Shopping Centres – a staple of institutional investment but perhaps somewhat inappropriately named these days. Evolving with the times they now consist of restaurants, gyms, cinemas and offer a diverse shopping experience. When we look at the likes of Bluewater, The Bull Ring and Westfield, you could be forgiven for thinking that these modern goliaths of retail were a fairly recent addition to the UK market, but you’d be wrong.
In 1571, Elizabeth I officially opened the Royal Exchange, a trading market in the City of London. Above the open-air piazza where dealers bought and sold commodities, there was a two-storey shopping mall, with 100 different kiosks – making it Britain’s first shopping centre. That’s means we had shopping centres 200 years before America was even a country! You can still shop there to this day, after it reopened as a luxury retail centre in 2002. When you compare that mall, which more closely resembled a covered market, to the state of the super prime schemes worth in excess of £1 billion today, it is clear to see there has been a monumental leap in the evolution of shopping centres. I am sat down with the head or shopping centre leasing and development, Mark Disney who kindly answered my questions on the past, present and future of an asset we all use and has become a staple of institutional investment.
The traditional definition is a collection of shops under single ownership with a roof. However, people have moved away from the concept of shopping centres as pure retail outlets and towards the idea of viewing them as destinations that offer an experience beyond traditional shopping.
Certainly it’s essential to understand the requirements of shoppers on particular ‘shopping missions’ (the latest buzz word). Not all shopping trips are equal and shopping destinations can be used in different ways at different times for different purposes. This could be for ‘browsing’, a big trip once a month, top-up convenience shopping, click and collect, leisure or a family/mates day out. Consequently, the blurring of lines between shopping missions is increasing. One way to think about it is that if you are competing with a multi-channel offering online, then a shop in a shopping centre needs to provide convenience – Can you walk there? Can you park your car for free? Can you get your desired product there and then? This clearly beats the internet for convenience and ease of shopping. You can go in, touch it, test it, and take it away with you – the internet can’t compete with that speed. The convenience of having everything physically in front of you means that you don’t have to worry about delivery times, costs or being at home to receive your delivery. Or if you are not going to beat the internet on convenience then for the same price of the product you have to add value – something that the internet can’t offer. Whilst shopping remains one of the UK’s top leisure activities and buying something from a shopping centre like Westfield (the modern day Cathedral of Consumerism) is often considered a day out in itself, the competitive advantage lies with centres that also offer a place to have fun. For example, a Mercedes pop-up shop, offering simulated driving experiences, tea tasting opportunities at T2 or ice-skating with friends. Similarly if you are going to purchase something from Tiffany’s, you want that luxury customer experience. A plush environment, attentively staff and watching as they parcel up that special blue Tiffany bag, box and ribbon. By comparison, online is merely functional; driven by convenience and price. Ultimately, shoppers may not be prepared to pay too much more than they would on the internet but they are more than happy to go and get an added experience if they can access it conveniently.
Is the move towards value-added experience being driven in part by the generation shift that’s balancing an aging but affluent population, who still see themselves as young and have no intention of retiring to a quiet and gentle life, and those of us under 35 who have a different way of shopping?
Millennials often value convenience and multisensory experiences or events ahead of product ownership – something now being referred to as the ‘subscription economy’ (think Netflix, Spotify, car leasing etc.). In addition, increased urbanisation has resulted in more people living in smaller spaces and a greater need for public spaces in which to socialise and congregate. The generational shift means that we have a huge retiring/retired population with money to spend and millennials many of whom have grown up with an educational gap in cooking aligned with a relative reduction in the cost of eating out and expensive housing that has reduced the sq. footage of kitchens and increased the need for house sharing, meaning that kitchen space is limited. Consequently, somewhere to eat or drink is important.
That leads us nicely on to the future of shopping centres. Does this generational shift combined with increasing competition from online retailers, mean that bricks and mortar schemes are focusing their attention on providing a leisure mix to attract and hold on to their customers?
CBRE carried out some research which stated that in future, any shopping centre offering less than 25% of its space to F&B or leisure will no longer be fit for purpose. That’s obviously quite a generalised statement, as the larger centres could get away with a smaller proportion. However shopping centres must have a multi-dimensional offering. Millennials want indulgence, but don’t need service – if you went into Curry’s PC World, and asked the salesman what the dishwasher or wireless speaker does, they would pick up the label and regurgitate the information back to you. Millennials aren’t interested in this, as they will have already done the research online. They want to go into the store to look at it in person, however they don’t want to buy it there and then because they might be going straight on to the cinema with mates, so instead they buy it on their phone at a later date. This is the reality. Retailers are now looking at show rooming – creating a desire or a want that is more than a need. Shops play a very important role in this process. In fact, if there were no stores the luxury items would struggle for exposure. People go into stores and listen to Bose speakers admiring them and aspiring to purchase them, however if you went on Amazon and filtered by price, many people would not have the same aspiration to purchase them.
It’s a risk retailers are aware may happen, so ensuring their own online store is easy to use and building brand loyalty is key. The masters of it are John Lewis. Their name is synonymous with quality and good customer service. People will even pay a premium to purchase goods in order to benefit from the warranty, customer care and service. Knowing that you have the convenience of returning an item face to face, and not have to pack it up in its box and send it back to an online store like Amazon, has a value.
In addition, a large MSU retailer recently revealed they get 20,000 ‘click and collect’ sales every month and 10,000 returns every month. Of those 30,000 people entering the store to either collect or return an item, over half of them will buy something else in the store. The internet is actually driving people into stores.
The standard view is that if a retailer is going to give you turnover generated instore but purchased online then you have to allow returns to be credited. However, retailers can get around these things and turnover rents are challenging and generate a grey area that is wholly unsatisfactory. The landlord is at risk of not being able to capture the true value of the store. Clearly, physical stores have become far more than just a sales platform, they also harness enormous marketing power. Large online fashion retailer, Misguided, who recently opened in a super-prime shopping centre, did so because 48 million people visit the centre every year. Within the first week of displaying the hoarding on their unit to announce their opening, they had 6,000 likes on their Facebook page. Once opened, the store saw huge store sales, but also a substantial increase in sales online within the store catchment – with the consumer now more aware of their product and perhaps more comfortable with the returns route.
Occupiers must now look at shopping centres as both a sales and marketing platform. In many ways this should be captured in the rent they pay for these units. If Japan’s TDK were willing to pay £4 million per annum for space on Piccadilly lights which has 72 million people walk past it every year, then should we be looking at a marketing rent on top of sales rents for retailers where their units get exposure to 40-50 million people per year? A shop at Westfield is like a billboard on steroids – you see the brand, you can go inside, touch, feel, and play with the product and most importantly purchase it there and then and walk out with it.
So now we have not only have the transaction value of a store but also an online, exposure and marketing value for brands. So take Rockar, a previously entirely online car dealership, who launched a digital retail store in partnership with Hyundai at Bluewater. This allowed the brand to reach new markets, recording 54% of buyers were women and the average age of customers was 39. It also saw 60% of buying customers leaving the store and completing purchases later online. Ultimately Hyundai turned over more than £10m from a unit in a shopping centre.
This is becoming an ever more important feature of an asset manager’s business plans. Especially within new developments, developers are designing centres to ensure they are suitable for maximising future shopping centre income generation. For example it is now essential to ensure that the mall width is sufficient to avoid congestion and that the centre is optimising its marketing potential through advertising technology such as 20ft quadrupled sided screens hanging from the roof of the centre. Whilst location is still the key real estate consideration, design and structure are of increasing importance. Mall commercialisation can add to the variety and excitement of the retail mix. Gone are the days when the space was let to the highest bidder regardless of the quality of merchandise or possible impact on full price stores. Mall kiosk operators are now increasingly seen as an opportunity to drive income as well as add to the appeal of the overall retail mix.