Are we seeing the death of bricks and mortar retail?

At Catalyst Fund Managers we have long held the view that not all physical retail is created equal and that there would inevitably be a distinct return profile differential between high-productivity (higher quality) and low-productivity (lower quality) retail real estate over time. While there are undeniable structural changes impacting the entire retail sector, most notably the growth of e-commerce and its impact on brick and mortar retail sales, we maintain our view that the looming ‘retail apocalypse’ will not result in the death of all physical retail as we know it. In fact, we believe that the very best quality retail in terms of location and product/service/experience offering will maintain relevance for consumers and, therefore for retailers, over the foreseeable future.

It has become clear that what consumers demand, and thus what retailers are required to offer, is an omnichannel retail presence, whereby e-commerce platforms and physical retail stores work in unity. Myriads of retailers incorporating online strategies and a growing number of pure e-tailors moving into physical stores indicate omnichannel as the ‘new normal’. It is also indicative of the fact that the economics of pure online retail remain challenging, i.e. the ability to make meaningful profits from online retail alone is not easy. No clearer example of an e-tailor moving into brick and mortar is that of online giant Amazon having bought Wholefoods in 2017 – an indication of the desirability and need to be in strong physical locations that are close to your target consumer demographic.

The most recognised retail names are rethinking their physical store presence. Gone are the days of mass store rollouts and having numerous stores in close proximity to one another. Global brands such as Zara and H&M are choosing to have fewer, but larger and more dominant ‘flagship’ stores in key locations. This allows them to efficiently connect with their customers and to provide an enhanced customer service experience. Most retailers also now offer click-and-collect services as well as online returns in-store, which have known additional benefits. Allowing customers to return their online purchases in-store generally results in additional spend instore to a value equal to or greater than that of the initial return. Studies have also shown that closing a physical store in a location has a sustained reduction in online sales within that same location. The message is that online and physical retail work in symbiosis.

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Article written by Tiffany Jones, Investment Analyst at Catalyst Fund Managers