For professional investors and advisers only
September 2013
Out-of-town but not out of Fashion
Retail parks in a multi-channel world
Patrick Bone, Head of UK Property Research
Background
The UK retail sector is going through a period of unprecedented change. Consumers are struggling
in the aftermath of the deepest and most prolonged recession in recent history. Excessive levels of
household debt, tighter lending conditions and macro economic uncertainty have all contributed to
the weakest consumer recovery on record (see chart 1).
A weak consumer environment has been compounded by well documented structural changes,
creating the backdrop for what some commentators have described as ‘the perfect storm’. Growth in
online shopping and increased competition from supermarkets has taken market share away from
traditional in-store channels. With 50% of high street and shopping centre leases due to expire by
2015 this represents an opportune moment for retailers to rationalise their portfolios (the comparable
figure for retail warehouses is just 15%)1. The net result being a glut of boarded-up shops and
premature talk about the ‘death of the high street.’
Chart 1: Weakest consumer recovery on record Chart 2: Retail loses its defensive qualities
Rental growth (%)
Spending rebased to 100 at peak GDP
110
105
100
95
19
17
15
13
9
11
7
5
3
1
-1
-3
-5
-7
90
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
25.0
20.0
15.0
10.0
5.0
0.0
-5.0
-10.0
-15.0
115
Quarters from pre-recession peak in GDP
1979
1990
Source: Schroders, ONS, 2013
2008
Retail
All Property
Retail warehouse
Source: Schroders, IPD, 2013
In light of these developments it is unsurprising that the investment performance of the UK retail
sector has suffered. In 2009, retail rents fell by 5.6%, the largest calendar year decline in the history
of the IPD Index. Even out-of-town retail, which had enjoyed consistent rental growth from 1983,
saw rents fall.
Indeed whilst in previous recessions the retail sector has proven to be relatively defensive, during
the financial crisis retail rents fell in line with the wider market (see chart 2).
1
Jones Lang LaSalle, May 2012
For professional investors and advisers only
September 2013
Growing divergence in performance by retail formats
Although retail performance has deteriorated, the impact has not been felt evenly across all formats.
What we have seen is an increase in the polarisation between retail locations that dominate their
catchment and weaker, more secondary locations.
Vacancy rates offer some insight into the success of different retail locations. Most formats have
seen the number of empty units rise; however, vacancy rates have remained lowest in fashion
parks, regional shopping centres and shops in prime towns (see chart 3). This trend is also
replicated in rental performance. The only area to record rental growth over the period end 2008 to
end 2012 has been central London. Fashion parks and regional shopping centres have seen a
moderate fall in rents and have fared considerably better than the high street and in-town shopping
centres.
Chart 3: Polarisation by quality evident
Chart 4: Fashion parks more defensive
Rental change (%) 2008-2012
Vacancy rate (%)
25%
20%
15%
10%
5%
0%
20
10
0
-10
2007
C London shops
Fashion Parks
Regional SCs
Bulky goods Parks
South East shops
In-town SCs
-30
Rest UK shops
Secondary SCs
Bulky Goods Parks
Secondary TC shops
Prime TC shops
Regional SCs
Fashion Parks
-20
2013 Q2
Source: PMA, Schroders, July 2013
Source: IPD, Schroders, July 2013
Is the UK consumer past the worst?
We are not expecting a particularly strong recovery in retail sales, but we believe we are now past
the worst. Consumers have taken advantage of lower mortgage costs over the past five years to pay
down debt and increase their savings. Indeed the debt to deposit ratio has fallen back to 2002
levels, meaning the consumer balance sheet is now in a far healthier position than it was at the start
of the recession.
Schroders expects consumer spending to gradually improve in the second half of 2013, with growth
of 1.5-2% p.a. in real terms over the next five years. This is some way below the 3-4% p.a. growth
we saw in the decade leading up to the financial crisis, reflecting our view that we are unlikely to
return to the debt fuelled spending we saw pre 2007.
Although consumer spending is expected to improve, clearly there are a number of major structural
shifts underway which are fundamentally changing the way in which we shop. Understanding these
changes is increasingly critical for investors if they are going to position assets towards those
formats and locations that are set to benefit, or at least be defensive to these changes.
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September 2013
E-tailing
It has been well documented that the major structural change underway in the retail sector is the
growth of internet shopping. Over the period 2003-2010, e-tailing accounted for nearly half of all
retail sales growth in the UK. The UK online retail sector is the largest and most mature in Europe,
accounting for approximately 13% of all non-food retail sales.
The switch from e-commerce to m-commerce
If we split e-tailing down further, the key growth is likely to be in m-commerce (mobile commerce);
consumers purchasing goods and services from their smart phones. The prevalence of fast
broadband speeds, tablets and smartphones means that internet shopping can now be conducted
from almost anywhere, at any time. UK consumers have been early adopters of m-commerce and
mobile devices are set to form an increasingly important source of product and price information on
the move, as well as replacing plastic loyalty and payment cards.
So what does this mean for retail park landlords? The need for retail locations to provide broadband
facilities to enable these activities to take place is clearly pressing. E-commerce is deemed to be a
key threat; however, m-commerce offers opportunities for innovation within retail schemes. Those
landlords and retailers that engage with their customers, such as through loyalty apps that reward
customers for shopping in their schemes or shops, can transform the customer’s multi-channel
journey beyond anything seen to date. British Land for example, has entered into an agreement with
BT to provide WIFI access across all of its shopping centres and fashion parks. Andrew Smith of
British Land states, ‘we believe integrating technological advances is essential in a modern retailing
environment: both to meet consumer expectation and to help retailers better reach their consumer
and maximise sales.2’ We believe this kind of consumer engagement is going to be key to
enhancing the retail experience going forward.
Chart 5: Most of the growth is in multi-channel
(£bn) constant 2010 terms
80
60
40
87% transacted
in-store
65% transacted
in-store
20
0
2010
Store only
Research online-purchase offline
2020
Click and Collect
Store to online
Source: Javelin, Schroders, July 2013
2
3
‘Mobile digital tools open up the shopping centre experience,’ Estates Gazette May 2013
Direct online
September 2013
For professional investors and advisers only
Where will future online growth take place?
The UK consumer is increasingly savvy, spending a greater proportion of time researching goods
and finding the best value. This pricing transparency has largely been responsible for the demise of
in-store sales of goods that can be transferred electronically and low-margin businesses that
compete on price, leading to the demise of music, electrical, travel and book retailers.
Although to date the growth in e-tailing has largely been through pure online channels, we think
most of the growth going forward will be in genuine multi-channel journeys (see chart 5). By 2020,
Javelin forecast that the web will play a role in 75% of all non-food transactions, a significant
increase from 44% today. At first glance this would point to the demise of traditional retail locations;
however, we expect most of this growth is going to be through store based retailers, with ‘pure’
internet retailers only forecast to represent 8% of the market in 2020.
The majority of this growth is instead expected to take place through researching online and
purchasing in-store, ordering online inside a store, and purchasing online and picking up in a store
(‘click and collect’). In all of these approaches, the role of the physical store remains key to the sale.
Javelin estimate that physical stores will still be involved in 83% of all sales at the end of the decade,
with 65% of transactions still taking place in-store.
Click and collect – the retail warehouse opportunity
The internet has cannibalised sales of goods and services that can be transferred electronically.
However, the growth in tangible goods is proving more difficult, both in terms of logistics and also
cost. Home delivery and the cost of the ‘last mile’ is a problem retailers have failed to solve and
unless the cost can be passed on to consumers (who remain reluctant to pay for delivery), margins
will continue to suffer. For the consumer home delivery is often not a perfect solution either,
particularly having to wait for a parcel to arrive.
For most retailers, click and collect is a cheaper and more cost effective channel than home delivery.
Indeed, the transition to click and collect is already in full swing: the most successful retailers over
the past 2-3 years have been those that have embraced multi-channel strategies, growing both instore and online sales. John Lewis, a bell-weather for the UK retail market, has seen click and
collect grow from 15% of all online sales in 2009, to 40% by 2013. Next, which has 50% of its retail
portfolio out-of-town, report that 60% of returns are to store, whilst 20% of new Next directory
customers sign up in-store. Importantly both of these retailers have also been actively taking new
space, particularly out-of-town. And with these two retailers generally ahead of the game, it is likely
we will see other retailers embracing these strategies in the years ahead.
We believe that multi-channel retailing will exacerbate the growing polarisation that we are already
seeing between catchment dominant schemes and the rest. Retail units need to provide retailers
with flexibility to accommodate changing space requirements, they need to be used as showrooms
to showcase the full range and they need to provide good accessibility – particularly if they are to
fulfil a click and collect function. Stronger retail parks are ideally placed to offer flexible retail formats,
good accessibility and free car parking.
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September 2013
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Where will we shop? The customer knows best
Multi-channel offers the consumer choice; choice in how they shop, where they shop and when they
shop. And ultimately the power rests with the consumer.
To get a true insight into consumer behaviour Schroders commissioned Emotional Logic to organise
a series of focus groups, to try to understand what dictates where people decide to shop. As part of
the focus group discussion, we asked shoppers about their perceptions of different retail formats –
what works, what doesn’t work and what they would like to see changed.
When asked about retail parks the findings were very revealing. Though a fairly crude perception,
consumers tended to view a retail park as either one with a B&Q, or one without. Consumers tend to
visit a retail park to shop at a particular retailer, rather than browsing, or staying for a significant
period of time. This is partly due to the layout of retail warehouse parks which have parking at their
heart and stores to the edge. This results in a tendency for shoppers to drive from store to store. It is
also due to a lack of facilities at many parks, such as toilets, or coffee shops. In essence they are
functional and practical, but the vast majority fail to deliver an experience, or emotional connection
that creates customer loyalty and longer dwell times.
Despite these weaknesses what shoppers like about retail parks is the convenience. They like the
ease of access and the free parking which make them ideal for click and collect and also for a
one-off purchase.
Property investors think of retail schemes in terms of shopping centres, high street shops and retail
parks; however, shoppers differentiate by the experience, the convenience and the choice on offer.
We believe the ability to position assets to meet these requirements is going to be key to driving
performance.
Why do we shop?
It is important not to overlook the fact that shopping remains a popular leisure activity. The UK is
after all a ‘nation of shoppers’ and the ability to touch, try and achieve instant gratification cannot be
replicated online. Consumers like to be seen shopping; the experience of walking out of a boutique
with an expensive purchase cannot be replicated sitting at home in front of a computer. Shopping
remains a day out and you cannot compete with the feel good factor by ordering online.
To provide this experience we need to think more creatively than we have in the past. If retail
locations are to differentiate themselves from competing schemes, they need to offer consumers a
place where they can shop, eat and play in an appealing social environment.
Over the last decade a clear structural trend has emerged in consumption patterns, with an
increasing proportion of income being spent on what we can broadly define as ‘leisure,’ as
demonstrated by chart 7. Changing lifestyles and working practices dictate that we are increasingly
time poor and money spent on eating out and going to the cinema is now becoming less
discretionary. Retail parks that provide an attractive leisure offer can create a 10am to 10pm
destination and thereby increase catchment penetration, drive footfall and enhance the overall retail
experience. This in turn should drive turnover and ultimately rental growth.
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September 2013
Chart 6: Strong growth in leisure spend
Chart 7: Leisure operators pricing power
Average % change in prices three years to Q4 2012
Index: 2006=100
125
120
115
110
105
100
95
Source: Schroders, ONS, May 2013
Leisure spending
2012
Retail sales values
2011
2010
2009
2008
2007
Consumer spending
Gas
Food
Sports and gyms
Cinemas and theatres
Plants & Flowers
Alcoholic Drinks
Electricity
Restaurants & Cafes
CPI - All Items
Car Maintenance
Housing Rents
Clothing
Books
New Cars
Footwear
Toys
IT Equipment
-10
Pricing Power
Powerwpower
Limited Power
-5
0
5
Source: Schroders, ONS, May 2013
Importantly, a number of leisure services are resilient to online growth – after all you cannot eat or
drink online. Whereas retailers have been unable to increase costs in line with inflation, leisure
services are one of the only areas to demonstrate pricing power – the ability to pass on an increase
in cost base to the end user. Food operators, cinemas and theatres have all been able to increase
their prices above CPI, in contrast to the deflation seen in footwear and electricals. This ability to
increase prices above, or in line with inflation, enables leisure operators to pay competitive rents,
often with index linked rental uplifts, an attractive quality in today’s low growth environment.
What influences how we shop?
Austerity, the increased participation of women in the workforce and the greater number of single
households are all driving efficiencies in the way we shop. An increasingly time poor consumer
demands convenience.
Click and collect has been a major beneficiary of these factors, but to function effectively, pick up
points for car-borne shoppers need to provide easy and cheap (or free) parking. Whilst the best high
streets and shopping centres offer an attractive tenant mix, high parking costs and restricted access
make them less amenable for click and collect. Retail parks are the ultimate form of convenience
shopping; easy to access, easy to park next to and easy to exit. Our focus groups associated retail
parks with convenience and it is imperative that they continue to offer this function going forward.
The role of physical store networks will continue to be key to showcasing brands and providing a
leisure activity. But consumers now have wider options in terms of where and how to shop than ever
before. Quite simply, the ability to buy consumer goods through different channels means a
consumer has no need to visit an unpleasant shopping environment.
Retail parks need to respond to these changes by providing an attractive range of shops. For a retail
park to become a ‘destination,’ it needs to offer consumers a pleasant environment with access to
the brands that they want to shop in. Adjacencies are key to ensuring that once on the park,
shoppers will visit more than one shop. Providing suitable ancillary leisure services and facilities is
key to extending shopping hours to drive footfall, dwell time and therefore turnover, retail profits and
rental growth.
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September 2013
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Affordability
A persistent concern for investors has been the affordability of fashion parks and whether there is
further opportunity for rents to grow. With profit margins squeezed by high service charges in
shopping centres, rising energy costs and an increase in import costs, rental affordability is an
increasingly important consideration.
We have worked alongside retail research consultancy FSP to try to answer the affordability
question. They provide trading estimates for a number of the leading high street retailers and use
these numbers to assess the profitability for retailers of trading in-town and out-of-town.
Their analysis shows that sales densities remain slightly higher for most retailers in-town, reflecting
the higher volumes of town centre footfall. Average rents per sq ft on trading areas tend to be lower
on retail parks however, particularly for clothing and footwear operators. Once the impact of lower
service charges (compared to shopping centres) and a higher efficiency of space is considered, they
estimate that out-of-town formats have a higher operating profit as a percentage of turnover. This
analysis suggests retail parks retain a trading advantage over the high street/shopping centres and
are therefore better positioned to drive rental value growth going forwards. More importantly, it
demonstrates that out-of-town stores provide profitable trading formats.
How to drive performance
Whilst we believe that fashion parks retain a modest cost advantage over the high street, we cannot
rely on this alone to drive rental growth in the years ahead. Our research shows that the transition to
multi-channel retail is changing the way we shop and in turn the way retailers use space. Retailers
are responding by looking to trade from fewer, but better stores - the right space, in the right location
and at the right price.
Retail parks are well placed to benefit from the growth in click and collect, offering ‘convenience’ in
the form of good access and free parking. The best parks can also provide the range of retailers,
leisure offer and facilities to provide a ‘destination’ shopping experience.
These parks remain in the minority however, and landlords need to embrace change and adopt
proactive management strategies if retail parks are going to become strong destinations in their own
right. In some cases this will require capital investment, but with the polarisation between the
strongest and weakest schemes increasing, the landlords of the best schemes are in a strong
position to continue to grow market share and drive performance.
Conclusion
The economy, technological innovation and demographic and lifestyle changes are all fundamentally
changing the way we shop. Shoppers now have more options than ever before and successful
schemes will have to offer choice, experience and convenience if they are going to continue to
prosper. We believe the best retail parks are uniquely positioned to deliver all three. The simple
configuration of space makes them more flexible (subject to planning) than town centre units, whilst
easy access and free parking will see them benefit from the strong growth in click and collect.
Although fashion parks will not be able to compete with city centres or the best shopping centres in
terms of experience, by improving their tenant mix, facilities and shopping environment, they can
become catchment dominant retail destinations in their own right. The ability to offer consumers
choice, convenience and experience, will ensure that the best parks offer strong growth in the years
ahead.
To discuss the themes in this article further, please contact Patrick Bone, Head of UK Property Research at
patrick.bone@schroders.com, telephone +44 (0) 207 658 4568 or Jane Gravestock, Head of Fund
Management, UK, Specialist Funds at jane.gravestock@schroders.com, telephone +44 (0) 207 658 3942.
7
September 2013
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