The value of physical retail

2The value of physical retail

New research undertaken by intu in collaboration with Javelin Group (part of Accenture Strategy) looks at how physical stores will continue to drive sales on- and offline as we look to 2025

Foreword:the value of physical retail

The growth of online shopping has placed the role of the physical store under intense scrutiny over recent years.

The drop in traditional shop-based sales has been seen as an indication that the future of physical retail is under threat, and its value to brands in decline.

This scrutiny is only set to increase, particularly with the majority of physical outlets only just beginning to emerge from temporary shutdown, due to the ongoing COVID-19 crisis.

As many in the industry will be aware, the full picture is far more complex than first meets the eye. As consumers have moved online

and started making use of new channels to purchase goods, the role of the physical store is by no means over – it is simply evolving.

With this in mind, Javelin Group (part of Accenture Strategy), in collaboration with intu, has taken a fresh look at the retail landscape, demonstrating the positive impact physical stores continue to have on retailers’ performance.

This includes the significant role they now play in driving online sales, as we move towards a true ‘omnichannel’ retail environment. The research looks at how, in this new context, we should measure the value of stores.

3The value of physical retail

81% of people said that they would visit shopping centres the same or more often than before COVID-19

At this point it is important to acknowledge the impact of COVID-19. The outbreak has created huge uncertainty and new challenges for the sector, complicating the picture. We do not yet know what the full impact of the virus will be – on the health of retail long term, or on consumer behaviour.

Early research is encouraging. A recent study by intu, in collaboration with psychologist Donna Dawson, for example, shows that many consumers are keen to revert to pre-lockdown shopping and spending habits as soon as is feasible. See more on this in our report - The new normal: retail during and post COVID-19.

A Kantar study of consumers in China during lockdown, meanwhile, found that 65%, 58%

and 55% of people were most looking forward to returning to out-of-home dining, shopping and entertainment respectively, following the lift of restrictions. Kantar has predicted that UK consumers will be even more eager to return to the shops. Please see more on this in our insights piece here.

It is of course still too early to draw definitive conclusions on the full effects of the pandemic.

However, as we move towards a new normal, the insights in our report show the longevity and continued value of the physical store. They should provide confidence to retailers and the wider industry as we navigate a challenging period for UK retail.

The impact of coronavirus

Source: intu

4The value of physical retail

Despite the rise of online shopping, the research shows that £8 out of every £10 spent in the UK in 2025 will still be influenced by a physical store in some way (analysis undertaken by Javelin Group (part of Accenture Strategy) in February 2020).

This is because whilst in-store sales remain important, they are no longer the only function physical shops fulfil.

The figure also takes into account how a physical store presence now drives online trading – often known as The Halo Effect.

This covers click & collect purchases, in-store orders, ship-from-store orders, as well as the customer service function shops fulfil. It also includes catchment ‘halo’ sales – that is online sales in a store’s surrounding catchment area, following store visits or due to general enhanced brand awareness. Research by CACI into the Halo Effect shows that online sales more than double in a store’s catchment area.

We now need to think about an ‘omnichannel’ retail environment, with multiple touchpoints – online and offline - in a consumer’s purchasing journey.

£8out of every £10 spent in 2025 will still be influenced by the physical store

How is the role of the physical store changing?

5The value of physical retail

Purchase process

The Halo Effect

% increase in online sales within a store’s catchment area

Source: CACI The Halo Effect statistics

• Sales following a store visit• Enhanced brand awareness in area

Omni-channel retail: How do

physical stores drive sales?

In-store sales

Ship from store orders

Customer service

Catchment ‘halo’ sales

In-store ordering

Click and collect

Online sales more than double within a physical store’s catchment area

(106%)

Fashion

127%Consumer electronics

154%Sportswear

124%

Leisure goods

84%Homewear

83%

Source: analysis from Javelin Group (part of Accenture Strategy) – undertaken Feb 2020

6The value of physical retail

Landlords and retailers are adapting to the evolving role of the physical store in several ways.

Some of these include:

1. The development of new models for assessing the value of physical stores

2. Evolving use of space in shopping centres/areas

3. New rental models

How is the sector adapting?

1. The development of new models for assessing the value of physical stores

As the role of the physical store evolves, so too must the way we measure its value

Traditional models and KPIs for assessing the success and long term sustainability of physical outlets are outdated and no longer fit-for-purpose. They often fail to consider the significant role now played in driving online sales.

We’re increasingly seeing landlords and retailers look for new ways to evaluate their physical assets.

As part of our research, Javelin Group (part of Accenture Strategy), have formulated an example of a new model for determining the value of physical stores.

It assesses three key elements:

• A store’s known or forecast sales

• A store’s ‘omnichannel halo’, covering: o Stores’ omnichannel capabilities - how

seamlessly consumers can shop cross-channel, via services like click & collect

o Online trading performance – online sales as a proportion of total sales

o Venue catchment area characteristics – including demographics and shopping behaviours of customers in surrounding areas now, and in the future. How likely are they to shop online, for example?

• Benchmark occupancy cost ratio (OCR)

Potential incremental omni-channel value

Existing sales performance

Benchmark OCR Conclusion

Source: Javelin Group (part of Accenture Strategy)

New models like this give a much more comprehensive view of physical store value and performance.

7The value of physical retail

2. Evolving use of space in shopping centres/areas

As people’s relationship with physical retail changes, landlords are adapting how they use space, to keep shoppers enticed and their centres sustainable in the long term.

Many, for example, are increasing leisure provision. Our research confirms that now more than ever, shopping is about the experience. Visitors to intu centres are no longer focused solely on the retail; they want a ‘day out’. Consumers are drawn by a strong leisure offering, and the chance to spend time with friends and family. When this is on offer, it positively impacts retailer performance.

The report finds that retailers in larger UK centres with a ‘high’ leisure provision typically outperform chain average by around 24%.

Those in centres with a ‘high’ food & beverage provision, meanwhile, typically outperform chain average by 13%. These elements are key to enticing visitors, and to increasing spend and dwell time.

Landlords, therefore, are dedicating a greater proportion of space to meeting these new preferences.

We’re also starting to see the full re-formatting of retail space that is no longer needed or fit-for-purpose. Many landlords are looking at alternative land use – including residential developments and office space – to supplement income and drive footfall, building a new catchment on their doorsteps.

Consumers are drawn by a strong leisure offering

8The value of physical retail

3. New rental models: an evolving landlord-tenant relationship

As the role of the physical store evolves, traditional rental models are being challenged, and the landlord-tenant relationship is changing.

In a new and fast-moving environment, flexibility is key – for both landlords and tenants.

We’re beginning to see this reflected in a move towards shorter leases, with less rigidity around renewal terms.

This increased flexibility enables landlords to more easily manage land use in line with demand, and also allows retailers the space to adapt, as they both continue to acclimatize to ‘the new normal’.

In addition, new KPIs and metrics are now driving discussions, taking into account omni-channel consumer behaviour, and the role stores play in online trading. Increasingly, the focus is on data around consumers’ wider purchasing journey, and what this might mean for the future of an individual physical store. Increasing collaboration between landlords/tenants, and the sharing of information is key here.

You can read more about what intu’s newly launched customer performance team is doing in this space here.

9The value of physical retail

Physical retail has undoubtedly faced some challenges over recent years.

However, as the research outlined above demonstrates, its role is far from over. The part stores play in driving online sales and overall retailer performance continues to be crucial, and models for measuring their contribution should take this into account.

Landlords and retailers have already started taking steps to adapt to the changes. They now need to work closely together to maximise the value of physical stores going forward. Close collaboration, the pooling of data and information and an open dialogue will be key to success.

This is all the more important as we navigate the challenges brought by COVID-19, and work to ensure a smooth transition to a new normal, as soon as possible.

Conclusion

For more information

If you would like further information on any of these topics, or to discuss a bespoke insight piece with us please contact:

James Millerintu, Head of analytics & insightjames.miller@intu.co.uk

Or visit our website to read more of our insight pieces here

020 7960 1200intugroup.co.uk