Shopping habits are evolving and omnichannel retail is an investment opportunity, argues Calum Bruce.
Amid grim headlines about high-street closures, it’s easy to be pessimistic about UK retailers, but the prospects for different sub-sectors vary widely.
Retail warehousing offers investors an attractive way of harnessing the trends that are transforming the high street.
Since its origins in the 1980s, retail warehousing has changed significantly. Initially, most out-of-town retailers sold bulky goods such as fridges and dishwashers, from stand-alone units. In the next phase, retail parks evolved, anchored by DIY or bulky goods tenants.
In the late 1990s, the line-ups softened and shopping parks emerged as fashion stores got in on the act, attracted by the greater floor space on offer.
In the run-up to the 2007-08 financial crisis, several companies expanded on very cheap debt and were paying sizeable rents. As the crisis erupted, retailers with long leases were caught out and vacancy rates rose.
When retailers began to return to retail parks in the wake of the crisis, they were much more cautious.
Today, retail-park tenants focus on flexibility and affordability. They prefer smaller unit sizes to the “big boxes” of the past, and retail parks have a more diverse mix of tenants.
A day in the park
Besides stores selling bulky and discount goods, retail parks are now “the high street out of town”, with coffee shops, cinemas and casual dining venues, and for many consumers, shopping at a retail park is seen as a day out.
Crucially, out-of-town parks offer retailers clear advantages over the alternatives.
High-street shopping centres have expensive rents, limited parking and costly service charges. In addition, there’s simply not enough spending to keep them all in business. Most of these problems also apply to traditional high-street shops.
In contrast, retail warehouses offer considerable flexibility. Large units can be divided and smaller ones combined as tenant requirements change. Such flexibility is vital during a period in which retail habits are changing fast.
Despite this rapid evolution, a physical store is still a necessity for most retailers. Buyers of bulky goods need to see the items up close before they commit, and it’s simply not cost-efficient for retailers to rely on an online-only model, given the cost of home deliveries and returns.
Recent research indicates that the penetration of online shopping for all retail will slow and plateau at 19% by 2022. However, the key question is how a site interacts with the online world.
Another quality of out-of-town retail parks is how they have embraced the internet. Retailers used to see “bricks ‘n’ clicks” as the solution. Today, the concept has evolved into an “omnichannel” approach, which means having both online and brick-and-mortar stores, and combining click and collect, home delivery and a location for returns into the shopping experience.
Omnichannel has advantages for retailers. Research shows that most people who pick up an online purchase in-store buy something else, too. The same is true when they return goods. So, retailers are getting up to three opportunities: the initial sale, a potential in-store purchase on collection, and a likely third purchase if some goods are returned or exchanged.
It all plays to the strengths of retail warehousing. An out-of-town retail park offers the best location for combining all the elements that omnichannel requires: space for storage and display; parking for customers and delivery vans; and the opportunity to tempt people with fuller product ranges than what the high street can offer. Most importantly, retail warehouses are cheap.
Companies are acknowledging these advantages. For example, Marks & Spencer has been attracting headlines as it closes city-centre stores, but it has been opening shops in retail parks.
We expect this pattern to become more widespread as high-street stalwarts embrace the omnichannel approach. And as omnichannel becomes omnipresent, investors who have anticipated the trend will stand to benefit.
Of course, there have been some high-profile failures among retail-park tenants. But Toys R Us and Maplin failed not because of their location, but because they didn’t adapt to change. Toys R Us didn’t offer the children’s experience that its rivals did, while Maplin was slow to adopt the online/offline model.
There are always casualties during periods of change. But behind the gloomy headlines, many retailers are adjusting to the new environment.
At Ediston, our portfolio provides ample evidence of this. In the past year, we’ve agreed terms or exchanged deals with around 30 retailers in 52 retail-park deals.
The retail landscape is changing, but for those who embrace the change, the opportunities are considerable.
Calum Bruce is director of Ediston Properties Limited and manager of Ediston Property Investment Company.