If physical retail is to fulfil its potential, we must think very differently about the way we do business. In recent years, one of my biggest frustrations has been the inability of government and the industry itself to change to meet market demands. In the face of seismic shifts, we all have to adapt our strategies and up our game.
The adversarial nature of the landlord and tenant relationship is nothing new, but we must find more collaborative ways of working, leasing, valuing and utilising commercial space to ensure town centres are fit for purpose.
The truth is that we have seen dynamic changes in consumer behaviour but the system we use to respond have remained static. The onus is on everything to be more reactive and for the industry to test and trial new ways of working.
We may have seen a glimpse of the future with landlords taking an ownership in Arcadia as part of their CVA. Are we going to see landlords receiving a dividend rather than rent? If they became a shareholder, they would automatically be much more interested in how the physical store is trading and how they might support it.
If the industry is to adapt, government must listen much more carefully to what it has to say. It means for instance, acting on business rates – a 19th century tax for a 21st century sector. We also need to address things like the inflexibility of the planning system and make reforms to the Landlord and Tenant Act 1954.
Turning an adversarial tenant/landlord relationship into a collaborative one has to be a priority. In the future, the market is likely to adopt outlet-style revenue-based models of leasing which are likely to prove far more sustainable.
That shift will depend on a symbiotic relationship where both parties strive towards common goals and objectives. It will require landlords and occupiers to be fully transparent and share data.
That level of disclosure must also extend to funders. The way banks value asset and appraise will have to change if these new models are to prove successful. The emphasis must shift from outdated covenant analysis to focusing on the value of a successful business for its catchment.
All this requires innovation around how we source, share and analyse information. Historically, our industry has performed very poorly in that respect. Whilst online players like Amazon allocate c.10% of their turnover to R&D, the real estate market has failed to make a meaningful commitment to innovation. Unless we find new ways to use technology to share knowledge and drive efficiencies, that gulf will widen further.
Stores of the future
You just have to look at the figures to see that bricks and mortar retail still has a fundamental role to play in the UK market. According to research by CACI, retailers that open a store in a catchment, see a 50% uplift in online sales compared to those that don’t have a physical presence.
As many online retailers struggle with profitability, they will increasingly see the value of physical space to drive greater margins and however consumer behaviour may evolve, stores will play an integral role in the future of our town centres. ASOS has seen profit margins fall to c.1% with rising costs, whilst Next has maintained a 5% profit margin, largely due to its well managed store portfolio.
Yet physical retail will have to evolve. In the future, we are likely to see legacy retailers having fewer stores, a rise in the number of independents and greater focus on service and experience.
To compete with online retail, stores must focus on sensory engagement. Purchasing online is a functional utilitarian action and if managed right, stores have the opportunity to engage our other senses. To get the right energy and human interaction, we will need to transform the store environment and train and incentivise staff to offer a new level of customer service.
We should apply that model to all forms of retail. People talk about consumers wanting either convenience or experience as if they were binary options. They want both and our sector has to deliver.
Provenance, sustainability and social impact
That emotional engagement doesn’t end there. Consumers now demand more than a purely transactional relationship with retailers. They care about how a business behaves, where it sources its products from and how it interacts with the world around it.
At the same time, CSR is also moving further up the agenda for investors. That might involve anything from sustainably-sourced materials to diversity on boards.
As an industry, we must spend time understanding our social impact. The property sector has attracted a lot of bad press in recent years about its attitudes and behaviour. Be it the Presidents Club scandal or the gender pay gap, the industry has not done itself any favours and it’s time to face up to some harsh truths.
People to drive solutions
Retail has a key role to play in shaping our town centres and making them work for the wider community.
In some places that will happen organically, whilst others will require public sector support and intervention from local authorities. Government must give those local authorities the tools they need to help build sustainable centres.
They need a clear vision and to engage with disparate landowners. It is critical that research is undertaken to ensure the mix of uses is right and that it meets the needs of its catchment. In some places, local authorities still seem to have a build it and they will come mentality. Developers and large stakeholders should put people at the forefront of any regeneration, think holistically and ask what their customer wants and that will drive success.
It’s an exciting time to be working in the property industry and if our members are prepared to make the necessary changes, bricks and mortar retail will play an integral role in the future of our towns and cities. As part of a much wider mix of uses, there is an opportunity to engage with so many other sectors and develop new skill sets.
Yet the transition is huge and requires an acceptance on all sides that many of the systems we have used in the past are no longer fit for purpose. Be it planning, tax, or leasing, we must change the way we do things or the journey we are all on will be longer and the pain will be deeper.