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Dilip Khullar


The impact of the internet on Spanish retail centres

By Dilip Khullar, Managing Director, Cadena Desarrollos, Madrid

Disruption in retailing is scarcely new and, while latest digital technologies may have accelerated the pace, one hallmark of the industry has been the incumbents’ inability to adapt fast enough. The economics of distribution implies that to protect margins retailers cannot simply sell the same merchandising mix against competitors whose costs and business models are similar otherwise margins will erode to a commoditised level. Therefore, if a retailer can differentiate its business model and carry it upmarket, higher margins will pass through to the bottom line. The system creates immense tension on the retailer to look for new growth areas while continuously being challenged by new business models at the price-sensitive end of the spectrum. We have moved from the temporary market to the fixed market, to the department store, to shopping centres, to discounters and retail parks and now to the more recent ‘dark stores’.
Spain is recovering from a severe recession marked by deleveraging both at household and state level. Over the last five years retail property has faced declining sales densities. In spite of the development, online sales continue to increase. Mintel estimates that online sales in Spain stood at €6.7bn in 2012, having grown by 250% over the last five years. Broadband access is virtually a prerequisite for online shopping, and Spain continues to lag northern Europe with only 67% of households connected 10% and 20% below Germany and UK respectively. Spanish online sales now account for 3% of all retail sales versus close to 13% in the UK and this is forecast to double by 2018. Although accurate statistics are difficult to find, recent estimates indicate that electrical goods, clothing and footwear account for 55% of all online sales for physical products in Spain. Pure play online sales from outside the country do not register in official statistics. Online growth has been driven by traditional multi-channel retailers, notably, El Corte Ingles, but with the entry of Amazon in late 2011, this is changing rapidly. Mobile device shoppers are probably going to be a game changer with already almost 50% of device owners having bought products while away from home.
Small brick & mortar retailers are at a disadvantage when it comes to the high cost of setting up online infrastructure. They can provide a transactional service by using online platforms of third-party providers (ebay and Amazon Marketplace) but the commissions generally cut into margins. Delivery costs will continue to be a major issue, with population densities a driving force in keeping costs down. Customers clearly hate paying for delivery. Demand and the configuration of retail property in Spain will therefore depend on how tenants react to the internet:

  • Clothing and footwear will continue to be big space users. Pure-play retailers have found it difficult to compete against multi-channel.
  • Grocery retailers will reconfigure space requirements. The principal operators are moving to more urban or peripheral locations, and will thus become less of an anchor to retail centres and will release some space for other occupiers.
  • DIY and home furnishing sales in Europe have not suffered from high online penetration, and the segment should drive further demand for retail space.
  • Electrical goods are vulnerableto online sales. However, a physical presence of at least one large retailer is in the industry’s interest.

It is realistic to assume that the future shopper will make fewer shopping trips with a higher spend per trip and with an increased leisure requirement. Store and online sales will merge in the consumer mind, and store purchases will not necessarily be the ‘default’ option. Retail property owners will need to give customers a good reason to visit. The polarisation of retail destinations will be a long-term trend, with increasing concentration of market share over a reduced number of dominant locations.
At Cadena we believe that the selective acquisition of Spanish retail property investments will provide strong returns over the medium term. The future of retail property and a way to combat the rise of online is to integrate the asset into its local environment. This implies a partnershipbased approach with retailers and more focused property management. The rise of the internet has made malls vulnerable but the response does not necessarily have to be digital; the real focus needs to be on designing an environment which is more convenient and more enjoyable. dk

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