Covid-19: The future of retail will be out of town and online
Opinion: There will be a bigger role for hands-free, click-and-collect facilities
Retail parks may prove more attractive to investors than the high street in a post-coronavirus world
The past two months have seen the unprecedented shutdown of Ireland’s retail sector, leading inevitably to difficult conversations between retailers and the owners of their shop premises. So what deals are landlords and tenants agreeing to reflect this shutdown?
Although some have been proactive in offering rent deferrals, most owners have, to date, adopted a wait-and-see approach. This isn’t entirely surprising, when you consider that, just two months ago, everybody was trading. Three months ago, the notion that the Irish retail sector would go into hibernation would have seemed fanciful. Indeed, only three months before that, the Irish grocery sector had set a new post-2007 record. Who could have foreseen that this record was going to be surpassed in March 2020?
With the true impact of the shutdown on businesses still unknown, and with certain retailers now beginning to reopen after a two-month hiatus, most landlords and tenants in the retail sector are, quite understandably, waiting to accurately assess the true extent of the damage done during the hibernation, and to work out how trade will be conducted in future before committing to deals.
The market has generally recognised that there is little room for a “one-size-fits-all” solution for the impact of the Covid-19 crisis when it comes to rents and leases.
At Bannon, for instance, we manage 14 retail parks where retailers such as Woodies started to reopen on Monday. The ability of retailers such as these to trade profitably from these locations in the current climate is substantially different to that for a high-street fashion retailer or a restaurant in a shopping centre. Quite apart from the complexity involved in different retail uses is the variance between locations. High streets in city centres, for example, will have experienced a very different shutdown to that of smaller local high streets.
While we are seeing some negotiations between owners and occupiers specific to user, location and development type, in most cases there is a significant “wait-and-see” policy being adopted as parties don’t know what the immediate future holds.
So what will the retail landscape look like after Covid-19? In the medium term we expect the main focus to be on turnover and rent sustainability. Although in theory the entire retail market could be open by mid-August, this will mean different things for different businesses. A socially distanced shopping experience may work well for a small shop that would only ever have served one customer at a time, such as a local butcher or florist. It may also have very little impact on trading in most retail park locations, where a low density of staff and customers was already the norm.
But it will be very different for fashion stores, at least in the short-term, where new rules limiting or even prohibiting customers from trying on clothes and footwear or otherwise examining products could have a significant impact on sales. All of this will have to be handled in a way that still encourages the shopper to come and visit the store. We are strongly advising our owner clients to remember that shopping is meant to be a pleasant experience, and while social distancing messaging is important, it should be designed to encourage rather than discourage or intimidate the customer.
We see a bigger role for hands-free, click-and-collect facilities that will both increase retailers’ profitability while also connecting them with customers who do not wish to spend time in store. This should further reinforce the existing movement towards omni-channel retailing where the operations of physical stores work in tandem with the retailer’s online platform. The growth of such shopping with a greater focus on customer experience was already in evidence before Covid-19, and we envisage a strong acceleration of these trends for successful retail locations.
What will investors be interested in when the dust of this pandemic settles? Decisions will be made based upon the core principles of demand, supply and ability to generate returns. The Irish retail sector is in the interesting position of having been static from a supply perspective for more than a decade. Other than stand-alone supermarkets, which have been rare, no new retail developments have opened here since 2010, and none are on site at present. The demand side of the equation had expanded steadily over the same period, culminating in an all-time peak of consumer spend and wealth pre-Covid 19.
The core consideration for investors will be the ability of retail assets to generate income on a sustainable basis. As with the last recession the current stress in the system will lead to greater transparency in the sector, with retailers opening their books to demonstrate what they can afford to pay, and with owners structuring deals and leases to reflect what retailers can afford. Assets with a proven ability to sustainably generate cash will always be in demand, especially in such a low interest rate environment. The current crisis demonstrates that sometimes a smaller retailer with a sustainable business model might generate a better return than a larger corporate without one. We expect to see increasing investor interest in retail parks and grocery-anchored necessity-based shopping centres.
James Quinlan is a specialist in retail agency and a director at Bannon