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The future of retailing and retail real estate – what lies in store? 

Technological change is piling pressure on traditional retailers, a trend with significant implications for retail real estate, says Chris Urwin.

3 minute read

picture -The Bentall Centre, Kingston- upon- Thames, Greater London

Physical, store-based retail shopping is set to decline significantly as consumers increasingly turn to e-commerce. The UK retail sector will need fewer and smaller stores, which must also become platforms for discovery, engagement and interaction instead of mere distribution channels; forming part of a multi-channel strategy that will see a blurring of online and offline retail. To compete with what online shopping has to offer, stores must focus on creating an ‘experience’ for shoppers.

Location will be an important driver of that process. As such, for real estate investors it will be essential to form a view on which markets have the most promise.

Facing up to the online threat

Online shopping has changed consumer expectations of the shopping experience by raising the bar on product information, price comparisons, personalisation, ease of buying and instant customer satisfaction. It also eliminates many of the costs and hassles of shopping in stores, such as transport and time costs, queuing, difficulties locating products and a lack of in-store assistance.

According to CapGemini1, 40 per cent of consumers across a range of countries say shopping in a store is a chore that has to be done – almost as many report they would rather wash dishes instead!

Of course, unlike online shopping, physical stores have the advantage of making shopping a tactile and social experience, which is how they might retain their relevance. While cost, choice and convenience have traditionally been the key to consumer satisfaction, control and richness of experience have become increasingly important to modern consumers. Shopping in stores is also competing with an ever-growing range of services, many emerging in the sharing economy, personalisation economy and on-demand economy.

Technology may well help physical stores in this fightback. Virtual reality, artificial intelligence, the internet-of-things, robotics and drones and custom manufacturing and 3D printing all have the potential to create a more satisfying experience for shoppers.

Focus on product and location

Not all products are created equal when it comes to creating an appealing shopping experience. High-engagement products have the potential to create a shopping experience full of discovery, interaction and excitement. Low-engagement products, meanwhile, are typically routine purchases where speed, efficiency and price are the chief concerns. For such products, there will be a greatly reduced role for physical stores. To compete with online shopping, physical retailing needs to focus on high-engagement products and on creating locations with strong destination appeal. Just as not all products will lend themselves to creating an experience, not all markets are equipped to transition to high-engagement destinations. Scale is vital in this respect, so major cities and existing regional shopping destinations should fare better than smaller retail locations. By this analysis, London, Kingston, Manchester, Birmingham, Glasgow, Exeter, Bath, Cambridge, Edinburgh and Oxford score highly.

The impact on different retail formats

As distinctions between different types of retail asset become blurred, all retail segments will need to establish themselves as destinations while providing more leisure activities and a diverse range of options for eating, drinking and socializing. The changing nature of retailing implies specific impacts for different retail segments.

Shopping centres, for example, will have to re-examine the availability of anchor tenants. Most centres have a department store as an anchor but the outlook for these is particularly uncertain. One possibility is for shopping centres to have leisure operators as an anchor. To succeed, shopping centres need to embrace disruptive technologies, focus on adaptability and flexibility, and provide a setting for a wider range of economic and social activities, for instance co-working and libraries.

Retail parks, meanwhile, will need to significantly broaden their offering. More leisure activities, or even the fusion of retail and leisure parks, will be especially important. Underdeveloped as they are in this regard, it presents a significant opportunity for repositioning. 

Designer outlets in many ways already embody destination retailing and the model appears reasonably sound. Sales are generally less impacted during a downturn and their very nature revolves around strong brands. In addition, the lack of online outlet shopping improves the designer outlet physical offering.

Supermarkets will need significantly less space, with very large supermarkets (in excess of 60,000 square feet) especially affected. Much of the retailing that takes place in supermarkets is low-engagement shopping and so, as online retailing gets easier, the need for supermarket space will decline. Supermarkets should focus on the higher-engagement elements of their offer such as butchery, bakery and deli services. In-house restaurants may also enrich the shopping experience, while space for click and collect operations could bolster their resilience.  Small, well-located convenience stores are expected to continue to proliferate, however, as they benefit from changing shopping patterns, particularly in larger cities.


1 CapGemini Future of Retail Store Survey


Important Information

Unless stated otherwise, any sources and opinions expressed are those of Aviva Investors Global Services Limited (Aviva Investors) as at 10 October 2017. This commentary is not an investment recommendation and should not be viewed as such. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Past performance is not a guide to future returns. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested.


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