exploring new leasing models in an omni-channel world · 4.0 shopping centre owners’ evolving...

Exploring nEw lEasing ModEls in an

OMNI-CHANNEL WORLD

2

Foreword 3

Executive Summary 4

1.0 Introduction 7

2.0 The Evolution of Omni-Channel Retail 9

3.0 Retailers’ Evolving Business Models 15

3. 1 From Multi-Channel to Omni-Channel Operations 15

3.2 Store Portfolio Optimisation 17

3.3 Purpose And Value of The Store 19

4.0 Shopping Centre Owners’ Evolving Business Models 20

4. 1 Portfolio Specialisation 20

4.2 Shift From Space-Making to Place-Making Strategies 2 1

4.3 Digitising the Business Model 23

4.3.1 Customer Experience 23

4.3.2 Enhance Sales 24

4.3.3 Customer Insight 24

4.3.4 Retailer Relationships and Revenues 25

5.0 Changing Lease Strategies 26

5. 1 Tenant Mix 26

5.2 Lease Length, Security of Income and Security of Tenure 28

5.2.1 U.S. Lease Structure 28

5.2.2 European Lease Structure 29

5.3 New Services and Revenue Streams 30

6.0 Rental Capture 3 1

6. 1 Negotiating Process 3 1

6.2 Current Rent Models 3 1

6.3 Omni-Channel Challenges for Rent Models 32

6.4 Capturing Store Value in an Omni-Channel World 34

6.4.1 Click and Collect 35

6.4.2 Returns 36

6.4.3 Online Transactions In-Store 36

6.4.4 The ‘Halo’ Effect 36

7.0 The Toolbox 38

7. 1 Fixed Rent Models 38

7.2 Turnover or Percentage Rent Models 39

7.2.1 Conventional Turnover Rent Models 40

7.2.2 European Factory Outlet Style Leasing Models 4 1

7.2.3 Geo-Fence Turnover Models 42

7.3 Use of Alternative Performance Metrics with Lease Models 43

7.3.1 Net Shopping Hours 44

7.3.2 Volume of Customers 44

7.3.3 Conversion Rates and Basket Size 44

8.0 Outlook 46

List Of Contributors 47

Notes 48

TABLE OF CONTENTS

ICSC Global Headquarters 1221 Avenue of the Americas New York, NY 10020 646.728.3800

European Office 29 Queen Anne’s Gate London SW1H 9BU United Kingdom +44.20.7976.3100

ACKNOWLEDGEMENTSThis report was prepared and written by Brenna O’Roarty (RHL Strategic Solutions) and Alan Billingsley (Billingsley Investments), in close collaboration during all stages of the project with ICSC Research. Special thanks to the European Research Group and North American Research Task Force (two of ICSC’s global research advisory groups) for their support and advice.

3

fOREWORD

It isalreadyclearthatallaspectsoftheshoppingcentre industryarebeingtransformedbytoday’srapidlyevolvingdigitalera.Thisstudyexaminesindetailhowoneespeciallyfundamentalcorefunctionisbeingaffected:leasing.

Shoppingcentrelandlordsandtenantsareadaptingtoa‘newconsumer’usinghomecomputers,tablets,smartphonesandin-storekiosksorsalesassociatestoresearch,experienceanddecideonaproduct.Thatmorecomplexconsumerjourneyispresentinganadditionalchallengetotheowner-tenantrelationship,forcingtherealisationthatthelongstandingleasingmodel,basedonmetricsinvolvingin-storesales,needstobereexamined.

Thegoalofthisreport is tostartaconversationonthissubjectandraiseawarenessoftheemergingoptions.Atthesametime,itaffirmsnotonlythatthestoreremainsthecornerstoneofsalesandmarketingstrategyintheomni-channelenvironment,butalsothatthevalueofalocationnowencompassesmorethansimplythesalesgeneratedbythatphysicaloutlet.

Despitethepowerfulforcesofglobalisation,local,regionalandnationalmarketsretaintheirindividuality, so a ‘one-size-fits-all’ approach would be inadequate in addressing this multi-facetedsituation.Forthatreason,thisstudyanalysedtheresultsofextensiveinterviewsinboththeUnitedStatesandEurope,findingmultiplevariationsinhowrespondentsareanticipatingthenewstateofaffairs—andofferingsignpostsforthosetravelingdownthisevolvingpath.

The multiple headwinds affecting the retail real estate industry worldwide in recent yearshaveonlyreinforcedtheneedforfarsightedleadershipthatcontinuestoadvancecompaniesthroughunfamiliarwaters.Partofthatleadershiprequiresembracingtechnologythatpromisestoalterevenfurtherrelationshipsbetweenconsumersandbusinessesandbetweenownersandretailers.Thisreporthasbeenwritten—andisnowbeingoffered—inthatsameconfidentspirit.

StephenD.LebovitzICSCChairmanPresidentandChiefExecutiveOfficer,CBL&AssociatesProperties,Inc.

4

ExECuTIvE suMMARy

Thisresearchreviewstherevolutionofomni-channelretailandexamineshowownerandretailerbusinessmodels are adapting to the digital era. A revolution in omni-channel retail is altering or will soon altertraditional retail rent/leasingmodels. In this report,weanalyse the impactof thismassive transitiononoptimalretailrent leasingmodelsandexaminehowbothtenantsand landlordsareadjustingtochange.Theanalysis isbasedonprimaryandsecondaryresearch, includingthefindingsfromapproximately90interviewswithrepresentativesofretailers,shoppingcentreownersandotherindustryexperts,andfrompresentations tospecial interestgroupswithin the ICSC, involvingover200membersacross theUnitedStates and Europe. Consequently, the project has sought to give a voice to the industry on the futuredirectionofretailleasingandrentalmetrics.Ratherthanattemptingtoprescribeonespecificleasingmodelformorsetofforms,thisreportprovidesatoolboxthatincludesawidespectrumofpossiblealternativestoaidtheindustryasitconsidersanddevelopsfutureleasingmodels.

The key findings of the research are:

• new technology, in tandem with wider structural economic and societal macro trends, has facilitatedand accelerated changes to consumer buying behaviour. Theconsumerdecision-making journey ismore complex, involving cross-channel shopping activity—often in real time— pre-, during and post-purchase. The permutations of shopping patterns are manifold, varying not only across consumers,butalsowiththemodeandmoodofanyoneindividual.Mostretailersandownersareimplementingomni-channelbusinessmodelstoharnesssuchchangeandbettermeettheexpectationsofthenewconsumer.

• The scale and rapid pace of change requires a major restructuring of retailer business models acrossmultiple dimensions including inventory management, distribution, customer insight, merchandising,marketing and accounting.Eventhemostadvancedretailershaveyettofullyimplementtheiromni-channelstrategies.

• Far from diminishing the role of the physical store, digital retail has expanded it. Mostomni-channelstrategiesareanchoredonstoreportfolios,withtheirvalueextendedfrombeingapointofsale(POS)tothebackboneofomni-channelsalesandmarketingstrategies.Consumersareengagingwithmultiplein-storeandonlinetouchpointsbeforetransacting.Assuch,itisthecontributionofastoretoasalethatmatters,notthePOS.

• Equally, many owners have been quick to respond to this digital transformation, restructuringbusinessandshoppingcentrestrategiestobetteranticipateandrespondtoconsumerchange.Realisingthatitisno longer sufficient toofferaccessible,well-designedcentresandgood-quality space to retailers,theyarefocusingonplace-makingstrategiesthatdrawconsumersintoacentralmarketplace,therebyhelping retailers access customers. This represents a fundamental shift in responsibilities betweenownersandretailers,aswellasarecognitionthat,toengageandattractconsumers,thecentremustdelivermorethanastrong,coherenttenantmix.

• new technologies are being explored by retailers and owners. as well as engaging with customersand providing them with superior experience and service, this digital infrastructure enables a muchdeeper understanding of consumer behaviour within the centre and across channels. These newtechnologiesarestilldevelopingandnostandardhasbeenestablished,butmostfocusontrackinganddeliveringcustomerinsights.Theyareincreasinglybeingusedasabasisforconsumerresearchandnewperformancemeasuresandofferthepotentialforownerstodevelopnewrevenuestreams.

• amid all this digital innovation and change, retail leasing and rental models remain largely unaltered.Dependinguponthecurrentrentalframeworkusedbycontributors,aswellasthefunctionandscaleof shopping centres managed, many retailers and owners considered current leasing models to be

5

‘working,butcreaking.’Asaresult,manyretailrealestateprofessionalsarebeginningtoreevaluateexistingleasingmodelsandrentmetricsintheUnitedStatesandEuropetoassesswhethertraditionalapproachesremainfitforpurpose.

• appropriate solutions will vary between different types of centres in terms of scale and function, and between different types of retailers, in terms of sector and brand power. looking forward, the basis of lease contracts is expected to be derived from one or more of the following three broad frameworks:

1. fixed Rent Models.Theseinvolvea100%baserentwithnoadditionalperformancemetric,usuallysubjecttoeithersteppedincreasesoverthedurationofthelease,ortoperiodicreview,ascommonlyseenintheU.K.Someretailersandownersfamiliarwiththisapproachhavearguedthatcompetitivebidding for a space intrinsically determines the value a store contributes to total sales, includingassociatedonlinesales.Ashortcomingof thisrelativelysimplemodel is thatretailersarenotyetabletoquantifythevalueofastoretototalsales.Althoughtherentagreedatthestartofaleasemight represent a useful proxy, difficulties arise over its applicability over the course of a lease.Givensecurityoftenure,thisiscomplicatedforleaserenewalinEuropeandforperiodicrentreviewsintheU.K.Afurtherdrawbackoftheapproachistheweakalignmentof interestbetweenownersandretailersduetotheabsenceofaperformanceincentive,exacerbatedbythegreaterdegreeofcollaborationbetweenthesestakeholdersthattheshifttowardsomni-channelstrategiesimplies.

2. Turnover or Percentage Rent Models.Thesetypesinclude:

a. Conventional turnover rent models,whichincludeabase,ratherlikeafixedrent,accountingfrom92%to100%oftheestimatedrentalvalue.Baserentsareaccompaniedbyaperformancerent,whicharepayableasapercentageofstoreturnoveronceagreedsaleshurdlesareachieved.Thedifficultywithconventionalturnover/percentageratemodelsisthattheperformancemetricisbaseduponthePOS,notthecontributionofthestoretoasale.Asaresult,intheU.S.,baserentshavebeendriftingupwards,withthepercentagerentlikelytokickinatahigherleveloftargetsales.Otheralternativeadjustmentsofferedaretoincreasethepercentagerateappliedtosales,butthisisonlyaveryapproximatemeasureofthestore’scontributiontototalsales.Someownersareattemptingtoincludeclickandcollectandin-storeonlinesalesinthetotalsalesvolume,butperhapsatareducedpercentage rate. However, strong omni-channel retailers argue that they are driving footfall andincrementalspendingtothecentreandthatattributingthesaletothestoreignorestheircostsofoperatingtheonlinesalesanddistributionplatformthatgeneratedthesale.

b. European factory outlet-style leasing models. Some retailers and owners of more challengedneighbourhood and mid-sized centres suggested, similar to leases implemented in Europeanfactoryoutletcentres,ashifttoalowerbaserent,lowersaleshurdleandhigherpercentageratetoprovide forgreaterrisksharing,giventhegreateruncertaintyofsalesperformance insuchschemes.Animportantelementofsuchagreementswouldbetheabsenceofsecurityoftenureforretailers,withatwo-wayoptiontobreakaleaseifpre-agreedsalestargetswerenotmet.Again,thecontributionofthestoretonon-storesalesisimplicitinthebaserent.

c. geo-fence turnover models.Modelsthatincludeallsaleswithinanagreedgeo-codedcatchmentarea have been proposed by a number of owners. Depending on the transaction, a differentpercentageratewouldbeappliedacrossdifferentcategoriesofsale,including‘clickandcollect,’‘kiosk,’and‘halo’inanefforttoextrinsicallymeasurethevariationinthecontributionofthestoreto different types of sales. However, retailers are generally reluctant to provide turnover dataonnon-storesales.Moreover,whilemanyretailersareplanningtoshifttowardsmergingonlineandstoreprofitcentresbasedupongeo-fencingmodelsanchoredonstoreportfolios,fewhaveimplementedthisstrategy.

6

3. Models using Alternative Performance Metrics. A number of owners of both destination andneighbourhoodcentresintheU.S.andEuropesuggestedthatperformancemetricsshouldbelinkedtotheiroperationalmanagementexpertise,ratherthantosales.Manyretailersindicatedthatwhereownersinvest in innovativeassetstrategiesthatgenerateresults,theywouldbewillingtoacceptnewperformancemetricsthattakethevolumeandvalueoftheconsumeropportunityintoaccount.Anumberofretailersexplainedthatfindingappropriatemetricstorewardownersandmanagersfordeliveringastrongercustomeropportunitymirroredthedifficultyinrewardingsalesstaff.Themorepermutationsinvolvedincompletingapurchase,theharderitistomeasurehowmuchgoodin-storecustomerserviceorsalestechniquecontributestototalturnover.

Astheydetermineappropriateandworkablerentalmetrics,retailersandownerswillengageinconsiderableexploration.Manyoftheseexperimentsrelatetoexistingkeyindicatorsalreadyusedtodevelopstrategicinitiativesandongoingperformancemanagementofthecentreandindividualoccupiers,aswellasnewmetricstoincentiviseretailstaffmoreeffectivelyinanomni-channelera.Amongthenewperformancemetricstoemergefromthediscussionswere:netshoppinghours;volumeofagreed-targetcustomers(notsimplyfootfall);andconversionratesandbasketsize.Ownersadvancedindigitalstrategiesstressedthevalueofthenewinsightstheyareabletoderive,butacknowledgedthatasnewtechnologiesarestillembryonicitistooearlytoembedthemintolonger-termleaseagreements.However,thisareaismaturingrapidlyandwilllikelybeasourceofkeyperformancemeasureswithinfuturerentalagreements.

The digital era is creating an unprecedented pace of change as economies and societies embraceinnovation.Theretailindustryisrunningfasttokeepupwithrapidlyevolvingconsumerdemandsand,indoingso,tocontinuetotransformitselftobetterrespondtoandanticipatechange.Intheomni-channelera, leasingmodelsandrentmetricsthatarebaseduponPOSare losingrelevanceasaproxyforthecontributionofastoretototalsales,andnewapproacheswillberequired.Thisresearchprovidesausefulframeworkastheindustryconsidersthewayforward.Giventhatomni-channelretailinvolvestheblurringoftwoofthemostdynamicandinnovativeindustries—retailandtechnology—itiscertainthatsolutionswillemerge.

7

1.0 INTRODuCTION

Newtechnology,intandemwithwiderstructuraleconomicandsocietalmacrotrends,hasfacilitatedandacceleratedchangestoconsumerbuyingbehaviour.Retailersarerespondingwithashifttowardomni-channelbusinessmodels.Equally,manyownershavebeenquicktorespondtothisdigitaltransformation,restructuringbusinessandshoppingcentrestrategiestobetteranticipateconsumerchange.Asaresult,shoppingcentreprofessionalsarereevaluatingexistingleasingmodelsandrentmetricsintheUnitedStatesandEuropetoassesswhethertraditionalapproachesremainfitforpurpose.Ratherthanattemptingtoprescribeonespecificleasingmodel,thisreportsetsoutthefullspectrumofpossibilitiescreatedbythesechangingconditions,withtheaimofprovidingausefulframeworkfortheindustrytoconsider.

Farfromdiminishingtheroleofthephysicalstore,digitalretailhasonlyexpandedit,fromapointofsale(POS)tothebackboneofomni-channelsalesandmarketingstrategies.

Approximately10%oftotalretailsalesoccuronlineineventhemostadvanceddigitalretailmarkets.Itisgenerallybelievedthatthispercentagewillincrease,asonlineretailsalesgainscontinuetooutpacethoseofin-storesales.However,focusingonsalesallocationismisleading.ViewingPOSasameasureofthevalueofastoremasksthecomplexityofthecustomer’sdecision-makingjourneyandthesymbioticrelationshipacrossthephysicalandonlinesalesplatforms.Althoughstoreturnoverasaproxyforstoreperformancehasservedtheindustrywellinthepast,itisbecominglessappropriateasameasureofastore’svalueandcontributiontototalretailsales.

EXPLORINGNEWLEASINGMODELSINANOMNI-CHANNEL WORLD

far from diminishing

the role of the

physical store,

digital retail has only

expanded it, from

a point of sale (POs)

to the backbone

of omni-channel

sales and marketing

strategies.

8

Thetwomajorparticipantsintheleasingprocesshavemovedinparallelstepstodealwiththedigitalage:

Retailers’businessmodelshaveevolvedfrommulti-channeloperationsthatmanagedonlineand store operations in parallel, into one integrated platform. Most have developed omni-channelstrategieswiththeaimofbetterrespondingtotheircustomers’needsandpreferences.Thoughfewhaveestablishedseamlessoperations,1the physical store remains the cornerstone of retailers’ omni-channel strategies,withavalueconsiderablygreaterthanasamerePOS.

Ownershaveadaptedtheirownbusinessmodels.Recognisingthattheyarenolongerjustofferingwell-located,good-qualityspacetoretailers,theyarefocusingondeliveringandenhancingasenseofplacethatdrivesconsumerstoacentralmarketplace,therebyhelpingretailersaccesscustomers. Moreover, in a fundamental shift in the relationship between shopping centreownersandretailers,somelandlordsarealsousingnewtechnologiestofacilitatetheinterfacebetweenthecustomerandthestore.Atthesametime,theretailerisrelyingmoreheavilyontheshoppingcentretoattractandengagetoday’sdemandingconsumer.

Amid all this digital innovation and change, retail leasing and rental models remain largelyunaltered,withthemetricsunderlyingmostrentalagreementsunchanged.

The aim of this research is to establish how retailers and owners are changing their business models in response to the evolution of omni-channel retail, what their current and anticipated challenges will be, and how these changes are shaping asset strategies, leasing models and in particular, rental metrics.

Thefindingsarebasedonbothprimaryandsecondaryresearch.Approximately90interviewswereundertakeninEuropeandtheU.S.withrepresentativesofretailersandshoppingcentreowners,aswellasotherindustryexperts.2Thecontributorsarerepresentativeofthegeographicreachofthestudy.Aseriesofworkshopswereundertakentobuilduponthepreliminaryoutput.AdditionalinputwasreceivedduringsixpresentationsofpreliminaryfindingstomemberspecialinterestgroupswithintheICSC,capturingfurtherfeedbackfromapproximately200members.Assuch,theprojecthassoughttogiveavoicetotheindustryonthefuturedirectionofretailleasingandrentalmetrics.

INTRODUCTION1

9

BillGateshassuggestedthat‘wealwaysoverestimatethechangethatwilloccurinthenexttwoyearsandunderestimatethechangethatwilloccur in thenext ten’.3By2000, itwasalreadybecomingclear thattheconsumerbrowsedonlineandshoppedin-storeandvice-versa.Thebiggest impactoftheInternet intheseearlyyearswastheaccelerationofcompetitivepricing,particularlyforcommoditygoodsincludingelectronics,books,andmusic.4

Although the digitisation of products themselves was not foreseen as occurred, for example, withinpublishing,musicandgaming,otherretailersheededGates’warninganddevelopedonlinechannelstohelpprotectandgrowmarketshare.5Beyondcommodity-shapedgoods,existingnationalandinternationalretailers,especiallythosewithanestablishedcataloguechannel,hadacompetitiveadvantagegiventheirexisting brand value strength, customer base, scale and logistics networks. In most markets, the firstdecadeofthe21stCenturywitnessedarapidshiftfromabinarymarketofpure-playe-tailervsphysicalretailertoonedominatedbymulti-channelretailersandonlinebehemoths.Web-onlyretailerscompriseapproximately30%oftotalonlinesalesintheU.S.,mostofwhichisfromoneretailer,Amazon.Onlysomepure-playe-tailersareprofitable.Astheyfocusongrowthinmarketshare,manyoftheseareestablishingsomeformofphysicalretailpresence.

Theemergenceandrapidgrowthofsmartphones,tabletsandtheseeminglyexponentialriseoftheInternetofThings(IoT)since2010havefurtherencouragedconsumerautonomy.Consumerbehaviourisnolongerbinary; consumers can—and are—shopping simultaneously online and in-store, seeking opinions frompersonalnetworks,readingpeerreviews,inventorycheckingandundertakingpricecomparisoninrealtime.Moreimportantly,consumershaveseamlesslyintegratedtechnologyintotheirbuyingbehaviour(Figure1).Suchshoppingjourneysarecomplexandvarybetweenconsumersandacrossdifferentmodesandmoodsofshopping.Consumersbrowseinventory,compareandresearchproductsonlineand/orin-storeinadvanceofapurchase.Forexample,aconsumermightresearchaproductonline,experiencetheproductin-store,and,afterreflection,purchaseitonlineforanin-storepick-up.

POSisoneofmanystepsalongthisjourneyanditsplaceisrelativelyunimportanttotheretailer’sprofitability.Fulfilmentoftheproductisalsovariableandmaybereceivedimmediatelyin-store,collectedfromstoreordeliveredtohomeoranalternativeaddressorcollectionpoint.Thecustomerjourneyalsoextendsbeyondthe purchase decision with the post-purchase experience, which includes reviews and returns, but alsopresentstheopportunityforretailerstomakefurtherrecommendationsandtargethighlyrelevantofferstoconsumersbasedontheirpurchasehistory.Thisapproachrequiresmulti-channelretailerstoshiftfromessentiallyoperatingseparateretailplatformstowardsone,integratedplatform.

fIGuRE 1. Complex Customer Journey

2.0 THE EvOLuTION Of OMNI-CHANNEL RETAIL

Right Person Right Offer

Deliver

Discover

Decide

Right Place Right Time Right Way

10

Markets differ in their digital retail maturity in terms of the share of online and mobile shoppingpenetration.Internetaccessisaprerequisitetoaccessingdigitalshopping.Whiledigitalaccesshasfastbecomeregardedasabasicnecessitybyconsumersinmanycountries,itisnotuniversal(Figure2).

However, smartphones and other devices offering mobile web access represent an advance towardsuniversalaccess.Theyarealsoagame-changerforconsumerbuyingbehaviour.

fIGuRE 2. Home and Mobile internet access, 2014

(PercentageofIndividuals)

Accompanying the evolution of omni-channel retailing is the growth of online sales. To some extentreflectingInternetpenetration,onlinesalesgrowthvariessignificantlyacrossmarkets.TheU.S.,U.K.andNordicmarketshave thehighestonlineshareof retail salesandalsoprovide themostaccuratedata.EstablishingtherateofgrowthandscaleofInternetsalesisdifficultasnotallmarketshavereliabledata.

Ireland

United Kingdom

Sweden

Spain

United States

EU 28

Portugal

Poland

Norway

Netherlands

Bulgaria

Italy

Hungary

Romania

Mobile Access (excluding home or work) Internet Access at home

Germany

France

Finland

Turkey

Denmark

Czech Republic

Belgium

Austria

100 20 30 40 50 60 70 80 90 100

THEEVOLUTIONOFOMNI-CHANNELRETAIL2

Sources: M. Meeker, 2015 Internet Trends; Eurostat

11

fIGuRE 3. online sales as percentage of retail sales*, 2014 and 2015F

Inaddition,theretailsalescategoryisabroadumbrellaandencompassesmanysalesandservicesthatwouldnotusuallybefeaturedinthetenantmixofshoppingcentresandmightbecharacterisedbyahighonlinesales component, for examplebetting shops, ticketingetc. TheCentre forRetailResearchhascompiledsurvey-baseddatathatquantifyonlineretailsalesincludingineightEuropeancountriesandtheU.S.,usinganarrowdefinitionofretailsalesthatbetterreflectsretailactivitieswithinshoppingcentres(Figure3).6However, it isworthnotingthatas thedataexcludefoodandbeverage(F&B)services,whichcannotbedigitised,theonlineshareoftotalsalesmaybeoverstatedfortotalspendingacrossshoppingcentres.

Usingthisnarrowerdefinitionofretail,theU.K.hasthehighestproportionofonlinesalesat13.5%in2014.Atlessthan3%,Spain,PolandandItalyhavethelowest,tosomeextentreflectingregionalisationinpenetrationratesandinthequalityoftelecomsinfrastructurebeyondmajorcities.TheU.S.achievesahighpenetrationrateapproaching12%.Lookingatspendingpercapita,U.S.consumersoutpacetheirEuropeancounterpartssubstantiallyatpercapitalevelsaveraging$1,815.52(€1,325.20/£1,119.79)comparedto$1,329.54(€970.47/£820.05)inEurope(Figure4).

fIGuRE 4. online spending per Capita

European Average

France

Sweden

Spain

Netherlands

Germany

Italy

2015F2014

Poland

United Kingdom

United States

20 4 6 8 10 12 14 16

EuropeUnited States

€ 1,400

€ 1,200

€ 1,000

€ 600

€ 800

€ 400

€ 200

€ 0


*Retail sales exclude autos, gas, tickets, and sales-weighted transactions.

Source: Centre for Retail Research

Source: Centre for Retail Research (2015)

12

Insomeofthematureonlinemarkets,thereissomeevidencethattherateofgrowthofthesesalesisslowing.Individualretailers’performanceacrosschannelsdivergeswidely,dependingupontheirmarketshare,asseeninFigure5.Thoseretailerswhohaveestablishedthehighestshareofonlinesalesrelativetototalsaleshavethelowestratesofgrowthandviceversa,perhapsindicatingthatonlineasaproportionofstoresalesreachesanaturalplateauatwhichgrowthratesbegintomoderate.Thistrendisalsoevidentinthegrowthmomentumacrosscountriesinthenumberofindividualsmakingapurchaseonlineinthelastthreemonthsandthedeclineinthenumberofindividualswhohavenevermadeapurchasebetween2009andyear-end2014.(SeeFigure6.)Thosemarketswiththelowestpenetrationrates,likeSpain,arecharacterisedbythestrongestgrowthrates,andthisholdstrueacrossallretailsegmentswhereSpainisgenerallyindicativeofthistrendaswell.(SeeFigure7.)

fIGuRE 5. online as percentage of all sales and annual growth

fIGuRE 6. online purchase activity and growth, 2009-2014

Macintosh (NL)

Macy’s (US)

Nordstrom (US)

Media-Saturn (DE)

Williams-Sonoma (US)

Debenhams (UK)

Douglas (DE)

Lululemon Athletica (US)J Crew (US)

La FNAC (FR)

Empik (PL)

M&S (UK)

Next (UK)

Online sales growth Online sales share

Gap (US)Abercrombie & Fitch (US)

Footlocker (US)

John Lewis (UK)

Walgreen (US)

Tom Tailor (DE)

Mango (ES)

100 20 30 40 50 60 70 80 90 100

% Population

Bought online in last 3 months Never bought online

% Growth 09-14 % Population % Growth 09-14

European Union (28 countries)GermanySpainFranceItalyNetherlandsPolandPortugalFinlandSwedenUnited Kingdom

100%

80%

60%

40%

20%

0%

-20%

-40%

-60%


Source: Property Market Analysis (PMA) (2015) based on company reports; Vertical Web Media LLC

Source: Eurostat (2015) ibuy survey

13

fIGuRE 7. online purchase activity and growth by retailer Category, 2009-2014

Given the symbiotic relationship between online, in-store and other channels such as catalogue sales,retailersareshiftingawayfromseparateprofitcentres.FocusingonthefinalPOSismisleadingasitmasksthemorecomplexcustomerjourneyunderlyingit,involvingmultipleconsumertouchpoints.Forexample,it isestimated that in theU.S.andU.K.over50%of in-storesalesareWeb influenced,withconsumersbrowsingandresearchingproductsandpeerreviewspriorandduringastorevisit.7

Equally,onlinesalesareinfluencedbythephysicalstoreaspartofthepre-purchasejourney,fulfilmentorpost-purchaseexperience.Thisholdstrueforeventhemostdigitallyactiveconsumers.AComscoresurveyonbehalfofUPSsolelytargetingveryactiveonlineconsumersfoundthatthestoreinfluencedthecustomerjourneyinupto60%oftheironlinesalestransactions(Figure8).


% Population

Food/groceries Household goods Clothes, sporting goods

% Growth 09-14 % Population % Growth 09-14 % Population % Growth 09-14

% Population % Growth 09-14 % Population % Growth 09-14 % Population % Growth 09-14 % Population % Growth 09-14

European Union (28 countries)GermanySpainFranceItalyNetherlandsPolandPortugalFinlandSwedenUnited Kingdom

250%

300%

350%

200%

150%

100%

50%

0%

Computer software Computer hardware Electronic equipment Digital media, software, music

250%

300%

200%

150%

100%

50%

0%

Source: Eurostat (2015) ibuy survey

14

fIGuRE 8. role of store for High Frequency online shoppers

Foromni-channelretailers,whatmattersisthatthesaleoccurs,thatcustomers’experiencesarepositive,andthattheywillremainorbecomeloyaltothebrand.Customersexpecta‘one-customer,one-company’service,ademandthatexceedsmanyretailers’capabilities.

Thekeyforretailersisnotnew:todelivertherightproduct,attherightprice,intherightplace,intherightway,totherightperson.Thedifficultyisthattherightplaceisnowbothmorediverseandmoredynamic.Mostmulti-channelretailersunderstandtheimportanceofrestructuringtheirbusinessmodelstobettermeetthedemandsoftheircustomers.8

Omni-channelshoppingbehaviourrequiresretailerstomaturefrommulti-channelplatformstoanomni-channelorganisation,whichrequiresaconsiderableinvestmentininventorymanagementandinformationtrackingsystems.


Search online, buy onlineSearch online and in store, buy in storeSearch online, buy in store

Buy online, pick up in storeSearch in store, buy onlineSearch online and in store, buy online

U.S. Europe France Germany Spain U.K.

Search in store, buy in store

80%

90%

100%

70%

60%

50%

40%

30%

20%

10%

0%

Source: UPS / ComScore Survey, Europe (2015); UPS / Comscore Survey US (2015). Survey of online consumers (sample of respondents comprises 20% making 2-3 purchases, 40% making 4-6 and 40% making 7+ purchases on-line in past 3 months) ‘Thinking of purchases you make, both online and in stores, how often do you purchase in the following ways?’

15

Shoppingbehaviourcontinuestoevolveastechnologybecomesmoreaccessible,morepervasive,morepowerfulandmoreintuitive.Retailersarerespondingbyrestructuringtheirbusinessoperationstobetterrespondtoconsumerdemandsandcapitaliseontechnologicalchange.

Thisreorganisationpermeateseveryaspectofthebusiness.Inadditiontoorganisationaltransformation,theevolvingomni-channelretailmodelalsohassignificantimpactsuponstoreportfolios’optimisationandthe

roleofthestoreitself.

3.1 from Multi-Channel to Omni-Channel Operations

Inordertotransformintoanomni-channeloperator,retailersmustintegrateallaspectsoftheirbusinessmodels.Nearlyallretailershaveincorporatedthisgoalintotheirbusinessplans,butfewhaveachievedfullintegrationatthispointintime.

Central to this is the integration of teams to enable a holistic approach to understanding customers,developing the retail proposition, selecting stock, tracking inventory, merchandising and marketingstrategies.Thisintegrationrequiresthewholesalerealignmentoftheoperatingmodelintermsofprocessesandsystems,teamsandperformancemeasurement,aswellastheredistributionofthecostbase.9

Traditional retailers’ investments in their online platforms are placing strains on the profitability andgrowthdemandedbypublicmarkets.Asaresult,only19%ofthetop250globalretailershavebeenabletodeliveraprofitableomni-channelstrategy10,whenonlineprofitmarginsarebrokenout.Thisconfirmstheassumptionthatmosttopretailersarenothighlyadvancedinrollingouttheirintegratedplatforms.

Most retailers are still catching up, with more experimentation required. Fulfilment and inventorymanagement,thekeystounlockingprofitability,representthetopprioritiesforthemajorityofretailers,requiringconsiderableinvestment.

Integratingplatformsinvolvethreemajorstages:

1. Effective inventory management and tracking.Retailerswitha largeonlinepresencemayoperateacomplexinventorysystemasalegacyofhavingparallelonlineandin-storeretailchannels.Thismayincludedistributionfromcentral,regionalandlocaldistributioncentresandfromstores.Managingthisinventory requires the creation of an integrated information technology system. For many retailers,establishingasystemthatensuresthattheretailerknowsthelocationofallofitsproductsonareal-timebasisissomethingtheymustgetright.Theabilitytodeliveraproductthatissupposedtobeininventorytoacustomer,whetherathome,in-store,in-storeforpick-up,oratotherdistributionpointsmustbeachievedaspromisedandinatimelymanner.Fulfilingsuchpromises,whethermadein-storeoronline,isessentialtobuildingcustomerloyaltyandtrust.Hence,inventorymanagementandfulfilmentareamajorfocusformanyretailers’capitalexpenditurescurrently.

2. facilitating fulfilment as inexpensively as possible. Fulfilment isa considerablecost for retailers.Amazon, the largest online retailer in the U.S. and Europe, has set the bar high with a large-scaleefficient fulfilment system and an aggressive growth strategy that frequently offers free shipping.11

Itsheavyfocusondistributionisallowingittofurthershortendeliverytimes.Asaresult,traditionalretailersfeeltheneedtocompetewiththeirownlow-costorfreeshippingthatisalsoprovidedquickly.Viewedbyinvestorsas‘tech’companies,AmazonandotherInternet-onlyretailershavegreaterlatitudein favouring growth over profits.12 In contrast, traditional retailers are subject to meeting quarterly

3.0 RETAILERs’ EvOLvING busINEss MODELs

16

profithurdlestosatisfyinvestors,nomattertheirsuccessingrowingonlinesales.Currently,clickandcollectholds littlecostadvantageformanyretailersasonlineandphysicalstoresmayuseseparatecentralwarehousesandinventorymanagementsystems,requiringanitemtobedeliveredtothestoreregardlessofwhetheritisinstock.AccordingtoaBostonRetailPartnersDecember2014report,only24%ofretailershavesystemsthatworkwellforclickandcollect,and29%ofretailer’ssystemsworkwellforreturns.Integratinginventorymanagementalongsidedistributionmayunlockprofitability.

3. Integrating marketing and brand experience. Customers expect a seamless, cross-channel brandexperience.Storesareintegratingwithallotherchannelsandmustprovideuniformpricingandaccesstothefullmerchandisingrangeandmix,productandorderinformationandcustomerpreferences.Thisisapparentinthenumberofretailersthathaveequippedsalesassistantswithtabletsandotherin-storetechnologytoenablecustomers’accesstotheretailer’sfullrangeandinventory.Anexternalityofthishasbeentheblurringoflinesbetweenin-storeturnoverandonlinesales.

Increasingly,customersarealsoseekingtobeabletocontinuetheirshoppingjourneyinanyplace,whetheronlineorin-store,withouthavingtore-tracesteps.Thisrequiresallapplicationstobeintegratedandtobecapableofidentifyingindividualcustomersacrosschannels.Thelinkageofonlineandin-storecustomersmaybeachievedthroughmembershipofaloyaltyprogrammebycard,onlineordownloadedmobileapp,orincreasinglythroughanopt-inpushedtothecustomerthroughtheuseofWi-Fi,GPS/mobileandbeacontechnologythat interactsandtracksweb-enabledphones.Digitalstorefrontsanddisplaysare linkedtovirtualmarketingplatformusingQR(QuickResponse)codesandRFID (RadioFrequency Identification)taggingwhichcaninformandentertainthecustomerona24/7basis.Theseapplicationsgreatlyenhancemarketingopportunities,withtechnologyandsalesassistantsbothequippedtonavigate,directandassistconsumerspre-,duringandpost-purchase.

Combinedwiththeemergenceofpaymentviasmartphones,thesetechnologiesalsoliberatethepointofpurchase,providingcustomerswiththecapacitytotransactanywhereinthestore,removingtheneedforfixedormobilepaymentterminals.Suchtransactionsoccurdirectlybetweenthecustomerandretailer,ratherthanviaastorepaymentterminal.Thistrendisstillinitsinfancybutisexpectedtodevelopquickly.Lookingforward,theabsenceofcentralisedpaymentterminalswillfurtherreducetheowners’abilitytodemarcatein-storesales,althoughretailerswouldbeabletotrackthese.

Developing cross-channel customer insight is central to effective, cross-channel marketing. Figure9 illustrateshow the integrationof technology acrossplatformscould beused togreatlyenhance thecustomer experience and increase sales. Of course, the key is to ensure that customers benefit fromenhancedcustomerserviceandthatstrategiesarenotoverlyinvasive.13Forexample,acustomer’sentrancemaytriggeranotificationtotheretailer.Theorderisretrieved,thenheldatadesignatedcollectionpoint.Thisefficiencygreatlyimprovesthecustomerexperience,savingthatmostpreciouscommodity,time.

Suchcustomerinsightfromunderstandingthecomplexityofcross-channelshoppingbehaviourandhowitvariesbymoodandmode isvaluable for increasingbusinessprofitability.Most importantly, itallowsretailerstoclearlyidentifyandretainthenotional20%ofconsumersthatdeliver80%ofprofit.

RETAILERS’EVOLVINGBUSINESSMODELS3

17

fIGuRE 9. Extension of Customer Journey

Toachievethisrequiresbusinessaccountingandprofitcentrestobereorganisedtobetterreflecttheomni-channelbusiness.Thecustomerdoesnotcarewhereasaleisbooked,butdemandsexcellentincentivisedserviceatallstagesoftheshoppingexperience.Whereasaleisbookedisnolongeranindicationofallthefactorsthatcontributetothatsale.Increasinglysalesarebeingattributedtoprofitcentresbaseduponthegeographicalreachofstoresratherthanbyretailchannel.

3.2 store Portfolio Optimisation

Isolating the impact of omni-channel retail strategies upon store portfolios has been difficult, as theindustryhasfacedmultipleheadwindsintheaftermathofthefinancialcrisisinboththeU.S.andEurope.Over-indebtedconsumersfocusedonpayingdownunsecureddebtandreplenishingsavings,andcreditavailabilityreceded.Austeritymeasuresreducedpublicspending,resultinginjoblosses.This,combinedwithfreezesinpublic-sectorpaylevelsacrossmanymarkets,ledtodecliningincomeinrealterms.Thiswasexacerbatedbysharplydeclininghousepricesinmarketswherepersonalgainsinwealthfromapre-crisishousepriceboomhadhelpedtofuelretailspending,mostnotablyintheU.S.,theU.K.,Spain,IrelandandPortugal.Retailspendingdeclinedandrefocusedonvalue,withdiscountretailersandexpandingnon-foodsegmentsofsupermarketretailersbeingtheprimarybeneficiaries.

Thegrowthofmulti-channelretailingoverthisperiodprovidedretailerswiththeopportunitytoreducetheirfixedcostsbyrationalisingtheirstoreportfoliostostemdwindlingprofitmargins.Insomelocationsthishasresultedinsomesecondaryretaillocationsbeingperceivedasobsolete,whileinmany,rentallevelshavebeenrebased tomoresustainable levels in linewith retaileraffordability.Theresultingweaknessof consumer demand, together with over-leveraged retailer business models, left the sector exposed.Consequently, vacancy rates increased in secondary centres in Spain and in non-prime high streets intheU.K.IntheU.S.,thereisawell-establishedunderstandingthatlower-qualityretailspacemayneedtobe repurposed, renovated,or redeveloped.Similar trendsapply foropen-aircentres,particularly thoselocatedontheurbanperiphery.


Consumer on-line search; purchase options could include click and collect.

Click, try, buy

Personalised welcome and marketing

on entering store;service options

Orientation and Augmented Reality to areas / items

of interest

Synching with consumers’ apps

(for review & advice)

Internet of ThingsPayment

Review relevant offers and recommendations

COOL, NON-INVASIVE

Source: Adapted from McKinsey, ‘Digitizing the Consumer Decision Journey,’ June 2014

18

Thishasledtoretailerandinvestorretrenchmenttoprimelocations,destinationshoppingschemesandretailcentresthatdominatetheircatchmentarea.Thecontinuedgrowthofonlineretailingoverthesameperiodexacerbatedtheimpactofdecliningin-storespendingpatternsandfacilitatedstructuralchange.

However,oneoftheprincipaldriversofretaildeclinewastheinabilityofover-indebtedandover-expandedretailers towithstandsharplydeteriorating retail spendingpatterns.Online retailingaggravated ratherthancausedthedownwardretailspiralinsecondarylocationsandcentresintheU.S.,SouthernEuropeandtheU.K.

ThatexperiencediffersfromtheNordicmarkets,whereonlineretail isarelativelymaturesector,havingfirstemergedinthelate1990s.Betweenyear-end2007andyear-end2012,Swedenexperienced5.6%incompoundannualgrowthrate(CAGR)innominalonlinesales,overtwicetheCAGRforallretailsaleseveninnominalterms.14

Over the same period, retailer demand strengthened and the requirement to rebase rents in line withaffordabilityprevalentacrossmanyEuropeanmarketsdidnotarise.Indeed,primehighstreetandshoppingcentre rental levels increased by 7.0% since the previous market peak in 2007; growth in secondaryshoppingcentrerentallevelshasbeenmarginallystrongerat7.5%.Themarketexperiencedashortandlesssevereeconomicdownturn.

Putsimply,retailershavefounditeasiertogetasmallerpieceofabiggercakeinSwedenthantogetabiggerpieceofasmallercakeintheU.S.andotherEuropeanmarketssuchastheU.K.

Nevertheless, asomni-channel retail continues toevolve, the structureof the retail landscapewill adaptandrespond.Retailersaremergingtheirphysicalandonlineplatformstoincreasetotalsales,lowercostsandimproveservicelevelstocustomers.Increasingsophisticationinpersonalonlinemarketinganddeliverychannelsalsoenablesretailerstoreachtheircustomerbasewithareducedphysicalstoreportfolio.

Retailers have shifted store expansion strategies to conquering principal cities, rather than countries,reflectingthegreatermarketingreachofflagshipandmajorstores.15Thesizeofappropriatestoreportfolioswillvaryaccordingtothescaleofthemarketandthecharacteristicsoftheretailerwithregardtosectorandtargetaudience.

Aspirational retailersmayseek toconstrainstoreportfolios tohelpprotectandextend thescarcityor‘wow’valueassociatedwiththebrand.Atthesametime,theprovisionofomni-channelenablesflagshipandmajorstorestohaveamuchdeeperreachandsphereofinfluencethanpreviouslyachievable.Otherretailersmayrequirealargerstoreportfolio,buttheyarechangingthestrategyonthesizeandnumberofstoresrequired.Forsomeretailers,thismaymanifestitselfinareducedstoreportfoliobynumberofstoresandreductioninstoresizeinsecondarylocations,balancedwithincreasedlargerflagshipstores.

The larger stores enable the retailer to showcase products and focus on engaging consumers throughexcellentcustomerserviceandbrandexperience.Forothers,theoppositemaybetrue,assizewasreducedbutthenumberofstoreswas increased,providingmorephysicaltouchpointstoengagewithconsumers.Moreover,manyretailersarecreatingamoredefinedstorehierarchywithintheirportfolios,demarcatedbythefunctionorpurposeofoutletsindifferenttypesoflocations.

Since the onset of the downturn, retailers have largely pursued polarised store portfolio strategies.Securinggoodqualityspaceinperceived‘A’locations,includinglarge,destinationshoppingcentresandprimehighstreetsinEuropeandupscalestreetfrontretail intheU.S.,wastheprincipalobjective.Suchlocationsprovidedtherequiredcriticalmassofco-locatedappropriateretailers,qualityofenvironmentandtherequiredaccesstoaconsumeraudienceatarequiredscaleandquality.


Nevertheless, as

omni-channel retail

continues to evolve,

the structure of the

retail landscape will

adapt and respond.

19

Demandforwhatremainsafinitenumberoflocationshasexceededsupply,andrentsforsuchspacehaveincreased.Theuseofthisspaceismulti-faceted.Inadditiontodrivingstoresales,retailersarekeentousethishigh-profilespacetobuildbrandsthroughshowcasingproductstoengagewiththeirconsumersinaface-to-faceinteraction,providingexcellentcustomerserviceandcomplementaryservicestocustomers.Expensivestorefit-outsareacentralpartofthisretailtheatreandbrandbuilding.Asaresult,retailersreportthatonastoresalesbasis,profitmarginsareunderpressure,despitestrongtop-linesales.

However,thestoresareanimportantdriverofsalesacrossthewiderstorehierarchyandalsoonline.Astherecoveryinmostregionaleconomiesgainstraction,someretailersarebeginningtocautiouslyexpandintogood-quality,butlower-cost‘B’locationsthatareabletofeedoffflagshipandmajorstoresandassistindrivingprofitability.Unlike ‘A’ locations,whatconstitutesa ‘B’ location ismuchmorevariableacrossretailersgivendifferencesinproductrange,targetaudienceandpricingstrategies.Asaresultthecostofspaceintheselocationsisunderconsiderablylesspressure,allowingforhigherprofitmarginsforretailerswhoperformwellinsuchcentres.Inaddition,excessspaceinthesestorescanprovidelocalisedfulfilmentopportunities.

Storeportfolioshavealsoplacedasecondaryfocusonpropertiesthatprovideorfacilitatebrandawareness,convenienceandimpulsepurchases.Importantly,thesestoresofferaneasyaccesspointforconsumerstointeractwiththebrand,retrieveknowledgeandserveasacollectionand/orreturn-of-goodspointboughtonline.Again,thefocusisonexceptionalcustomerservice,withanemphasisonconveniencetomaximisetheutilityofaconsumer’stime.

3.3 Purpose and value of the store

The extension and greater complexity of consumer journeys characterising omni-channel shoppingbehaviourhaveincreased,ratherthandiminishedtheroleofphysicalstores.Mostretailersnowrealisethatthephysicalstoreisthecornerstoneoftheiroverallomni-channelretailoperation.ThevaluetothebusinessisnowconsiderablymorecomplexthanamerePOS.Strongsynergiesbetweensaleschannelshavebeenevidencedbyincreasedonlinesalesinmarketswheretheretaileropensastore.Longvaluedbyluxuryfashionretailers,thephysicalstoreisnowalsoviewedbyevenmid-marketretailersasakeytobrandingandshowcasingproducts.Thisspacemustbeexperientialinawaythatestablishestheimageandbrandoftheretailer,whilealsoshowcasingitsproductsinawaythatdrivessales.Whetherthesalethenoccursattheregister,asanonlinesalepickedupinthestore(clickandcollect),asasubsequentonlinesale,asanin-storeonlinesalethroughasmartphone,tabletorkiosk,orasareturn/exchangeofanonlinepurchasedoesnotmatter to themodernretailer.Thestorealsoprovidesa ‘haloeffect’ in the locality,creatingbrandawarenessfromitspresencethatcanpositivelyimpactonlinesales.

Theretailer’sobjectiveistodrivesales,whileestablishingcustomerloyaltyandbrandingfor long-termsuccess.Atitsextreme,certainretailershaveretainedseeminglynon-performingstoresbecauseoftheirimportanceandsynergistic relationshipwithonlinesalesvolumes in thecatchmentarea.Anumberofstudieshaveindicatedthatonlineandin-storesalesbenefitcumulativelyfromanintegratedoperation.16Recognisingthis,manypure-playretailershaveandareopeningphysicalstorestoenhancetheirbrand.17


Most retailers now

realise that the

physical store is

the cornerstone

of their overall

omni-channel retail

operation.

20

The major shopping centre owners in Europe and the U.S. have also fundamentally restructured theirbusinessestomeettheneedsoftheircustomers—bothretailersandconsumers.Thespeedofchangeisimpressive.Giventhatretailandtechnologicalchangeremaindynamic,ownersremainagile.Therearethreeprincipalareasofbusinessrestructuringanddevelopmentfortheseowners:portfoliospecialisation,place-makinganddigitisingthebusinessmodel.

4.1 Portfolio specialisation

Mirroringretailers,thedemandforshoppingcentreinvestmentshaspolarisedbetweenlarge,destinationcentresand,neighbourhoodandconveniencecentres.IntheU.S.,demandisalsostrongforbothtypesofcentres,althoughinvestorssegmentthesetypes.Demandissomewhatdifferent,however,forsecondarycentres and secondary locations with weak performance. While retailers have developed stratifiedportfolios,ownershaverationalisedportfoliosandtendedtospecialiseinaparticularsegmentoftheretailhierarchy.IntheU.S.andEurope,thelargestpublicREITsandlargeinstitutionalinvestorshavefocusedonprimeassetsandhavebeencullingweakerperformers.

InboththeU.S.andEurope,dominantdestinationcentresareparticularlyfavouredbythelargestshoppingcentre owners and investors. In both regions the ownership of destination and experience centres isbecomingincreasinglyconcentratedduetomergersandacquisitionsamongprivateandpublicpropertycompanies,investmentfirmsaswellasaggressivepropertyacquisitions.Thesehigh-qualityassetsdrawfromasubstantialaffluentpopulationandhavebenefittedfromstrongretailerdemand.

Suchownersspecialiseindestinationretailandengagingconsumerswithstimulatingenvironmentsandexperiences,supportedbyoutstandingcustomerserviceandfacilitiesthatmaximisetheutilityandqualityoftime.Inmanagingthesecapital-intensiveproperties,ownersareincreasinglyestablishingarecognisedbrandofownershipforthecentrethroughmoreextensivemarketingeffortsthanwerethenorminthepast.Someownersarecarryingthisbrandingevenfurther,establishinganationalorglobalbrandfortheirportfolioofproperties.

Asecondgroupofownersspecialisinginconvenienceandneighbourhoodschemesisidentifiable.Thesecentresmaybesmallenclosedmalls(morecommoninEurope)thataredominantandwell-locatedintheircatchmentoraccessibleopen-airformatsthatagainseektomaximisetheutilityoftimeforconsumersthroughensuringthattheexperienceoffulfilingconsumerneedsandrequirementsisconvenient,easyandsupportedbyexcellentservice.Thisincludestheco-locationofappropriateservices.Strongercentresare typically owned by public and private companies quite separate from the large destination centreownersandbyotherinstitutionalinvestors.

Beyond the spectrum of experience and convenience, retailer demand for mid-sized centres in Europehasbeenconsiderablylower.Theimpactonpricinghasresultedinlowcapitalinvestmentformanysuchschemes.IntheEuropeancontext,PropertyManagementAnalysis(PMA),asupplierofrealestatedataandanalysisfortheregion,hasreferredtothiscohortasthe‘squeezedmiddle.’(SeeFigure10.)Whilesomeweakschemesincompetitivecatchmentsmaybechallenged,othercentresinstrongercatchmentsthatbenefitfromamoredominantpositionmaysimplyrequirere-positioningwithinthenewretailhierarchy.

4.0 sHOPPING CENTRE OWNERs’ EvOLvING busINEss MODELs

21

fIGuRE 10. ‘squeezed Middle’ schemes Built pre-2005 By refurbishment / redevelopment status

4.2 shift from space-Making to Place-Making strategies

Manyownersrecognisedbythelate1990sthatretailenvironmentsneededtoprovideconsumerswithanexperiencethatgreatlytranscendedtransactionactivity.IntheU.S.,thiswaspromptedbyabove-averagesupply in some areas, renewed interest in high streets or downtowns, and the emergence of lifestylecentres.InEurope,itwasinitiallypromptedbyasocio-culturalconsumershiftfrom‘need’to‘want’andtheappreciationofthevalueoftime.Theevolutionofmulti-,andlateromni-channelretailfurtheracceleratesthisshift.ItalsomadesuchchangeevenmoreimperativeintheU.S.

Insuchenvironments,shoppinghasbecomenotmerelyameanstoanend,butanactivitytobeenjoyedinandofitself,regardlessoftheoutcome.Shoppingcentreownershavefollowedtheleadofsuccessfulretailers, who inspired by Apple, have used their stores as places to entice, excite and connect withconsumers.Asaresult,ownershaveshiftedfocustowardscreatingauniquesenseofplaceandsocialspacethatstimulatesallfivesenses.Thishasmajorramificationsforshoppingcentredesign, includingthescaleandfunctionofpublicspaces.

Customersaredrawn toa retaildestinationby thesocialactivities, ‘edutainment,’ leisurepursuitsandrelated events that it offers as much as by the presence of retailers. This transforms the role of theshoppingplacefromafairlypassivephysicalentitytoanactive,civicentitywithasenseofplacedistinctfromwhatisofferedbyretailers.Retailerswillneedownerstocreatethemarket-placeatleastasmuchas owners need them. By creating a shopping place, not merely shopping space, the owner has theopportunitytoharnessthebrandvaluecreated.

Thisisasignificantshiftinthetraditionalrolesofownersandretailers.Formerly,theshoppingcentreownerprovidedawell-locatedand-designedvenueforappropriateretailers.Theownermanagedthetenantmixtodriveconsumerfootfallandsales.Managementfocusedonunderstandingtheagglomerationeconomicsofco-tenanciesinordertomaximisethepowerofthetenantmix.Asidefromadvertisingcampaignsandperhapsconsumerresearch,theowner’srelationshipwiththeconsumerwasindirect,withretailersbeingresponsiblefordirectlyengagingconsumers(Figure11).

France

United Kingdom

Italy

Germany

Spain

Poland

Unchanged Upgraded To be upgraded

500 100 150 200 250 300 350

SHOPPINGCENTREOWNERS’EVOLVINGBUSINESSMODELS4

Source: Property Market Analysis (PMA) (2015)

22

fIGuRE 11. Traditional shopping Centre Model

Inatransferofresponsibilityfromretailertolandlord,ownersaredirectlyengagingconsumersthroughplace-makingstrategiesthathelptodrivecustomerflowtoretailers.Ownersseektodrawtheir targetaudiencetothelocationalongthecontinuumbetweencivicplaceandsocialspace.Thecreationofa‘civicplace’enablesretailtobebetterconnectedtobroadereconomicandsocietalpursuits.Althoughasenseof ‘social space’ isalso important forconveniencestrategies, itwilldominateexperience-and leisure-orientated retailing. Feelings of ownership and belonging are encouraged through spaces and servicesthat,byenhancingconsumers’well-being,allowthemtotranscendtheirpurchasedecisionandfacilitatediscretionaryspending.Inbothcases,theenvironmentwillfosterasenseofcommunitycohesion.Doingsowillrequireownerstodelivertangibleaddedvaluefortheirshoppers.

Related to this, for many consumers, time is their most valuable resource. Co-locating and deliveringservicesand/orexperiencesthatmaximisetimewillunderpincustomerexperience.Strategies,again,willdifferacrossdifferentcentretypesandcustomerprofiles.Forexample,convenience-ledcentresmayco-locatecivicorothernon-retailserviceswithinanon-coreretailspaceinthecentre,reducingthetimethatcustomersrequiretoundertakechores,aswellasplacingretailnearwhereconsumershavetobe.Equally,leisure-basedshoppingcentreswillneedtoprovidetheconsumerwithanexperiencethatcandelivermorethancompeting leisurepursuits.Thisrequirestheprovisionandco-locationofservicesthataddtothecustomer’ssenseofwell-beingandhappiness(forexample,personalisedservices,centralisedcollectionpointsforshopping,etc.).Figure12attemptstodepictthisevolvingstateofaffairs.

Leasingstrategiesalsoidentifyandcourtretailbrandsthathaveasignificantimpactonfootfall(includingtootherretailers).Thiscreatesahierarchyofcooperative,collaborativeandco-dependentrelationshipsbetweenownersanddifferenttypesofretailers,andamongretailersthemselves.


TRADITIONAL CONTEMPORARY

consumers

Engaging

Socialspace

EnrichingEmot

iona

l

retailers

owner

Provide retail stores,basic services and

maintain public services

Purchase products and services

Provide retail stores,manage centre, provide

and maintain basic public services

Pay rent and service charges

Citizens

OwnersRetailers

Deeper customerrelationships transcend

physical and virtual

Creation of social space and civic place with potential for new

income streams

Synergistic store andcentre response to real-time customer analytics, offering

new B2B services

Sources: RHL Strategic Solutions (2010); Milligan Retail (2010)

23

fIGuRE 12. social space and Civic place

Whilstonceconcentratingonprovidingretailerswithanexcellentspaceinagreatlocationwithsuperbco-tenancies,today’sownersincreasinglycreateavenuethatattractsconsumersandenablestheretailertofullyestablishitsbrand.Progressiveownersandmanagersareadeptatharnessingtechnologytofacilitatetheirobjectives.

4.3 Digitising the business Model

Theevolutionof the roleof technologywithinshoppingcentreownerbusinessmodelsmirrors thatofretailers.Initiallysetupasastand-alonedepartment,usuallywithinthemarketingdepartment,digitalisnowfullyintegratedintoeveryareaofthebusiness.DigitalrunsthroughtheDNAofre-fashionedbusinessmodelsanditsroleandimportancemaybesummarisedinfourinter-relatedobjectives:

4.3.1 Customer Experience

Mostownershaveinitiallyfocuseddigitalstrategiesondevelopingapplicationsandservicesthatgreatlyenhancethecustomerexperience.Thesemightincludeashoppingcentreapp,withorwithoutanassociatedloyaltyscheme.Theaimofsuchapplicationsistocreateacustomerexperiencethatisengaging,easyandconvenient.(Forexample,way-findingappsand/oraugmentedrealityprovideautonomousway-findingforconsumers.)

Equally,theabilityto locateavehiclewithinthecarparkonaninteractivemapand/orpayforparkingby mobile device enhances the customer journey. The appropriate provision of smart retail walls and/or installationof interactivewallsandmagicmirrorswithin themallorwithincertainstores,mayalsoenhancethecustomerexperiencebymaximisingtime.


Sources RHL Strategic Solutions (2010); Milligan Retail (2010)

Well-BeingSelf Actualisation – I am what I feel

Discernment – I am what I own

Social – I am one of you

Safety – I am comfortable

Basic Needs

Premium Brandsand Services

Fashion Trends, CosmeticEnhancement, Social Interaction

Basic Wardrobe Staples, Personal Grooming, Child Care

Food, Health, and Household Chores

Belo

ngin

gPe

rson

alis

ed

Serv

ices

, Re

stau

rant

sLa

test

Bra

nds,

Beau

ty C

linic

s, C

afes

Beau

ty T

reat

men

ts,

Kids

Clu

b, G

ym

Clic

k &

Col

lect

, Ret

urn

Serv

ices

;

Hou

seke

epin

g Se

rvic

es;

Oth

er N

on-R

etai

l Ser

vice

s

Social Space

Civic Place

24

4.3.2 Enhance sales

Shopping centre apps that provide customers with readily accessible information have been quicklyrecognisedasanimportantsales-drivingtool—forexample,byrewardingcustomerswithafreeadditionalhourofparkingorwithacouponforarefreshment.Similarly,dwelltimecanbeextendedthroughretailers,who can collaborate with owners to distribute vouchers or push a marketing promotion. Most ownersstresstheimportanceofgivingtheconsumerautonomyintheselectionofofferstheyarewillingtoreceivesothattheyarenotoverwhelmedbycommunications.

4.3.3 Customer Insight

Ownersareexperimentingandinvesting innewtechnologiesandservicesthatwillhelpthemtobetterunderstandtheircustomers’valueandanticipatetheirwantsandneeds.Traditionalmethodsofresearchhavenotbeenabandoned,buttheirlimitationsarebecomingmoreapparent.Thesetoolshavetypicallybeencustomercountersatmajorcentreentrances,atentriestostores,inhotspotswithincentres,interceptinterviewsandfocusgroupsessions.Establishedsystemsforcountingshoppersatentrieshavenumerousaccuracyproblems.18Mostcountersprovidenoinformationonthequalityofshoppers,theirtravelpatternsordwelltime.Interceptinterviewsandfocusgroupsessionscanprovideconsiderablymoreinformationonshopperidentityandpatterns,butareexpensiveandconductedinfrequently.Inaddition,theytendtooverweightshopperswithtimeontheirhands.

Digitalsolutionsarenowbeingexaminedtobuilduponthesetraditionalresearchtools.Mirroringretailerstrategies,innovativeownersaretrackingconsumersusingavarietyoftechniquesincludingWi-Fi, beacons,andGPS/mobile devices(celltowers).19Thusfar,thevarioustechnologiesallhavelimitationsregardingtheinformationgatheredasthisindustryofvendorsisstillinitsinfancy.However,therangeofdigitalsolutions,aswellasthecoverage,accuracy,sophisticationandcapabilityofexistingapplications,isexpandingrapidly.

Wi-Fi trackingisusedtotrackcustomerflowandgenerateheatmapsinrealtimeacrossthecentre.Beinglinked toan individual’sweb-enabledphonealsoallowsdwell times tobecalculatedand isparticularlyusefulforunderstandingthecontributionandpeeloffratesofanchorstoresandothermajorretailerstothecentre.Alimitationofthetechnologyatthispointisthatitisonlyaccuratewithina7-metre/22-footrange,whichmeansdataoncustomerjourneysandpeel-offratesfromthecustomerflowofoneretailertootherretailersinthecentreisnotgranular.

Beacons provide greater accuracy. Initially quite expensive, the technology is becoming increasinglycosteffective.Dependingon theconfigurationof thebeacons, thesedevicesarecapableof trackingaweb-enabled phone regardless ofwhether Wi-Fi is turned on.The greater trackingaccuracyallows fortherelationshipsbetweenretailerstobeanalysedandmeasured,withthenetcontributionofindividualretailers to customer flow being quantifiable. This allows owners to identify those retailers that reallyaddvaluetoacentreandthosethatbenefitfromit.GenerallyintheU.S.,shoppersarenotautomaticallytrackedandthelegalperspectivecanvaryacrossstates,withdigitaltrackingrequiringcustomerstoopt-in. (Thesamesituationcanbeobservedbetweencountries inEurope.)This could include the shopperdownloadingtheretailer’sorshoppingcentreowner’sapp.

EachmobiledevicehasauniqueIPnumberwhichallowsownerstoidentifycustomerretention/loyaltyrates,frequencyofvisitsand,whererelevant,whethertheyshopatotherdestinationswithintheowner’sportfolio.Trackingcanexplainmovement,butprovidesnoinformationaboutcustomersortheirspendingpatterns.Wherecustomerswithsmartphonesopt-intoashoppingcentresystem,perhapsbyacceptingfreeWi-Fi,or


25

downloadinganapporotheroffer(suchasagreeingtobepartofaVIPclub),ownersareabletogainfurthercustomerinsightbyaskingforpersonalinformationona‘givetoget’basis.Thesebeaconcapturesallowanownertodevelopamuchbetterunderstandingofconsumersandtheirinteractionwiththecentre,andstarttoidentifyapreciseconsumercohorttotarget.

GPS/mobile technologiesprovidemuchthesameinformationasWi-Fibutcantrackshopperdemographicson an aggregate basis. However, most vendors rely on only one telecom service for this tracking and,therefore,coveronlyaportionofshoppers.Inadditiontocapturingconsumerflowwithinacentrefromtriangulationofdeviceswithcelltowers,additionalinformationastowhereconsumerswork,liveandwhereelsetheymightshopcanbeprovidedatanaggregatelevel.Thisassistsindevelopingsocio-demographiccustomerinsights.

Websitecapabilitiesdevelopedbyafewownersallowsmallerretailerscost-effectiveaccesstoatransactionalonlinemarketplace,andprovideconsumerswithaccesstostoreswithinthecentresona24/7basis.20

Theperceivedvalueoftheseplatformshasalwaysbeenlessaboutthesalesvolumesgeneratedandmoreabouttheirmarketingvalue.First,ownersdevelopveryvaluableoperationalknowledgeofandexpertisein both online enterprise and customer relationship marketing. Second, when a portfolio is relativelyhomogeneousinscaleandpositioning,acompanycanmoreeasilybuildaconsumerbrandwithappealacrossallitscentres.

However,emergingtrackingtechnologiesgreatlyincreasethevalueoftransactionalwebsitestoowners,byfurtheringtheunderstandingoftheomni-channelbehaviourofcustomersandmostimportantly,theirspendingpatterns.Linkingthistoshoppingcentretrackingdataallowsowners—likeretailers—tobegintoidentifythenotional20%ofconsumersthatgenerate80%ofprofit.

4.3.4 Retailer Relationships and Revenues

Thecustomerinsightderivedisalsovaluabletoretailerswithinthecentreandthoseconsideringopeningastore.Mostownersareusingtheiranalysistostrengthenrelationshipswithretailers,andasatooltoexplainandsupportassetmanagementinitiatives.Understandingsynergieswithotherretailersandtheirrelativeperformancewithinthecentreisvaluableknowledgetotheowner.Anumberofownerswillcollaboratewithretailersanddevelopmarketingplans,includingdigitalstrategies,toremedychallenges.Currently,mostownersdonotchargeforthisservice.However,somearebeginningtocapitaliseontheirknowledgebase,customerengagementandmarketingexpertiseandaredevelopingvalue-addedcustomer insightandmarketingservicesforretailers.Suchservicesprovideanewrevenuestreamandthecapabilitylowerstheriskandheightensthebrandvalueofthecentre.


The perceived value

of these platforms

has always been

less about the sales

volumes generated

and more about

their marketing

value.

26

Throughout Europe and the U.S., macro trends, including and facilitated by technological change, aretransformingtheshoppingcentreindustry.Thecreationofplacehasusurpedthedevelopmentofspaceforbothownersandretailers.Thetransformationofretailingfrommulti-toomni-channelhasmadethischangeevenmoreurgent.Thisshiftinemphasisisalsochangingthestructureofleasestrategiesinregardto tenant mix, lease length and income security, and in the development of services and new revenuestreams.

5.1 Tenant Mix

Shoppingcentreownersandmanagersinterviewedexplainedthatomni-channelretail,inconjunctionwithwiderstructuralchange,ishavingasignificantimpactontenantmixstrategies.Suchchangeisevidentacrossallcentres,althoughtheimplicationsfortenantmixvarywiththetypeofcentre.Althoughthesechangesareneitherrecentnorsolelydrivenbytechnologicalchange,thegrowthofomni-channelretailingisacceleratingthetrend.

All markets report a sharp increase in F&B as a proportion of gross leasable area (GLA) in centres. TheproportionofGLAdedicatedtothisuseinEuropeanshoppingcentreshasalreadyincreasedfrom11%to15%,withnewdevelopmentsandrefurbishmentsindicatingafurtherriseto20%.IntheU.S.,higher-qualitymallsandlifestylecentresareatthehigherendofthisrangeandopen-aircentresatthelowerend,andbotharegrowing.ThisincreasingallocationofspacetoF&Bisveryimportanttodestinationandexperiencecentres.Untilrelativelyrecently,theroleofF&Bwithinashoppingcentrewastoassistinextendingdwelltimebyenablingconsumerstorest,re-fuelandre-charge.Currently,theF&Bofferisbeingusedasamajordriveroffootfalltodestinationandexperiencecentres.Asaconsequence,itisnotmerelythequantityofspacethathasaltered,butalsotherangeandhigherqualityofoperators.

ShoppingcentreownersandmanagersareenhancingtheF&Bcomponentofthecentretobuildbrandandengagetargetconsumers.Traditionalfoodcourtsarebeingreplacedorsupplementedwithhighqualityfastcasual,markethallandupscale full-service localand regionaloperators.Therehasbeenageneral shift inleadingedgecentresawayfromgenericnationaltomorelocaland‘authentic’outlets.AlthoughF&Boperatorspreferlonger-termleasesrangingfrom10to15years,anumberofownersindicatedthattheyareretainingasmallproportionofF&Bspaceonshort-termleasestoprovideamoredynamicofferthatkeepsthecentre’sconsumerappealfresh.

Specialty leasinghasbecomeamuchmoreprominentcomponentofacentre’sleasingstrategythaninthepast.Historically,itsfocuswasoncartsandfindingtemporaryorseasonalretailerstofillotherwisevacantspace.Today,itisbecomingamorecentralstrategytoattractunique,start-up,alternativeor‘pop-up’retailers(andsometimesbrandedretailers)aspartofitsdirectivetoimprovenetoperatingincomeandmerchandisingvarietythroughfee-based,short-termlicensingofspacewithintheshoppingcentre.

Whileownersaregenerallylaunchingthisinnovativeretailerstrategy,third-partyintermediariesarealsoemerging,suchasAppearHereinEuropeandStorefrontintheU.S.Bothcompaniesprovideinnovativesolutionsforretailspace,providingstart-upconceptsandpop-upstores.Someownershavealsocreatedco-workingspacewithinthecentre,rentingsmallworkareasandconferenceroomstobusinesses(includingretailers,entrepreneursandstart-ups),furtherestablishingasenseofplace.Thisisalsoanopportunitytonurturetheretailersofthefuture.

Inallcasesofspecialtyleasing,amorecontemporaryviewisbeingunderstoodoftheworthofretailspace,recognisingtheinherentvalueoftheadvertisingbillboarditrepresentsandhowthisconsumerinterfaceopportunitycomparestobrand-buildingspaceelsewhere,includingonline.

5.0 CHANGING LEAsE sTRATEGIEs

specialty leasing

has become a much

more prominent

component of a

centre’s leasing

strategy than

in the past.

27

Auniqueandexperientialstrategyisalsoevidentwithinoverallretailmixstrategies,withownersadoptingmoredynamicleasingstrategies.Eveninexpensivehigh-qualitycentres,ownersaredevotingasmallbutsignificantpercentageofspacetowardsembryonicretailers,includingnewandtestconceptsfrommajornationalandinternationalbrands,localestablishedindependentretailersand/orpop-uporstart-upshopswithaviableandscalablebusinessplan.Pop-upshopsareusedtocomplementratherthancompetewithexisting retailersandcanprovidea central attractionuponwhichwider retailerandcentremarketingstrategiescananchortofurtherenhanceappeal.

WithinEuropeanconvenienceandneighbourhoodcentres,highlyregardedlocalprovenanceretailersarebeneficialtocustomerflowandtoincreasingcustomerengagement.Pop-upshopsfromaspirationalorinnovativebrandsalsoprovidetheopportunitytocreateeventsthatmaybetiedintowiderlocaland/orregionalinitiatives.IntheU.S.,neighbourhoodandcommunityretailercentresaregenerallyanchoredbyamajornationalorregionalgrocer,whiletheshopspacehaslongbeendominatedbylocalretailerswhotargetlocalneeds.Inresponsetothislocaldemand,anincreasingallocationisbeingmadetoF&Btenants.

InbothEuropeandtheU.S.,destinationandexperiencecentresarealsoincreasingallocationstoleisureandentertainment.Attractions, includingpop-upvarieties, arebeingused todrive footfall andextenddwelltime.Similarly,certainspecialistretailersthathaveastrongbrandandinnovativeentertainingstoreconcept,yetlowaffordability,arealsorecognisedasprovidingavaluablepointofdifferenceforcompetingcentres. Although the affordable rent level of such stores may be low, their positive contribution tocustomerflowasaleisureattractioninadditiontobeingaretailerisrecognised.

Theprovisionofmorefavourable leasetermsforretailersthatgenerateverystrongconsumerfootfallisnotnew.Anumberofownerscommentedthatthevariationinrentalagreementsaccordingtobrandstrengthisincreasing.

However, the increased sophistication of consumer tracking within centres is also improving owners’understandingofthecontributionofindividualretailerstothecentre.Ownersandconsultantscommentedthat a number of retailers that benefit from attractive lease terms do attract strong footfall to theirstores,butcustomeranalyticssuggestthatthereislittleevidenceofsynergywithotherretailersacrosstheshoppingcentre.Moregranularanalysisofcustomerflowsallowsownerstobetterunderstandthesynergisticvaluethatindividualretailersbringtoacentreinadditiontotheiranalysisofdirectsales.

Place-making is at the heart of re-engineered shopping centre strategies and owners are integratingservicesintothetenantmixtodeliveronexperienceandconvenience.Indestinationcentresthisoftenincludes theco-locationofgymnasiums,spas,medicalclinicsandnon-surgicalcosmeticclinicsaswellascustomerservicessuchascollection lockersorcentralisedshoppingservices thatareusedtohelpcustomersmaximisethequantityandqualityoftime.

IntheU.S.,ownersofopen-aircentresarealsoaddingamenitiesincludinggatheringareas,increasingF&Bincludingpopularfastcasualdining,coffeebars,fitnesscentres,anduniqueandinterestingretailers.Insomecases,fashionretailerswhotraditionallylocateinmallscanbeattracted.IntheU.S.,powercentres/bulkygoodsretailparks,whichhistoricallyhavebeenafunctionalgatheringofdiscountretailers,areinsomecasesbeingsupplementedwithalifestylecomponentand/orgrocerystore.ThelifestylecomponenthasapleasantpedestriangatheringareasurroundedbyF&B,cinema,apparelandotherspecialtyretailers.

InEuropeanconvenienceandneighbourhoodcentresandinU.S.neighbourhoodandcommunitycentres,servicesarearisingproportionoftheretailmix,includingopticians,dentists,drycleaners,medicalclinicsandpersonalgrooming/beautyclinics. Inaddition,anumberofownersareexperimentingwiththeco-location ofpublic services asameans ofplacing the shoppingcentreat theheart of the civic centreorcommunity.Forexample,theco-locationofmajormedicalhealthfacilities,governmentoffices,adulteducationorpubliclibrariesisbeingtried.

CHANGINGLEASESTRATEGIES5

Within European

convenience and

neighbourhood

centres, highly

regarded local

provenance retailers

are beneficial to

customer flow

and to increasing

customer

engagement.

Place-making is

at the heart of

re-engineered

shopping centre

strategies and

owners are

integrating services

into the tenant

mix to deliver on

experience and

convenience.

28

Again,theseservicesassistindrivingfootfallandsimplifyingcustomers’dailylives.Throughco-locationofservices,convenienceretailcanhelptocreatetimeefficienciesforconsumers,therebyreleasingaprizedcommodityforcustomers.

MorechallengedlargerneighbourhoodcentresinEuropearealsoexperimentingwithinnovativeretailandmanagementconcepts.Forexample,newretailconceptssuchasInternetstoresofferalimitedproductinventoryintermsofsize,coloursandrange,butallowconsumerstoexperiencetheproductandgainadvice before purchasing online from facilities within the store, for store delivery. Other innovationsincludetheprovisionofagroceryanchorordepartmentstorebywayofanInternetwall,withassociatedspaceformarketingandfulfilment.

5.2 Lease Length, security of Income and security of Tenure

LeasestructuresarequitedifferentintheU.S.andEuropeandarethereforediscussedseparately.

5.2.1 u.s. Lease structure

Leasestructureshaveevolvedrelatively little intheU.S.overthepastdecadeormore.Stronganchororjunioranchorretailersgenerallynegotiate10-yearleaseswithoptionstorenewthatcanextendto30yearsormore.Aretailerinastrongbargainingpositionwillbeabletoobtainoptionstorenewatafixedrate,baseduponperiodic inflationarybumps.Anowner ina relativelystrongnegotiatingpositioncanresistsuchfixedoptions.

Themajorityoftenantsseek5-to-10-yearleasesinmajordestinationcentres,withinflationaryadjustmentsovertheleaseperiod,sometimeswithoptionstorenew.Apercentageoroveragerentisaddedtothebaseratesothattheownercancapturebetter-than-expectedperformancefromtheretailer.Thetermislargelydictatedbythecostoftenantbuild-out,whichisusuallysharedbytheretailerandowner,andisneededforamortisation.

Sincebuild-outshavebeenincreasinglycostlyasretailersestablishtheirbrandidentityandprovideanexperience, there has been little pressure from retailers to shorten the lease. However, if they have anegotiatingadvantageovertheowner,particularlyinanunprovenlocation,theretailermaysuccessfullygeta‘kick-out’clause,allowingthemtovacateiftheirsalesvolumedoesnotreachaspecifiedlevelbyatargetdateorifappropriateco-tenanciesarenotmaintained.

When an owner is taking a chance on a new retailer or one with poor credit, shorter-term leases arecommon.Asaresult,tenantbuild-out isasminimalaspossible. Inneighbourhoodorcommunityretailcentreswheresmalllocalretailersarecommon,leasetermsaretypicallythreetofiveyears,withlongertermsfornationalandanchortenants.


29

5.2.2 European Lease structure

InEuropeanmarkets,leaselengthshavebeentrendingevershorter,atleastinrespectofsecurityofincome.Inmarketswherethe lease length isnotprescribed in law, thetermwillbetheproductofanegotiatedmarketcontractthatisdrivenbytheunderlyingstrengthofdemandandsupply.Thistrendwilldifferacrossmarkets,betweencentresandtemporally.InmostEuropeanmarkets,retailershavearighttorenewtheirleaseonthesameterms,althoughincertainmarketsitispossibletocontractoutofsuchrights.

Currently,retailersaregenerallyseekinga10-yearleasewiththebenefitofaone-waybreakoptionatyearfive,unlesstheprevailinglandlordandtenantlawinacountryismorefavourableasforexampleinFrance,wheretenantsmaybreakeverythreeyears.F&Boperatorsbreakthistrendandareseekingtolengthenleasestoaminimumof 10years,upto 15.Thisreflects thehighratiooffit-outcosts to turnover,whichrequiresamortisationoveralongerperiodoftime.Majorretailersusuallyamortisetheirfit-outcostsovera7-to-10-yearperiod.Giventhis,someownersconsidertherequirementforanearlierleasebreak,whichhasadisproportionateimpactonacentre’ssecurityofincomeprofile,tobesomewhatgratuitous.

However,retailersexplainedthatthepaceofretailchangerequiredgreaterbusinessagilityandthis isaccentuatedwheretheyareunabletoprojectthecostofstoreswithanycertaintybeyondtheinitialterm.Forexample,rentsmaybesubjecttoreviewtoopen-marketrent,ratherthanasteppedindex-linkedrise.

The greatest impact of the digital era for retailers has been on pricing transparency, giving shopperseasy access to competitive pricing information. This has squeezed margins for many retailers. Rentalaffordabilityismoresensitivetorisingcostsand/ordecliningsales.Anumberofretailerssaidthattheywerepreparedtocompensatefortheadditional incomeriskgeneratedbybreakclauses.Alternatively,havinggreatercertainty,bywayofcappedservicechargesand/orsteppedrentalincreases,wouldreducetheneedforabreakoption.Similarly,anumberofretailersalsosuggestedthathavingahighercomponentofvariablerentandlowerbaserentwouldsharetheriskofanyweaker-than-expectedperformanceinregardtoanewlyopeningcentre.

Owners provided a different perspective, arguing that the capital costs and funding requirements ofdevelopment and refurbishment are upfront commitments. They suggest that five-year leases are tooshort,giventhatfinancingrisksareunderwrittenbytheincomesecurityprovidedbyretailleases.Arealestatefundersuggestedthatprevailingloan-to-valueandrequireddebt-servicecoverageratiosallowforamarginallyhigherproportionofvariableincomewithoutimpactingfinancing.

Anumberofownersofexperientialschemescommentedthattheywouldwelcomeshorterleasesforaproportionofthetenantmix if theabilitytoterminatethe leaseweretwo-way.Theyarguedthattheyrequiregreateragilitytoeffectivelymanagethetenantmixinafast-pacedretailworld,characterisedbyfickleconsumersandever-shorterbrandlifecycles.

Indeed,anumberofownersareviewingthe incomeprofileof thecentreasaportfolioandarekeentooptimiseriskagainstretainingoperationalflexibility.TheybalancethelongersecurityofF&Bretailersandthemid-termsecurityofmajorsub-anchorsagainsttheshorterleaseprofileofmoreemergentorshorterlifecycleretailers,butthisoperationalflexibilityrequiresretailerstoforegosecurityoftenure.

Discussionswithretailersindicatethattheyaregenerallyreluctanttorelinquishsecurityoftenureinitsentirety.However,mostretailerswouldconsider linkingleaserenewaltoaperformancebenchmark,asisthecaseforfactoryoutletcentresinEurope,particularlyifthevariableincomecomponentofrentalmodelsweregreater.Anumberofretailerscommentedthatincertaincircumstances,thecentreandtheretailersitaccommodateswouldbenefitfromtheabilitytoterminateapoorlyperformingretailerinanotherwisestrongproperty.


However, most

retailers would

consider linking

lease renewal to

a performance

benchmark, as is

the case for factory

outlet centres in

Europe, particularly

if the variable

income component

of rental models

were greater.

30

5.3 New services and Revenue streams

Most owners in the U.S. and Europe are developing new services for both retailers, who remain theirprimarycustomers,aswellasforconsumers,inordertoadapttothechangingrequirementsofanomni-channelera.Theseservicesmaybebrokendownintothreeareas:thosewhichfacilitatefulfilment;thosewhichgreatlyenhancethecustomerexperience;andthosethatleveragedigitalinfrastructuretogreatlyenhancecustomerinsight.Eachhasthecapacitytogenerateadditionalincomestreamsforowners.

Fulfilmentofdigitalretailpresentsopportunitiesforarangeofnewservices.Ownersareconsideringorareprovidingclick-and-collectlockersand/orcentralisedfulfilmentlocationsintheshoppingcentre.Theseservicescanprovideanadditionalrevenuestream.Someownershavealsorecognisedthatsomeretailersrequiregreaterstorage/logisticsspaceandarecreatingsuchspaceinotherwiseunderutilisedareasoftheasset.Aswellascreatinganewrevenuestream,thecreationofsuchfacilitiesreducestheriskofretailersexpandingstockroomsattheexpenseofsalesspacewithinthestore,therebyprotectingtheasset’svalue.

Someownersareenhancingtheexperienceforthecustomerbydevelopingadigitalmarketplaceforretailersas a transactional website, through sales promotions and push-and-pull marketing delivered through adedicatedapp.Thesaleofgoodsthroughwebsitesprovidesaclick-throughsalesrevenueandsomeownersareseekingthesameforsalesachievedthroughmarketingpromotionsonotherdevices.Thisisoccurringatapointwhensomeconsumersareoverwhelmedbytheexpandingnumberofappsontheirsmartphones.Asingleapppromotedbytheshoppingcentrehelpscustomerstocurateandmanagemultipleretailinterfacesmoreeasily.Mostownersstressedtheimportanceofdesigningshoppingcentreappsthatgiveconsumerstheautonomytoselectwhichretailerstheywishtoengagewithandwhattypeofcommunicationandofferstheyareinterestedinreceiving.

Ownersareleveragingtheirinvestmentsindigitalinfrastructuretodevelopmoresophisticatedconsumeranalytics.Mostownersareattheearlystagesofharnessingtheirdataandareprimarilyusingittodevelopnewperformancebenchmarksforindividualcentresandacrossportfoliostoinformtheirowndecision-makingandassetstrategy.Whererelevant,performancebenchmarksaresharedwithretailersinaneffortto assist their understanding of the customer opportunity, their relative performance, and to improvefuturesalesperformance.

Currently,ownersdeliverbaselineanalyticsaspartoftheirowncustomerservice,butthereisalsothepotentialtodeveloprevenuesfromadditionalresearchandmarketingservicesstemmingfromcustomerinsightcapabilitiesforexistingtenants,potentialtenantsand,complementarybusinessesandservices.Todate,mostownerslimitcommercialisationoftheircustomerinsightanddigitalinfrastructuretodigitaladvertisingmedia,whichcanresponddynamicallyinrealtimetothecustomeropportunity.


Owners are

leveraging their

investments

in digital

infrastructure

to develop more

sophisticated

consumer

analytics.

31

Asmentionedearlier,bothownersandretailersthroughouttheU.S.andEuropearebeingchallengedtobetterunderstandthevalueofstorespacegiventhatthetraditionalmetric,in-storesales,isnolongeran accurate proxy of a location’s productivity. Given that consumers use multiple touchpoints in theirshoppingjourneyandthatsalesoccuracrosschannels,thisissueisofincreasingimportance.

6.1 Negotiating Process

Estimatesofastore’srentalvaluewithinshoppingcentresarestillpredominatelybasedontraditionalapproaches.Retailersdetermineanaffordablerentbasedupontheresidualoftheirsalesprojectionsforthestore,lessoperatingcostsandatargetprofitmargin.Thisleavesaresidualthattheybelievetheycanaffordtopayforrent.Storesalesestimatesarebasedonanassessmentofthevalueofthecustomeropportunityusingproprietarycustomerinsightsandstorecatchmentanalyses.

Theownerand/oritsleasingmanagerswillidentifyseveralretailersthattheybelievewouldbestbenefitfrom a particular location. For existing centres, leasing managers will understand the performance ofcomparable retailers within the centre and in other centres for which they have lease information. Inaddition, they will derive the rent-to-sales ratios of the target retailers in similar centres and alsounderstand theoccupancycosts (rentpluspass-throughexpensesandamortised tenant improvementcosts)thiscategoryofretailercanbear.

Leasenegotiationsarelikelytobebasedontheseassessments,withtheowneralsoconsideringthevalueoftheretailertogrowingthewidercentre’smarketshareofspendinginthecatchment.Equally,retailerswillconsidercompetitivecentresaswellasanypotentialsalescannibalisationof theirexistingstores.Negotiationsproceedfromthesefactors.Theevolutionofomni-channelretailingisplacingconsiderablestressonthismodel.

Intheemergingomni-channelworld,retailerswillneedtodeterminetherentthataspacejustifies,basedonunderstandingthestore’soverallcontributiontothebottomline.Thisshouldincludebothin-storesalesandthecontributionofthestoretoonlinesales.Thisisimportantindeterminingsupportablerentatahighlycompetitivelocation.

Owners and leasing managers are suffering from an absence of important information regarding thecontributionofthestoretonon-storesales,whichwouldhelpthemassessthetruevalueofaretailspace.Lookingforward,rentmodelsandperformancemetricswillevolvetocapturetherentalvalueofstoresmoreeffectively.Thisevolutionmaybesupportedbynewmetricsofcustomers’shoppingbehaviour,astheaccuracyandcapabilityofdigitalsolutionsincrease.

6.2 Current Rent Models

Whileconventionsvarybetweenandacrosscountries,rentalmodelsforcapturingthevalueofastorehaveremainedbroadlyunchangedsincetheadventofthedigitalera.Internationally,abaserentistheprimarycomponentofrentalincome.InboththeU.S.andcontinentalEurope,anadditionalvariablerent,baseduponaretailerachievingacertainsalesthreshold,isadded.Thisisgenerallyknownasturnover, overageorpercentagerents.

6.0 RENTAL CAPTuRE

Looking forward,

rent models and

performance

metrics will evolve

to capture the rental

value of stores more

effectively.

33

2.retailers in the U.s. and Europe are still experimenting with multiple elements of their omni-channel business model.Bysomeestimates,only35%ofretailershaveaplantoimplementtheiromni-channelmodel,suggestingthattheindustrystillhasalotofworktodotosuccessfullyintegratethefivekeydimensions(asseeninFigure13)totheseoperations:

•distribution;

•customerinsight;

•inventorytrackingandmanagement;

•single-brandexperienceacrossmultipleplatforms;and

•accounting.

Retailbusinessstrategistssuggestthatnotoneretailerhassuccessfullyaccomplishedallfivedimensionsandthateventhemostadvancedarestillworkingonatleastonecoreaspectofomni-channel.

fIGuRE 13. 5 Key dimensions to omni-Channel strategy

3.retailers are not yet able to isolate the contribution of the store to sales across multiple touchpoints.Arecentglobalsurveyofcross-channelretailersindicatesthat57%ofretailerscurrentlyrunseparateprofit centres for in-store and online, although this is rapidly changing.22 Some 23% have alreadymergedoraremergingonlineandin-storebusinessandaccountinglines.Geo-codingorgeo-fencingispreferredby18%,withallsalesattributedtopre-definedgeographiclocations,usuallyanchoredtophysicalstoreportfolios.Wherethesphereof influence ‘haloeffect’ofstoresoverlaps, thesalewillbeapportionedbetweenlocationsusinggravitymodels.Afurther5%allocateaccordingtocustomerloyalty. To this end, the methodology is very similar to that conventionally used to define shoppingcentrecatchmentandspendingprofiles.Whiletotalsaleswithinageo-fencedareamaybeanchoredtoastore,theywillincludepureonline,clickandcollect,non-storemobile,in-storemobileinadditiontosalescapturedin-storeatthePOS.Retailersrecognisetheyneedtobetterunderstandthestore’scontributiontothebottomline,butthisisclearlyaworkinprogress.

4.some owners feel that it is premature to consider developing new lease structures to take account of omni-channel business models.WithretailersstillimmersedintheintegrationoftheirplatformsandwithpoorPOSdata, it isdifficulttodevelopnewmodels.Nevertheless,someinterimstepsarebeingtaken.IntheU.S.,therehasbeenanincreasingemphasisonhigherbaserents,giventhedifficultyin

RENTALCAPTURE6

Distribution

StockManagement

CustomerInsight

Single BrandExperience

Accounting

34

measuringsales.Someleasingmanagershaveattemptedto includeleaseclausesthatcountvariousonlinesalesthatcanbeattributedtothestoreintheirreportedsales.Thishasbeenmetwithlimitedsuccess thus far, particularly since most retailers’ POS systems do not measure these related sales.Nevertheless,thereappearstobeabroadunderstandingamongownersandretailersthatthestoreiscentraltotheconsumerjourney,whetherornotthetransactionoccursin-store.

6.4 Capturing store value in an Omni-Channel World

The fundamentals underlying the rental value of a store have not changed. Rental values reflect theoperationalvalueof thestore, thevalueof thecustomeropportunityandenhancementof thestore’sbrandwiththoseconsumers.Historically,thisvaluehasbeencapturedbythesalesgeneratedthroughthatphysicalspace,withrent-to-salesratiosusuallyemployedtoexpressthestore’scontributiontotheretailer’sbottomline.

Thegrowthoftheretailer’sdigitalplatformisfundamentallychangingthestore’svalue.Itisempoweringconsumers,resultinginamuchmorecomplexcustomerjourney.Thestoreisnowoneofanumberofsalesplatformsthroughwhichtheretailercanengage,enticeandtransactwithconsumers.

Whatmakesdistinguishingthevalueofthestoreplatformsodifficultisthatconsumersareinteractingwithmultipletouchpointsacrosstheseplatformsforanyonetransaction.Achievingthesaleinthemostappropriatewayiswhatmattersandrequiresadynamicapproach(SeeFigure14).

fIGuRE 14. stores are the Cornerstone of omni-Channel retail

RENTALCAPTURE6

Store Contribution

Sales

‘Halo’

BrandShowcase

Fulfilment

35

The role of the store varies depending on the consumer, by mood and according to the purpose of theshopping journey. This is recognised in retailers’ store portfolios, with individual stores tailored to bestmeet their dominant functions within a particular location. For example, stores in the largest and mostdominantdestinationandexperiencecentresareusedtoshowcasethebrand’svaluesandproducts,andtomeaningfullyengagecustomers inthebrandexperiencethroughretailtheatreandrelevantcustomerservices.Thisshowcasinggeneratesbrandvalueforfutureorrepeatbusiness,inadditiontoimmediatesales.

Storeswithinneighbourhood,communityoredge-of-townretailcentres/parksareoftenconcernedwithconvenienceandattentive,yetefficientcustomerservice.Nevertheless,evenwiththesemoreconvenience-orientatedcentres,ownersareestablishingasenseofplaceandcustomerexperience.

6.4.1 Click and Collect

Integratingtouchpointsseamlesslyacrossthecustomerjourneyispivotaltoomni-channelsuccess.Clickandcollecthasbecomeanimportantroleforastore.Discussionswithownersandretailerssuggestthatclick-and-collect salesareamongst themostcomplexandcontentious in termsofvalueattribution tothestore.Usuallydefinedasasalethatistransactedonlineandguaranteedtobeinstoreforcustomercollection,click-and-collectsalesarenotusuallyallocatedtostoreturnoverwithinthetermsofexistingleaseagreements,althoughitemsthatarereservedonlineandtransactedin-storenormallyareaccountedforwithinthestorePOS.

Someownersrecognisethatretailerswithastrongomni-channelbusinessthatuseclickandcollectasasignificantfulfilmentoptioncanbeadriveroffootfallandincrementalsalestothecentre.Discussionwithretailersindicatedthatahighproportionofconsumerspickingupapre-ordereditemfromastorepurchasedanadditionalitemin-store,withthepercentagerangingfrom20%to50%ofsuchcustomersdependingontheretailbusiness.Anumberofretailersfurthercommentedthatindividualswhodomakeanadditionalpurchasein-storetypicallyspendover50%morethanthecostoftheoriginalitem.

Conversionratesarehighfortworeasons.First,theconsumerenteringthestoreisalreadyacustomer.Second,theretailerusesmerchandisingwithinthestoretointerceptandengagethecustomerinadditionalproducts.Retailerswithastrongclick-and-collectchannelbelievethatthefootfallandincrementalsalesgeneratedfortheshoppingcentrerepresentanetbenefitcapturedatthestore’sPOS.

Anumberofowners,especiallyofdestinationcentres,contendthatthecontributionofthestoretotheretailer’sabilitytofulfilonlinecustomerordersshouldberecognisedandthatthesaleshouldbeattributedtothestorewhenthestoreiscontributingtothatsale.Retailersgenerallyresistthisapproachandsuggestthattheywouldsimplyshiftthepointofdelivery.Someretailersalsoarguethatsincetheyhavenotyetintegratedtheirinventorysystems,theyarenotyetseeingcostadvantagestoclickandcollect.However,thereislikelytobeamiddlegroundforacoupleofreasons.

First,there is currently little cost advantage to retailers from click-and-collect fulfilment relative to home delivery. This isdue to the fact thatvery few retailershavean integratedonlineandoutletstockmanagementsystemandevenfewerareabletofulfilonlineordersthroughstockpickingwithinthelocalstore.Thus,therearenocostsavingsforfulfilmentfromclick-and-collectoptionstodate.However,thisisanareaoffocusforretailersastheyconcentrateonturninggrowthindigitalsalesintoprofitandin deriving additional sales from consumers collecting from the store. Thus, store fulfilment will soongenerateatangiblecostsaving.

Second,the alternative collection point to the store itself is unlikely to be cost free.Forexample,inanefforttoensuredeliveryintherightplace,alarge-formatEuropeanretailersoughttocreateacollectionpointatmajortransporthubsinFrance.Theleaseagreementfordeliverywasbasedonapercentageofturnover.Theturnoverratewasmuchlowerthanthatusuallyagreedforstoresalesinshoppingcentres.

RENTALCAPTURE6

36

Thisexamplesuggeststhatownersandretailerscanfindcommongroundastotheaccountingand/orvalueofclick-and-collect sales. Improved inventorymanagementsystemswill accelerate this,enablingretailerstoderivesavingsfromusingthestoreforfulfilment.However,itisunlikelythatclick-and-collectsaleswillbecountedatthesamerateasin-storesales.

6.4.2 Returns

Anotherfundamentalroleofastoreintheomni-channelworldisinacceptingreturnsfromonlinesales.Bothownersandretailersappeartobeinagreementthatsalestransactedonlinebutreturnedtostoreshouldnotbereportedasasubtractioninstoreturnoverdata.Researchsuggeststhatreturnstypicallygenerateadditionalsalesinstorethatoftenexceedthevalueofthereturn,therebycontributingtothestore’sperformance.23

6.4.3 Online Transactions In-store

Perhapsthemostcontentiousissueisreportingofonlinetransactionsoccurringinthestore.Inaneffortto better engage and improve customer service levels, many retailers are equipping sales staff withtabletswithinthestore.ThisfreessalesassistantsfromafixedPOSandenablesthemtoassistshoppersknowledgeablyandefficientlyatthepointofneed.

As well as enabling customers to complete sales transactions anywhere in the store, the approach alsoincreasessalesratesbyallowingcustomerstoorderandpurchaseitemsthatarenotinthestore’sinventoryintermsofsizeorcolour,orarefromanextendedmerchandiserangethatisnotusuallyavailablein-store.Similarly,retailersthatmighthaveaverywideproductrangeintheir largeformatandonlinestoresareincreasinglyusingfixedkiosksin-storetoenablethecustomertosearchawiderinventorythanmightbeavailableintheirneareststore.

Therewassomedivergenceinviewsregardingwhatshouldbeattributedtothestore.Manyownersandsomeretailerscontendedthatifasaleoccurswithinthestore,evenifonamobiledevice,itisclearthatthesaleshouldbeattributedasastoresale.Anumberofretailersexplainedthatthereareconsiderabledevelopment and operational costs, both digitally and logistically, underpinning sales of an extendedproductrangethroughanin-storekioskortablet.Someoftheseretailerssuggestedthatsomeproportionofthesalemightbedirectlyattributabletothestore.Stillothersindicatedthatsuchsalesshouldnotbeattributedtothestoreasthemerchandiseisnotordinarilyavailablein-storeandthecontributionofthestoreisalreadyembeddedinthebaserent.

6.4.4 The ‘Halo’ Effect

Due to the above, a number of owners proposed attributing a proportion of all sales that occur in thecatchmentarea,whetheronlineonly,clickandcollect,mobile,orstoresales,tothephysicalstore.Thiswouldreflectthe‘halo’effect‘,24orhowaparticularlocationcanheightenbrandawarenessevenforconsumersshoppingsolelyonline.

Manyonlinepurchasesmaskamorecomplexcustomerjourneythatmightincludeapre-purchasestorevisitthatenabledtheretailertoengagetheconsumerandshowcasethemerchandise,precipitatingasubsequentsaleonline.Retailersgenerallyconsideredthecontributionofthestoretonon-storesalestobealowproportionofthewidermarketingstrategy.Itsvalueisconsideredtobeembeddedalreadyinthebaserent.

RENTALCAPTURE6

37

Aspreviouslydiscussed,researchhas indicatedastrongrelationshipbetweenaretailstoreandonlinesalesgeneratedwithinthattradearea. Inmostsituations, ifastore ispresent,onlinesalesarehigher,giventhebranding,‘halo’effectandconvenienceforreturnsofaconvenientphysicalstore.

Ownersandretailershavebeenattemptingtobetterunderstandastore’svaluethroughitsoverallsalesin that tradearea.This reflectsarecognitionthat thecontributionof thestore toretailerprofitabilityisconsiderablymorecomplexinthedigitaleraandwillvarywiththeroleofaspecificoutletwithintheretailer’sportfolioandthemodeoftheconsumer’sshoppingactivity,forexample,whethertheindividualisshoppingforneedorwant,forconvenienceorexperience,etc.

Given this greater complexity, structured discussions with retailers and owners considered whetherconventionalmethodsofrentalassessmentandperformancemeasurementarestilleffectiveatcapturingthe value of the store. The research interviews further evaluated alternative approaches to capturingvalueandexploredarangeofnewmetricsthatmightemerge inthefutureasameasureofshoppingcentreperformanceandinturn,rentalvalue.Thisresultedinawidespectrumofapproachestocapturingvaluethatareofvaryingrelevancetodifferenttypesofshoppingcentres.Thisevaluationofarangeofpossibleapproachesprovidesausefultoolboxforselectinganddevisingcurrentandfuturerentalmodels.

RENTALCAPTURE6

38

Theapproachestocapturingstorevalueputforwardbyownersandretailerswithintheresearchinterviewsare wide-ranging and may be broadly grouped into three principal categories. These include fixed rents,turnoverrentmodelsandpotentialnewrentmodelsbaseduponalternativeperformancemetrics(Figure15).

fIGuRE 15. The Toolbox

7.1 fixed Rent Models

FixedrentsdominateleasingmodelsinshoppingcentresintheU.K.andonhigh-streetretailelsewhereinEuropeandupscalestreetfrontretailintheU.S.(Figure16).Someownersarguethattheadvantageofthismodelisthatanegotiatedrentbasedoncompetitivemarketforcesisthebestindicatorofastore’svaluetotheretailerwhocanbestbenefitfromthatspace.Fromtheretailer’sperspective,thefixedrentaccountsfortheoverallcontributionofthestoretototalsales,nomattertheretailchannel.

Thismodelbypassestheneedtoaccountforin-storevsonlinesalesthatcanbeattributedtothestoreforthepurposeofdeterminingrent.Retailersareattractedtothecertaintyoftherentalcostthatfixedrentmodelsprovide.However,theyarguethattheperiodicreviewofrentallevelsintheU.K.,usuallyatfive-yearintervals,erodesthisbenefitandthatthelackoftransparencybeyondyearfiverepresentsamajorrisk.

7.0 THE TOOLbOx

RentalCapture

Fixed Rent

Turnover Rent

New Performance

Metrics

39

fIGuRE 16. Fixed rent Models

The U.K. rent review process is based upon comparable rent evidence, which in a shopping centreenvironment is largely under the control of the owner. Being quasi-judicial in nature, this results in aparticularlyadversarialprocess.

Many retailers interviewed commented that the level of uncertainty as to whether rental levels wouldremainaffordablepost-reviewisdrivingsomeretailerstowardsshorteningleaselengthsorensuringthereisabreakclauseatreview.Retailersfavourfixedrentallevelsbeingincreasedinlinewithanagreedindex-linkedbenchmark,commonlyrelatedtoinflation,asistypicalinU.S.andcontinentalEuropeanmarkets.IthasemergedasanalternativetorentreviewsintheU.K.andrepresentsagrowingsegmentofthemarketsince2000.

Althoughrecognisingthatanopenmarket-negotiatedrentclearlyindicatesthemarketworthofastoreatthetimeofthelease,manyownerscontinuetoprefertheinclusionofaperformance-relatedincomestream. In addition to a base rent, this performance-related income rewards owners for continuing toinnovate,collaborateanddevelopbestpractices.

Moreover,anumberofparticipantssuggestedthatfixedrentalmodelsleadtoalowalignmentofinterestbetween owners and retailers at a time when effectively responding to consumer change requiresincreasingcollaborationbetweentheparties.Bothownersandretailerscontendthatperformancemetricshelpensure thatwhatgetsmeasured tends togetdone.However, there is lessagreementas towhatshouldbemeasured.

7.2 Turnover or Percentage Rent Models

Manyownersandmost retailers favour turnoverorpercentage rentmodels.However,opinionsvariedwidelyamongstandbetweenthegroupsastohowthismightbestbeachieved.

There are positives and negatives in adapting this sales volume-based metric to the omni-channelretailmarket.Manyretailersconsiderthataperformance-related incomestreamshould leadtobettermanagementbyowners.Anincomecomponentthatisbaseduponretailers’salesperformanceincentivisesownerstocontinuetofocusstrategyonsalesgenerationandincreasedmarketshare,andmotivatesthemtocloselymonitortheimpactoftheirstrategiesthroughreportingofsales.However,inanomni-channelworld,storesalescannotcapturethecontributionofthestoretototalsales.

Thesalesturnover-basedmodelsmaybecategorisedintothreebroadgroups:conventionalturnovermodels,Europeanfactoryoutletcentre-stylemodelsandgeo-fencingmodelsthatdrawfromairportretailmodels(seeFigure17).

THETOOLBOX7

Fixed Rent Models

IndexLinked

PerformanceIncentiveTop Up

Periodic Review

40

fIGuRE 17. Turnover rent Base Models

7.2.1 Conventional Turnover Rent Models

Conventionalturnoverrentmodelsincludeabaserentaccompaniedbyavariableincomecalculatedasapercentageofsalesachievedaboveacertainthreshold.CommonlyutilisedintheU.S.andcontinentalEurope,baserentcomprisesfrom90%to98%25oftotalrentacrossportfoliosintheU.S.andfrom95%to100%inEurope.AnalysisofdatarelatingtoleasingpracticesintheU.S.showsalong-term shift toward higher base rents in high-quality centres, thereby diminishing the impact of percentage rents.Someownershaveindicatedthatthishigherbaserentsomewhatcompensatesforsalesthattheybelieveareassociatedwiththestorebutarenotreportedassuch.

Nevertheless,theseturnoverrentsareanimportantpartofincome,astheyflowstraighttothebottomline.Inaddition,reportedsalesallowanownertobettertracktheretailerandcentre’sperformance.Itbecomesakeytoolinleasenegotiations.

Indeed, recentanalysisof thesalesand rentalperformanceof centres revealsanegative relationshipbetweensalesproductivityandnetaskingrents,suggestingthatthevariableperformancecomponentofrentcapturesgrowth.26Althoughtheanalysisisnotbrokendownbytypeofcentreand,therefore,likelymasksthedifferentialperformanceofsegments,itconcludesthatomni-channelstrategiescomplicatethetraditionalleasingprocessandthisislikelytoimpactfutureleasestructures.

Mostretailersarekeentoretainalinktosalesintheperformance-relatedrentalmetric.Manyofthoseinterviewedstatedthatwhiletheroleofthestoreismulti-functional,individualstoresarestillrequiredtodeliveranappropriaterent-to-salesratiotoachieveatargetprofitabilityreturn.

Someownerspreferredaturnoverrentmodel.However,theycommentedthatwhileturnover levels intheirshoppingcentreshaveremainedbroadlystableinrealtermsinrecentyears,theybelievethatgrowthisdriftingonline,withthestoreusedaspartofthedeliverysolutionbywayofclickandcollectandothermeans.Tocapturethisvalue,theseownerssuggestedtheinclusionofclickandcollectandin-storeonlinesalesintheirreportedturnover,ashintedearlier.

Turnoverrentmodelscanbecomeattractiveoptionsinsecond-tiercentres,wheredemandforspacemaybemuchlowerthanfordestinationcentres.Intheseinstances,alower-than-usualbaserentmightpersuadeadesiredtenantwhomaynotbecertainofitsperformancetolocateinthecentre,helpingtosharerisksandmorecloselyaligninterests,whilecompensatingtheownerforstrongsalesperformance.

THETOOLBOX7

Turnover Models

EuropeanFactory OutletCentre-Style Geo-Fencing

Base Rent+

Turnover Rent

41

Anumberof retailers inboth theU.S.andEuropesaid theirprofitmarginsare typicallyhigher in thesecentresthaninhighlycompetitivefirst-tiercentres.Indeed,retailersseekingprimespacesinluxuryretailhigh-streetorupscalestreetfrontlocationsincludeamarketingvaluewithinthebudgetforastoretojustifyveryhighrents.Mostshoppingcentre-basedretailersareonlystartingtovaluethisrelationshipexplicitly,butitisalreadyimplicitintheacceptanceofhigherrent-to-salesratiosforpremiumcentres.

7.2.2 European factory Outlet-style Leasing Models

Europeanownersofsomeneighbourhoodandalsoofmorechallengedmid-sizedcentressuggestedrentmodelsmorecommonlyassociatedwithEuropeanfactoryoutletcentres.Theseinvolveaturnoverrentmodel,usuallyincludingalowerbaserentthanforconventionalturnoverrentmodels.

Animportantcomponentofsuchmodelsistheabsenceofsecurityoftenure—thatis,theretailer’srighttorenewthelease.SecurityoftenureiscommontovaryingdegreestolandlordandtenantlawinmostEuropean countries. However, given the importance of retailer performance to income, factory outletcentreleaseagreementsincludetheowner’srighttoterminatealeaseifastoreconsistentlyfailstoreachanagreedsalestarget.

Asdiscussedpreviously,someofthemostsuccessfulretailbrandsthatactassub-anchorsinEuropeancentreshavenegotiatedturnover-onlyleasesinneighbourhoodandsecond-tiercentresinrecentyears,while also retaining rights to security of tenure. Nevertheless, interviews with retailers indicate thatmanywouldforegosecurityoftenureiftherighttoterminatetheleasewerelinkedtoanagreedrollingperformancebenchmarkandownersparticipatedingreaterrisksharing.Anumberofretailersfurtherexplained that once base rents are agreed upon, the owner is much less exposed than the retailer tolower-than-anticipatedfootfallandsalesacrossthecentre,giventheverylowperformancecomponentofrents.Inshort,whiletheperformanceelementensuresthatincomecanincreaseifthecentreperformsinlinewithorbetterthanexpectations,itcannotdecreaseifitunderperforms,excepting,ofcourse,tenantdefaultorrentalrevisions.

Mostretailersrecognisedtheneedforasignificantbaserenttolowerrisk,secureastableincomebaseandachievefinancing.However,theysuggestedthatthevariable,performance-relatedcomponentofrentshouldbealargerproportionoftotalrent,witharangefrom75%to85%cited.Theseretailerscontendedthatthiswouldprovideforgreaterrisksharingthatwouldreducetherequirementforsecurityoftenure.Some retailers stressed that, while terminating the lease of a non-performing retailer might be in allparties’interests,therighttoendaleasemustbeperformance-linkedratherthanarbitrary.

Accordingtothislineofthinking,theturnoverrentmodelnegotiated,whichwilllikelyincludecaps,floorsandsteppedhurdlerates,should,ratherliketheimplicitvalueofafixedrent,reflectthetotalvalueofthestorewithinaretailer’somni-channelbusinessmodel.Thiswouldimplythattheproportionofsalestransacted online will grow in tandem with the percentage rate applied to store sales. This implicitlyreflectsthestore’scontributiontothecustomerjourneyunderlyingonlinetransactions.Inotherwords,theturnoverrentsliceofthestoresalespiewouldincreaseiftotalsalesincreasefasterthanstoresales,butthestore’sroleremainspivotaltototalsalesgrowth.

Thoseownersandretailersfavouringfixedrent,conventionalsalesturnoverandEuropeanfactoryoutlet-style leasing models see store value being captured through an open market-negotiated rent. To thisend,thevalueofthestore’scontributiontothewideromni-channelstrategy(andequallythevalueoftheretailertothewiderassetstrategy)willbeembeddedimplicitlyintherent.Thisiscertainlytrueofnegotiations for a new lease, although given that the omni-channel retail model has not yet reachedmaturity,itislessclearwhenrelyingoncomparableevidencetoestimaterentalvaluesuponleaserenewal,orforfixedrentsatrentreview.

THETOOLBOX7

42

7.2.3 Geo-fence Turnover Models

Most omni-channel retailers in the U.S. and Europe are striving to merge their online and in-storeaccountingsystemsinordertobetterunderstandoverallsales.Manyarecreatinglocation-basedprofitcentres,usingtheirstoreportfoliostoanchoranddefineappropriategeographicareas.Usingpostalorotherlocationalcodes,onlinesalesaregeo-codedandattributedtostore-basedlocations.Thisknowledgeenablesretailerstoquantifythevalueofaconsumeropportunitywithinaspecificlocation.Italsoenablesthemtounderstandinmoredetailthecontributionofdifferentconsumertouchpoints,includingthestore,tothecustomerjourney.

Fromtheowner’sperspective,understandinghowtheretailerisperforminginthecatchmentareathroughtotalsales isalsoveryvaluable.Aparticipant in theresearch interviewsexplainedthat ifastore’ssalesdecline,aretailer’sdecisionwhetherornottostayinacentremaydependontrendsintheirtotalsalesinthecatchmentarea.

Understandingthesizeofthetotalpieiscrucialtoassessingthevalueofthestore.Ofcourse,additionalcostsassociatedwithoperatingadigitisedplatformintermsoflogistics,stockmanagementmarketing,etc.alsoneedtobetakenintoaccount.Thenextstepinvolvesapportioningthecontributionofthestoretothedifferenttypesofcustomerjourney,whichisanareaofgrowingexpertiseformanyretailersandowners.

Anumberofownersfavouredamoreexplicitapproachtocapturingthevalueofastorewithinomni-channelbusinessmodels,predominantlyinconjunctionwithabaserent.Drawingfromexperienceofairportretailmodelsandothertransporthubs,wherepercentageratesappliedtosalesvaryaccordingtothecustomer’sbuyingbehaviourandtypeofproduct,theseownerswouldapplydifferentratesofturnovertodifferentsortsoftransactions,reflectingthevariablecontributionofthestore.

Forexample,asaleinthestoreislikelytohavethehighestpercentageturnoverrateapplied,whileanon-storeonlinetransactionwouldapplythelowestturnoverrate,reflectingonlytheregionalhaloeffectofthestore.Click-and-collecttransactionswouldregisteraratesomewhereinbetweenreflectingthegreatercontributionofthestoretocustomerfulfilment,butalsotheadditionalcostsofachievingthesaletotheretailerandthevalueofclickandcollecttothecentre.ItshouldbenotedthatintheU.K.retailersprovidepaymentsofaround6%ofsalepriceforitemsmarketedonlinethroughclick-throughcouponsplacedonthird-partywebsitesorweb-mails.

Aperformancemodelthatrecognisesthevariablecontributionoftheshoppingcentretothewiderangeofcustomer journeys is favouredbymanyowners,althoughmostthoughtthatretailers’ reluctancetosharedatawouldbeabarrier.Althoughmanyretailersrecognisethevalidityoftheapproach,particularlyifaccompaniedbygreatercollaborationbetweenownersandretailers includingmorerisksharing,thesuccessofsuchamodelwilldependuponitsdetails.

Individual lease agreements will continue to reflect the balance of power between the retailer andowner.Moreembryonicretailers—thosewithweakercovenantsoronline-onlyretailersseekingaphysicalpresence—maybeopentocollaboratemorewithowners.

Wheresuchretailerscanhelpdifferentiateacentre,ownersmaybewillingtotakealimitedrisk.However,asanticipatedbyowners,manyretailersarereluctanttosharesensitivedata.IntheU.S.,similarsharedrevenueapproacheshavebeenusedinpartnershipsbetweenmanufacturersand/orpure-playandbricks-and-mortar retailers. A jewellery supplier and online retailer, for instance, created partnerships withindependentretailstoresthatitsupplied.Theindependentretailerreceivesaportionofeverytransactioninanagreedgeo-fencedareaandsharesdifferentmarginsongoodsboughtthroughthestoretothosepurchasedonaclick-and-collectbasis.27Similarly,therelationshipandprofitsharingbetweenbrandownersandfranchiseesisshifting,notablyindepartmentstores.Previously,brandsreliedonfranchiseestoinitiateanddevelopcustomerrelationships,withfranchiseesoftenhavingfullautonomyonmerchandisingand

THETOOLBOX7

understanding

the size of the

total pie is crucial

to assessing

the value

of the store.

43

management.Whilethefranchisee’sroleasthepersonalfaceofthebrandremains,thebrandsthemselvesarenowabletoengagedirectlywithconsumersthroughothersaleschannels,especiallythroughon-lineadvertising,socialmedia,emailmessagesandtheirwebsites.Asaresult,thefranchiseestillremainsanintermediarybetweenbrandandcustomer,butinamorediminishedposition.However,thefranchisee’sroleinfulfilmentandshowcasingproducthasincreased.

7.3 use of Alternative Performance Metrics with Leasing Models

A number of owners of both destination and neighbourhood centres in the U.S. and Europe hopedthatalternativemetricsmightrewardthemfortheiroperationalmanagementexpertise.Suchowners’business models have transformed shopping centres into places that attract, entice and engage bydeliveringonexperience,convenienceandexceptionalcustomerservice.Theseownersaredeliveringthecustomeropportunity,notmerelyspace,bydrivinghigh-valuetraffictotheirstores.Ontheotherhand,retailerswouldbewillingtoacceptmetricsthatrewardthemforstrongervolumeandvalueofconsumeropportunityifownersinvestininnovativeassetstrategiesthatgeneratetheseresults.

Retailersconfirmedthattheyarebuyingintothecustomeropportunityprovidedbyprogressiveownerswhoproduceanoperational,customer-facingbusiness,notmerelyanincome-producingrealestateasset.Whilemostretailersagreedthatownersshouldbeincentivisedfordeliveringmore,anynewperformancemetrics remainundefined.Yet, to theextent thatnewmetricsaredeveloped, theyshouldsupplementsalesdata,whichremaincentraltogaugingastore’sperformance.

Bothownersandretailersacknowledgethatoncecustomersare insidethestore,conversionratesareprincipallydrivenbyaretailer’sproducts,priceandcustomerservicelevel.Moreover,aproportionofthesalesgeneratedwilloccuronline.Indeed,anumberofretailersexplainedthatfindingappropriatemetricstorewardownersandmanagersfordeliveringastrongercustomeropportunitymirroredthedifficultyin rewardingsalesstaff.Themorepermutations involved incompletingapurchase, theharder it is tomeasurehowmuchgoodcustomerserviceorsalestechniquecontributestoin-storeturnover.

Whilstownersandretailersacknowledgedthedifficulty infindingthesemetrics,theywerenot lackinginrecommendationsthatmightbeusedforhurdlerateslinkedtorentalincome.Manyoftheserelatetoexistingkeyindicatorsalreadyusedtomonitortheperformanceofthecentreandindividualoccupiers,aswellasnewmetricstoincentiviseretailstaffmoreeffectivelyinanomni-channelera.Amongthenewperformancemetricstoemergefromthediscussionswere:netshoppinghours;volumeofagreed-targetcustomers;andconversionratesandbasketsize(Figure18).

fIGuRE 18. alternative performance Metrics

THETOOLBOX7

Base Rent +

New Metrics

Volumeof Target

CustomersConversion

Rate/Basket Size

NetShopping

Hours

44

7.3.1 Net shopping Hours

Footfallandcustomerflowaremonitoredbyallthemajordestinationshoppingcentreownersinterviewed.However,toolsformeasuringtheserangewidelyinsophisticationandaccuracy.Suchmeasurement,notoftenfoundinneighbourhoodandcommunitycentresintheU.S.,ismorecommoninEurope.

With an increasing emphasisonplace-making, some owners consider net shoppinghours aneffectiveperformancemetricmeasure.Thismeasuresboththevolumeofconsumersandtheirdwelltime,therebyprovidingameasureoftheconsumeropportunityafforded.Indeed,itwascommentedthatwheredataillustratedthataretailer’sindividualmarketingactivitiesand/orpresencegeneratedavaluablenetbenefitforthecentrethatwasnotalreadyreflectedintheleaseagreement,thatsuchretailercouldberewardedwithrentaldiscountsand/orlowerservicecharge,orarentalholidaywithinturnovercatch-upmetrics.

SomeownersofneighbourhoodandlargerconvenienceschemesinEuropefavouredthisapproach.Theseownersarefocusedondevelopingassetstrategiesandmarketinginitiativesthatincreasethenumberofvisitstotheshoppingcentrebycustomersandextendthedwelltimeofsuchconsumers.Theseinitiativesinvolvetheco-locationofpublicservicesandleisureoperators,forexamplehealthcentresandgymnasiums,whicharelow-incomegenerators.Wheresuchstrategiessignificantlyincreasethecustomeropportunity,ownersandmanagersalsowishtoberewardeddirectlyfortheopportunitycostofalternativeincome.

7.3.2 volume of Customers

A number of owners suggest using new technology such as beacons to develop more refined metricsthatquantifythevolumeofagreed-targetcustomers,ratherthansimplyfootfall.Whilethistechnologyisstillinitsinfancy,itisevolvingrapidly.Althoughcapabilitiesbetweenbeacontechnologiesvary,mostarenowabletotrackindividualconsumersbytheIPaddressassociatedwithasmartphone.Suchtrackingis possible regardless of whether a consumer opts-in or the phone is switched on, so long as phonelocationservicesareenabled.Moregranularinformationisachievablewhereusersdownloadorsign-intoshoppingcentreappsorotherdigitalmediaoperatedbythecentre.

Essentially, owners and retailers agree upon the characteristics of a store’s target consumer—theircustomer—andagreeonappropriatehurdlerates.Whileofinterestinprincipletoanumberofownersofdestination,convenienceandmorechallengedschemes,theapplicationofnewtechnology,togetherwiththemanagementandanalysisofthedataamassedfromit,isnotyetadvancedenoughtoenablethis,theyacknowledge.However,itwasconsideredthatametricbaseduponsuchagreed-targetcustomervolumesmightbeincorporatedintoleaseagreements,especiallywithrespecttoperformance,inthefuture.

7.3.3 Conversion Rates and basket size

Anumberofretailersstressedthatthevastmajorityofsalesstilloccurredin-store.Whilethestoreisoneofmanytouchpointsalongtheconsumer journey, it isaparticularly importantone.Mosttransactions,whether in-store or online, involve the store at some stage of the journey. The store provides a face-to-faceinteractionbetweenthebrandandtheconsumerandamulti-sensorymarketingopportunity.Inthis context, those retailers argued that new metrics, while valid and desired, need to retain a link tosalesturnover.Incontrast,someownersandretailersarguedthatownersandmanagersarerequiredtodeliverthecustomer,butconversiontosaleswithinastoreistheresponsibilityoftheretailer.Onceinside

THETOOLBOX7 THETOOLBOX7

45

thestore therearemanyvariables impactingonconversion rates thatonly the retailercan influence:principally,product,priceandservice.Fromthisperspective,someownersandretailersarguedthattheowner’sperformanceshouldbebasedondeliveringapre-agreedvolumeofadefinedcustomerprofiletotheretailer’sunitandnotontheretailer’sabilitytoconvertthisflowintosales.

Inaddition,manyretailerscommentedthattheissuesgeneratedbyomni-channelretailforrentmodelsaregeneratingparallelissuesforsalesstaffwithaperformance-relatedcomponenttotheirpay.Inthesamewaythatavalueofastoreshouldreflectitscontributiontototalsalesinagivenlocation,remunerationpolicies must ensure that staff members are rewarded for their contribution to a sale regardless ofwherethetransactiontakesplace.Dependingonhowintegrateditsplatformsareandhowadvanceditscustomerinsighttoolsare,anindividualretailermightbeabletoachievethisthrougheffectivetrackingofcustomersacrosstheirsaleschannels.Othersusecustomersurvey-baseddataasaproxytounderstandthecontributionofthestoretoonlinetransactions.Itwassuggestedthatsuchapproachescouldalsobeusefulasrentalperformancemetrics.

Retailershavetraditionallyemployedkeymetricssuchasconversionratesandbasketsizetobenchmarkstoreperformance.Asretailersdeveloptheirabilitytotrackconsumersacrossmultipleplatformsandgaininsightintothecrosschannelbuyingbehaviourofindividualcustomerstheyareabletorefinethesekeystoremetricstoincludeonlinesalesthatwereinfluencedin-store.Onesuggestionmadewasthatbothtraditionalandevolvingstoremetricscouldalsobeemployedforaperformance-relatedrentalcomponent.

Conversion rate and basket size benchmarks link footfall, or potentially customer volume, to sales bymeasuringboththenumberofconsumersthattransactandtheaveragebasketsizeoftransactions.Basketsizecouldbeeasilyachievedforthecentreasanentitywherefootfalldataarecollectedandsalesvolumesarereportedtotheowner/manager.Increasingly,conversionmetricswillalsobeachievable,enabledbydigitalandvideotracking.Employingsuchmetricsatthecentrelevelallowsforperformancemetricstoconsiderthevalue,notmerelythevolumeofconsumers.Linkingthisbenchmarktoaperformance-basedtop-uprentwithagreedhurdleratesmightbetteralignownerandretailerinterests.

Thesemeasurescouldalsobeemployed tobenchmark theperformanceof individual retailersagainsttheirrelevantsectororsub-sectorwithinthecentre.Thiswouldrequireretailerstoreportkeymetrics,orowners/managerstocount/digitallytrackconsumerflowpassingandenteringaunit.Whileretailersare often required to report sales data for management purposes, current leases often stipulate thatsuchdatamaynotbeusedtoinfluencerents.Assuch,whileownersareabletoreadilycalculatesuchmetricsandretailerswouldbeinterestedtounderstandtheirrelativeperformanceagainstanappropriatebenchmark, their use as new rental metrics requires retailers to reconsider how such data might beemployed.Moreover,suchbenchmarkswouldbemorepowerfulifretailerswerealsoableandpreparedtoprovidetotalstore-influencedsales.

THETOOLBOX7

46

This research explores how the digital era has accelerated the pace of retail change—a process withlittleprospectofslowinganytimesoon.Overthepast15yearsasonlineretailinghascapturedalargerportion of sales, owner and retailer interests have become more closely aligned, yet the structure ofrentalagreementsremainsbroadlythesame.Inrecentyears,thechangingroleofstakeholdersmeansthatownersandretailersunderstandthattheymustworkevenmorecollaboratively. Inthenearterm,thehistoricallyadversarialrelationshipbetweenlandlordandrent-payingtenantisunlikelytodisappear.Itisclearthattheevolutionofrentalagreementstoaccommodatethenewrealityisatanearlystageofdevelopment.

Onthepositiveside,theseinterviewshaveidentifiedmuchcommongroundbetweenmanyownersandretailersastothepreferredwayforward.Clearly,differencesexistaboutdetails,butitishearteningtoknowthatretailersandownerssharegoalsandwillincreasinglydosointhefuture.

Ifcurrentleasingmodelsare‘working,butcreaking’,theindustrywillstarttorefurbishorreplacethem.Appropriate solutionswill varybetweendifferent typesof centres in termsof functionandscale, andbetweendifferenttypesofretailersintermsofsectorandbrandpowerforthetenantmix.Indeed,anyleasewillremainanegotiatedcontractbetweenindividualparties.

It is likely that initially, innovative lease models will emerge from more challenged centres; after all,necessity is themotherof invention.The toolboxemerging fromthis researchaims toprovideawiderangeandspectrumofalternatives,organisedinalogicalframeworkthatisintendedtoassist,ratherthanprescribe,thedevelopmentoffutureleasemodels.

Inthisfast-pacederaofcontinuinginnovation,businessmodelswillcontinuetoevolveasretailersandowners anticipate and adapt to change. However, given that omni-channel retail involves the blurringof two of the most dynamic and innovative industries—retail and technology—it is equally certain thatsolutionswillemerge.Forthisreason,thisstudymayhavetoberevisitedshortly.

8.0 OuTLOOk

Appropriate

solutions will vary

between different

types of centres in

terms of function

and scale, and

between different

types of retailers in

terms of sector and

brand power for the

tenant mix.

47

Weofferourwarmthanksandappreciationtothosewhocontributedinstructuredinterviewstothisstudy.Mostindividualswishedtoremainanonymousandhavetheircompany’sparticipationacknowledged.Thereportwouldnothavebeenpossiblewithouttheirassistance.

Interviewsdrewuponindividuals’knowledgeandexperienceoftheshoppingcentreindustryanddonotnecessarily represent the view of their employers. For this reason, there were a number of instanceswheremorethanoneindividualwasinterviewedfromthesamecompany.

Ofcourse,thosecontributinginformationarenotresponsiblefortheviewsexpressedinthisreport.

AberdeenAssetManagementAirsageAltareaCogedimAppearHereBarclaysBestsellerBritishRetailConsortiumBucksbaumRetailPropertiesCBRECBREGlobalInvestorsCitibankCityconOyjColliersInternationalCorioN.V. (mergedwithKlépierre31.03.15)Cornish&CareyCoStarGroupCushman&WakefieldDebenhamsPLCDeutscheAssetManagementECEProjektmanagement G.m.b.H.&Co.KGFootLockerInc,EuropeFungGroupFuturesCoachingGap(Europe)IncGeneralGrowthPropertiesGreenStreetAdvisorsHammersonICGroupIntuJCrewJavelinGroup(acquiredby AccentureStrategy,29.06.15)JonesLangLaSalleKlépierre

LandSecuritiesLaSalleInvestmentManagementLincolnPropertyCompanyLululemonAthleticaMacerichMackaysStoresLtdMacy’sMadisonMarquetteMangoMediaSaturnMilliganRetailMLV&CoMothercarePLCMultiCorporationNextPlcNomiPathIntelligencePropertyMarketAnalysisLLPRamcoGershensonPropertyTrustReteamGroupSimonPropertyGroupSonaeSierraTaubmanTelseyGroupTheDisneyStoreTheLegoGroupTravisPerkinsPlcTriGranitCorporationWellsFargoSecuritiesWestfieldCorpWestfieldLLCWilliams-SonomaWoodburyCorporationYum!

LIsT Of CONTRIbuTORs

48

1According to a 2013 survey by Multichannel Merchant and Neustar, 35% of retailers indicated they had alreadyimplementedanomni-channelstrategy,whileanother27%plannedtodoso;however,38%reportednoplansofanykindforthis.‘OptimizeOmnichannelEngagementWithActionableConsumerInsights,’p.4,https://www.neustar.biz.

2Allinterviewswereconductedwiththeunderstandingofstrictconfidentiality,sothatindividualsourcesofcommentswill not be cited here. However, companies that have contributed information and insights to the project areacknowledged.

3BillGates,TheRoadAhead,Penguin,1995.4JLL,‘Retail2010’;RetailFuturesProgramme,1999;JLL,‘TenForcesforRetailChange,’RetailFuturesProgramme,2001.5JLL,‘ConvergingRe-tailandE-tailWindows–OpportunityorThreat,’London,2000.6CentreforRetailResearch, ‘OnlineRetailing:Britain,Europe,USandCanada,’2015,http://www.retailresearch.org/

onlineretailing.php.7Javelin, ‘OrganisationalStructure:TransformingtheStructureofYourOrganisationforTrueOmni-ChannelRetail,’

2014;McKinsey,‘MakingStoresMatterinaMulti-ChannelWorld:PerspectiveonRetailandConsumerGoods,’Summer2014,http://www.mckinsey.com.

8More than four-fifths (87%) of retailers believe that an omni-channel strategy is somewhat to very important orcritical.SeeMultichannel MerchantandNeustar,p.5.

9Deloitte,‘TheChangingFaceofRetail,’2011,http://www.deloitte.com.10PWC/JDA,‘GlobalRetailandConsumerGoodsCEOSurvey:TheOmni-ChannelFulfillmentImperative,’December2014,

http://www.jda.com.11AccordingtoNielsen,13%ofAmericansasof2014subscribedtoAmazonPress,whichallowsforfreeshipping.See

EmilySteel,‘NielsenChartsReachofVideoStreaming,’The New York Times,March12,2015,p.B4,http://www.nytimes.com/2015/03/12/business/nielsen-reports-2-in-5-us-households-subscribe-to-video-streaming-services.html?_r=0.

12Amazon has not booked a consistent profit nor issued dividends since it was founded, and yet has a marketcapitalizationof$225billion,asofJuly17,2015,accordingtoFidelityInvestments.

13McKinsey,‘DigitizingtheConsumerDecisionJourney,’June2014,http://www.mckinsey.com.14Genesta,‘TheCaseforRealEstateInvestinginSweden,’January2014;Genesta,InvestmentStrategyUpdate,January

2015,http://www.genesta.eu.15CBRE,‘HowGlobalistheBusinessofRetail?’Global Research,April2015,http://www.cbre.com.16A February 2014 study by Deloitte revealed that in a sample of women’s apparel stores in the U.K., online sales

providedanetboosttosales,onlycannibalisingin-storesalesbylessthan3%.AndreaPozzioftheEinaudiInstitutefor Economics and Finance in Rome studied a major U.S. grocer and determined that even for this convenience-orientatedretailer,forevery$1insalescapturedonline,only$0.35wascannibalisedfromthestore.

17Athleta,Baublebar,Birchbox,Bonobos,BostonProper,CharlesTyrwhitt,Figleaf.com,Frank&Oak,Indochino,NastyGirl,RenttheRunway,andWarbyParkerareafewexamplesofonline-onlyretailersthathaveopenedphysicalstores.

18Cameraandothercountersystemsarereportedtomisscustomerswhoarewalkingclosetogether,andmaycountshoppingcarts,petsorotherobjects.

19Identificationofcustomersisintheaggregate,givingtheirareaofresidenceandlikelydemographictraits;incontrast,individualidentificationwouldpresentlegalandprivacyissues.

20Forexample,Intuandintu.co.ukandAltareaandrueducommerce.fr.21IntheU.K.,fixedrentisa100%rent,withnoperformanceelement.Itisalsocommontootherformats,likeretail

parks/big-boxandhighstreet.Ontheotherhand,baserentistheelementoffixedrent(non-variable)inaleasewithaperformanceelement,usuallyturnoverpercentage.

22EbeltoftGroup,‘GlobalCrossChannelRetailingReport,2014,’2015,http://www.ebetoftgroup.com.23ICSC,‘ShoppingCenters:America’sFirstandForemostMarketplace,’2014,http://www.icsc.org/.24BankofAmericaMerrillLynch,‘Consumer&RetailConference’(BloombergTranscript),Macy’spresentation,March

11,2014,p.6;Accenture,‘TradingSpaces:ChangingtheWayRetailersThinkaboutStores,’2012;JavelinGroup,‘HowManyStoresWillWeReallyNeed?U.K.Non-foodRetailingin2020’;RetailThinkTank,‘HowistheInternetChangingRetail?’,May2010;KPMG/SynovateRetailThinkTank,‘WhitePaper#16,’KPMG/Ipsos2010.

25IntheU.S.,baseduponareviewofannualreportsforthefivedominantmallshoppingcentreowners;inEurope,basedonfindingsofstructuredinterviews.

26CBREResearch,‘MallSalesPerformanceHintsatParadigmShiftforLeaseStructures,’July8,2015,www.cbre.com27DarrenDahl,‘AnOn-LineVendorCreatesLinkswithBrick-and-MortarStores,’TheNewYorkTimes,January7,2015,

http://www.nytimes.com.

NOTEs

exploring new leasing models in an omni-channel world · 4.0 shopping centre owners’ evolving...

Documents