It is not an understatement to say that Covid-19 has vastly altered markets and the way businesses work within them, especially those in the retail sector. Arguably one of the greatest changes induced by Covid-19 is the rapid take-up of e-commerce in place of physical retail. “Online sales have accelerated more over the period of the pandemic than in the last ten years combined,” says the head of supply chain advisory at global real estate company CBRE Bruce Robertson.
He acknowledges that since the start of the pandemic, total online sales in the industry have soared from 18% to 36%. More specifically, clothing retail has almost tripled to 44%, while online food sales now sits at 11% – double the pre-pandemic level.
The changes wrought by this unprecedented recalibration are certain to have knock-on effects, most significantly in the composition of retailers’ real estate portfolios. “Real estate plays a pivotal role in the whole transformation,” confirms Robertson. “Online fulfilment requires three times the warehousing space due to the increased ‘work’ required – singles picking, packing each item and needing to have fulfilment capability within the next day or same day proximity.”
“Every business who wants to grow their online capacity needs more warehousing space”, he adds. However, deciding on the amount, location, and timing of this space requires a “complex set of decisions” that need to be balanced with the “financial implications around cashflow, business profitability and levels of financial risk.”
Evidently, businesses that face this excess need for logistics space as a result of online shopping are fronted with a host of problems. While pure play online retailers face a simple investment case, as growing sales leads to higher revenue and therefore the capability to invest in more logistics capacity, “traditional retailers with a large store portfolio and an existing warehouse network to fulfil their stores have a much tougher set of decisions,” says Robertson.
He adds: “Whilst their online sales are growing, their store sales are falling away, it’s simply a channel switch and is cannibalising their existing sales. If they don’t invest in logistics fulfilment capacity they will lose sales and market share.
“However, the investment case for more warehouse capacity doesn’t stack as there is no overall sales uplift. The ones that haven’t invested in online capacity have gone out of business and for the retailers we see that have invested, profits have fallen away dramatically.”
CBRE’s supply chain and consumer advisory team supports retailers with real estate strategies across both warehouse fulfilment and store portfolio rationalisation, but what are the factors that businesses have to take into consideration when settling on the make-up of their individual real estate portfolios? For Robertson, it’s “all about ensuring a profitability model”.
On one side, firms need to take a logistics perspective. “They need to make their warehouse operation as efficient as possible and they need the volumes to drive transport efficiencies,” Robertson notes.
It is critical for retailers to understand where the demand, both present and future, is coming from to “ensure their warehouses are in the right place and will have capacity into the future”. In addition, Robertson raises the question of the availability of labour – something that is fast becoming one of the “most challenging areas when deciding a warehouse location”.
Alternatively, Robertson says that rationalising a retailer’s store portfolio centres around “identifying the best and most profitable locations and formats for their stores now and into the future”. The highest footfall, demographic fit, online impact, most profitable store format, alongside comparative rents and lease events are all factors that can determine a retailers decision to maintain or relinquish operations over a physical store.
It must be noted that not all retailers should be mentioned in the same bracket. Robertson recognises that “the pure-play retailers are booming”, but he also alludes to the significance of both Amazon, who “continues to grow and push boundaries”, and Ocado, who “has seen a huge uplift in sales and are investing heavily in growth”.
With Amazon operating over a respective 40% net sales increase and Ocado reporting 27% retail revenue growth for Q2 2020, before even the full extent of the pandemic, it is clear that the two firms are enforcing a restructuring to their respective markets. But how are these market leaders and food retail innovators shaping the direction of individual sections within the industry?
“Whilst I can see a continued steady migration of non-food products on-line with Amazon driving that shift,” says Robertson. “The battle ground now is really food”.
Despite the industry “starting from a low penetration base”, it currently represents 47% of total retail sales and contains a set of major brands with “strategies that are still emerging”, leaving the future of food retail wide open.
The question from a real estate perspective then takes two sides: “Whether the major supermarkets continue with a store based fulfilment model or whether they start moving to more of a dedicated e-fulfilment warehouse strategy to achieve the operational efficiencies needed for a profitable on-line business model”.
If this acceleration in online retail penetration caused by Covid-19 is to stick, there is no doubt that the questions regarding retailers’ real estate portfolios and their capabilities to compete with market leaders such as Amazon and Ocado will only become increasingly prominent and widespread.