Using data to right-size retail portfolios post COVID-19

Omni-channel and multi-speed

Prior to COVID-19, the retail sector was already experiencing ratings downgrades and store closures. Retail closures were up 59 percent in 2019 compared to 2018, with over 9,300 closures in the USA alone across top retailers such as Gap, Walgreens and Macy’s (Coresight Research).

As social distancing restrictions start to ease, we expect an initial rebound as consumers return enthusiastically to stores. But longer-term, the reality is that spectre of recession threatens sales, the consumer pocket is squeezed and shopping habits have shifted irrevocably. The immediate pain will become a lasting pinch for many retailers.

We’ve seen this pattern in past recessions. In the wake of the 2008 financial crisis, dozens of retailers – many staples of the American market – were forced to close large swathes of their stores and file for bankruptcy. Some of the more well-known names included Eddie Bauer, Fortunoff, Circuit City and KB Toys, and most of those never recovered.

After the coronavirus we will likely see the strong get stronger, the marginal recede, and the weak close altogether.

Prime retail should bounce back because the fundamentals remain in place, but secondary retail and those outlets that were in a poor cash position before the crisis will be the biggest casualties.

However, this doesn’t tell the whole story. We’re already seeing the emergence of a complex multi-speed system – with online retailers, grocery and health & beauty continuing to thrive and outperform other retail sectors by catering to new consumer demands in the lockdown environment.

A local revival

When we emerge from the pandemic, there will undoubtedly be longer-term ramifications for how we live, work and shop. Should the working from home trend perpetuate, this could lead to re-localization strategies from retailers, giving a much needed boost to local high streets and perhaps leading to a kick-back to the mom-and-pop stores of the past.

The automotive sector has been shrinking for some years, with car ownership falling as urbanization rises. However, if the current experience triggers a broader transition away from city centre working and living, then a return to more car dependent suburban lifestyles may help bolster sales. Electric vehicles could be the big winners, as clean air becomes an increasing focal point for policy.

Retail adaptability

In this uncertain climate, we are helping retailers to get full visibility of their business and, crucially, to unlock data to inform action. Bricks and mortar decision-making must be underpinned by rigorous evaluation of what an investment can deliver, in different locations and configurations. We are helping our clients to scenario test alternate models, since these real estate strategies will be critical to future success and survival.

Building knowledge of customers by collecting a wealth of data – demographics, profile, sales history, catchment area – is key to gaining competitive advantage.

However, more powerful insight can be gained by aligning customer and portfolio data. To make sure that physical retail space is adding value, information on customer trends should be matched against real estate performance, size, operating costs and capital expenditure.

Assessing average sales per footfall versus the cost to build prime retail or secondary units will be a key consideration. The cost for retail construction varies greatly by market and sector and is likely to increase due to COVID-19 impacts on material and labour availability. Average new build costs range from $150 per square foot for automotive to more than $1,000 per square foot for high-end retail in high-street and/or high cost-index locations.

For many retailers, it will not be a straightforward case of rationalization. Although retailers may be considering a reduction in their footprints due to current pressures, the requirement for social distancing in retail spaces over the coming months and perhaps years will drive the need for more space to accommodate fewer people.

Clicks versus bricks

Importantly, data needs to be used to inform the right blend of physical and digital sales. Social distancing measures have further accelerated the requirement for retailers to build an effective online distribution model. However, even ‘pure play’ online retailers still struggle to balance this equation.

Reverse logistics has put some e-commerce players under financial strain. On average, 15-40 percent of goods purchased online are returned.

It costs significantly more to bring an item back through the supply chain than to ship it, due to inefficiencies in returns handling. In recent years, this has motivated certain online brands to open up small format stores to act as drop off points for returns and collection hubs for orders.

Data-backed decisions

In a post-COVID world, stronger application of data will enable retail businesses to introduce a more agile ‘hub and spoke’ store network where different services are offered in different locations. Many retail clients across a variety of sectors have already started to migrate to this model and we expect this trend to accelerate.

Consideration should be given to experience centres that draw footfall, create leads, leverage technology and promote the brand culture versus traditional full-service sales facilities or service-only outlets, which provide not only revenue but also customer convenience. Many automotive retailers, such as Porsche for example, are already applying this model.

Having visibility over portfolio performance also allows for greater interplay and re-balancing between retail and logistics. There may be opportunities for surplus space in stores to be adapted into logistics space and for underperforming out of town ‘big box’ units to be repurposed as warehousing.

Repurposing ‘big box’ to warehousing can easily be achieved with minimal costs since the large volume area and storage equipment is typically already in place. However, additional consideration should be given to site circulation to ensure any increase in distribution traffic does not negatively impact the customer experience.

No strangers to adversity

There is no doubt that these are unprecedented times for retailers, but the sector has already survived decades of disruption and found new ways to unlock opportunity.

Most stagnant and severely underperforming retailers fell away long before COVID-19. Those that remain have already started to build flexibility into their models and invest in digital tools. By embracing bold, new approaches and taking tough decisions where needed, many will emerge stronger from this crisis.

Further resources

Please visit our COVID-19 response page for all of our resources relating to the impact of COVID-19 on the construction sector.