white-heat impact of Covid-19. Some of this will be invariably rewound and a level of equilibrium will be realised.
Part of the problem is the retail industry’s difficulty in defining the role of bricks and mortar. For many years it has recognised the benefit of the halo effect from the multi-channel model whereby offering your goods to customers via more than one route has typically generated revenues far greater than would be derived from the individual parts if operated independently.
This was certainly recognised by John Lewis, which understood the fact there is a high level of interchange between the channels as shoppers undertake ever more complicated, circuitous shopping journeys. It calculated that as much as £6 in every £10 spent online was driven by its shops. This is the try in-store and buy online (I’m sure there is an acronym for this!) phenomenon of which the reverse is BOPIS – buy online, pick-up in-store.
This figure helped justify its gung-ho store opening programme, which between 2008 and 2016 saw it grow from 26 stores to 46, and during which time online sales increased from 10% of its total sales to an impressive 33%. By 2019 this hit a hefty 40%. But then something odd happened and John Lewis devised a new methodology that instead suggested only £3 in every £10 spent online was driven by its shops. This was then used to support its radical store closure programme.
John Lewis is certainly not alone in overhauling its store estate. Marks & Spencer back in 2016 announced plans to close 75 stores and this was revised upwards to 100 in 2018. Things have become even more toxic around store portfolios on the back of its forecast that 40% of its clothing and home sales will be online – double the level pre-Covid-19 – in the future.
I’ve no idea what the John Lewis methodology involves but it seems clear that the radical change in outcomes of its calculation highlights how complicated it is to quantify in hard cash the relationship between online and physical stores. As well as being showrooms, stores are also places to return any unwanted products bought online and can act as collection points for the increasingly important click & collect. The growing practice of using stores as mini-fulfilment centres for online orders requiring home delivery is another factor to be taken into account when determining the value of a store.
Clothing and homewares retailer Next has studied this multi-dimensional scenario particularly impressively and is arguably the role model for managing the role of the store in an increasingly digital-first retail sector. Unlike other retailers it is not undertaking any knee-jerk reactions but managing a steady decline of its store estate. In some cases it is happy to run them at a loss if they can justify their existence by offering a purely supportive role for online sales, and collections and returns within a specific area.
The company is also clever enough to realise the basic factor that stores are not going to become completely redundant in the retail landscape. Take clothing, Bernstein Research forecasts online sales within Europe will account for 35% of total retail sales by 2020. It suggests it is also unlikely that other categories will see online become the dominant channel for the foreseeable future.
Bernstein also found that more than half of Gen Z and millennials undertake most of their shopping in physical stores, which surely paints a significantly rosier picture of the future role of the store than we have been led to believe by the many retailers who seem to be jettisoning their stores in a rather haphazard and economically questionable manner.
Boring warehouses might be where the real estate action is right now but that does not necessarily mean high street stores must conversely have very little value.