Online retailing accounts for an increasing share of consumer spending. This year, Danish consumers are projected to make online purchases to the tune of DKK 125 billion, a figure that has grown by 12-15% annually in recent years. Meanwhile, sales in traditional shops have been stagnant at best, with many retailers and sectors are suffering a slump in shop turnover.
Retail vacancies on the rise
Naturally, this trend has impacted both demand for retail space and rental prices.
Provided that growth in online retailing continues to accelerate at the same rapid rate in the years ahead, retail vacancy rates are bound to increase even further. In a worst-case scenario analysis, ICP Denmark (Institute for Center Planning) estimates that up to two million sqm space out of an overall Danish retail stock of some eleven million sqm will become redundant by 2030.
This is by no means a purely Danish phenomenon. In the United States, irrespective of favourable trends in both consumer confidence and spending, the retail sector is witnessing a substantial number of bankruptcies, and retail vacancies are soaring. Most recently, department store chain Sears, once one of the world’s largest retailers, has filed for Chapter 11 bankruptcy.
Against this backdrop, it is hardly surprising that some investors think twice about investing in retail properties. Every investor knows that cyclical fluctuations in rental prices and vacancy rates are transitory phenomena with no bearing on the long-term capital growth of investment property, whereas structural changes in demand may severely impair capital growth longer term.
Traditional shops and online shops are complementary
However, we do not subscribe to the view that growth in online retailing is likely to continue unabated. The retail sector is becoming increasingly attentive to the fact that online retailing and traditional shops are more than just alternative options and competitors, but that they actually offer synergy potential and complement each other. In this context, it is interesting to note that Amazon, a global leader in online retailing, is in the process of setting up traditional shops to complement its online platform.
Many years ago, when all households had acquired a television set, and when it suddenly became possible for everyone to rent a movie from e.g. Blockbuster, the movie theatre market was hit. Indeed, some market players predicted the death of the movie theatre market. Why bother to go out to watch a movie at the theatre when you could just as well stay at home and watch the same movie at a lower price?
It turned out otherwise. Today, Blockbuster is history. Movies are available for streaming on the Internet, and it has become even easier to watch movies in the comfort of one’s own home – you do not even have to venture out to a shop that rents out movies.
Nevertheless, the movie theatre market is flourishing as never before. Up-to-date movie theatres can provide cinemagoers with an experience altogether different from the one they get when watching a movie on the screen at home. Moreover, consumers like to spend money on leisure activities and experiences.
When metropolitan tourists visit Copenhagen to go shopping at Strøget, they could save a lot of time and money by shopping online. However, the tourists are not just looking to buy an article. They are looking to get an overall shopping experience, and the actual purchase of the article is just part of the experience.
The retail concepts that fail to be innovative will be hit hard by online retailing. This has happened to many highly esteemed retail businesses in the United States, as exemplified prominently by Sears and Toys’R’Us.
However, the retail trade of the future will not be confined exclusively to online platforms. The winners will be the retail concepts that understand that customers demand a shopping experience in traditional shops, and that online retailing and traditional shops are not merely competing against but indeed complementing each other.
What to do with the redundant retail space?
There is hardly any doubt that the shift will cause a rise in retail vacancies in some but by no means all segments. In this connection, it is worth bearing in mind that the markets of large cities in general are supported by favourable demographic trends which, all other things being equal, will have a positive spillover effect on retail occupational demand.
Well-functioning city centres and the most attractive shopping centres with strong catchment areas, a broad selection of shops and other activities, as well as the ability to be innovative and create an interesting shopping experience, will not merely survive, they will prosper with stronger footfall.
Local shopping centres in the suburbs of major cities, including those typically located next to a train station in Greater Copenhagen, have already – not only due to online retailing – lost a lot of trade with specialty goods. In many locations, grocery and convenience shops are more or less the only shops that make any sense. Such locations call for investments in urban revitalisation schemes. In many places, new local plans are underway, aiming for higher building density, not least in terms of residentials.
Abroad, multiple large-scale shop units in attractive locations along arterial roads leading into major cities are being converted for storage and logistics use, including “last mile logistics”, distribution facilities for online businesses. Longer term, this trend may well catch on in Denmark – although the process will be painful seeing that logistics facilities today command a rent that typically falls substantially below the rent such facilities have been able to fetch historically if used for retail.
The biggest losers will not doubt be shops, including big box outlets, on the outskirts of small urban communities. Here, a cocktail of sustained growth in online retailing and less than favourable demographic developments may potentially seriously impact retail vacancy rates, as such locations rarely offer obvious options of redeveloping redundant retail properties for alternative uses.
All in all, the retail sector is facing major structural changes, but further mass extinction in retail is quite implausible. Shops that understand the importance of a good location and that can be innovative and provide customers with a good experience will be well-equipped to survive in future retailing.
This is really not a new phenomenon, but many shops have nevertheless failed to take it seriously so far. Online retailing now forces them to do precisely that.