“A perfect storm…”, “turmoil”, “alarming”, “devastating”. The newspaper headlines are barely an exaggeration – it’s a hard time to be a retailer. But the coverage in the business pages tells only half the story, writes Waheed Nazir.
Changing consumer demands and behaviour have been evident and well documented for some time now, and are having a significant effect on the retail sector and property industry across the country. This should no longer be a surprise to us, but the headlines will persist as major disruption to the sector continues. Throughout history the tale of industries not responding to micro or macro changes is all too evident. Why should retail be any different? It is how the sector responds that should be creating the headlines.
One thing is, however, clear. The reshaping of the retail landscape is a social as well as a business issue, and one that will have a real impact on the look and feel of our towns and cities in the years to come.
But to understand that future impact, we need to reflect on the root causes of retail’s current challenges, and particularly how shopping habits have evolved. Shoppers’ habits are a direct reflection of broader social and economic trends, with ever-increasing demand for convenience reflecting hectic lives alongside the desire to have a greater range of “experiences” and to use time more productively.
Retail has become a battle for better logistics
The move towards more convenience shopping means that today, if you know what you want to buy, you either order it online, or expect to be able to pick it up within a few minutes of home or work. Retail offerings from Amazon Prime to the “local” and “express” formats of the supermarkets fundamentally reflect the desire of consumers for greater convenience.
For these purchases, customers reward firms that can deliver at speed and offer low prices. To win over these shoppers, retail has become a battle for better logistics.
On the other hand, some shoppers do not want to buy anything in particular. Instead, they want to enjoy their leisure time by browsing and discovering new things. These consumers are rewarding firms that can excite them with bespoke products, engaging events or personalised experiences.
For traditional mass-market retailers, this divergence in consumer behaviour represents a huge strategic choice over how to compete. Regardless of the path they choose, firms are being forced to re-assess and adapt their business models.
But change requires investment. And at precisely the moment when retailers needed to fund capital expenditure, they have faced three headwinds that have forced up costs.
Firstly, the fall in the exchange rate meant the price of many inputs spiked. Secondly, labour costs rose following the increase in the minimum wage. Thirdly, the changes in business rates pushed up direct costs for those with large store footprints.
The challenge was exacerbated by the uncertainty that accompanied the changes, as well as a persistent feeling that the tax burden has not been split fairly between online retailers and those with store-based models.
In the face of such a complex web of factors, it is no surprise that some retailers struggled to adapt and faced financial difficulties. What we are now seeing is how landlords are responding to these factors in their own investment decisions.
On the one hand, consumer expectations of convenience are encouraging smaller shop footprints and more mixed-use development.
We are now seeing more retail space going into commercial buildings, enabling office workers to pick up essentials in their lunch hours or go to the gym before or after work. Out-of-town retail parks are often adding a broader mix of uses to development plans, creating a captive customer base and ensuring areas still feel vibrant, even once the stores close.
Online retailers are now seeking smaller central locations for distribution centres as the battle for last-mile deliveries intensifies.
At the other end of the spectrum, for those consumers for whom shopping is a leisure activity, retailers and landlords now recognise that a great customer experience starts long before anyone steps into a store.
Whether retailers are focused on convenience or on offering an experience, it is vital to have an appropriate context surrounding the shops themselves
That means transport connectivity is more important than ever. There is also much greater focus on creating public space, and using it in imaginative ways to drive footfall, such as through events or pop-up markets. The proportion of space dedicated to leisure and cultural activities, from cinemas to trampoline parks, galleries and theatres, is growing, while independent retailers are now finding good locations easier to come by since they help shopping centres differentiate themselves from more identikit competitors.
As a result, whether retailers are focused on convenience or on offering an experience, it is vital to have an appropriate context surrounding the shops themselves. Creating the right sense of place is essential.
True placemaking, however, requires strong working partnerships between retailers, landlords, investors and local authorities.
While the current wave of disruption is tough in the short term, in business disruption tends to be creative over the longer term. By embracing change and working together, the property and retail industries can ensure that changes in shopping behaviour today will usher in a future with more consumer choice, stronger and more competitive businesses and more dynamic and resilient local economies and high streets across the UK.
Waheed Nazir is corporate director – economy, at Birmingham City Council
