Impact of e-commerce on retail real estate

Copyright: David Lawson/Financial Times June 2000

Home page

It is unlikely that many retail landlords found time to attend the Information Technology World Congress in Taiwan earlier this month, but perhaps such events should be given priority in future. IT dominates predictions about investors with billions tied up in malls and high streets. They must not  expect a clear and simple message, however.

 'Sell your shopping centres,' Lester Thurrow, a professor at MIT's Sloan School of Management, warned in Taiwan. 'Half the stores in America will be closed within 10 years as buyers move to the Internet.'

  Yet only a few weeks earlier the opposite view emerged  from another  world congress, this time held  in New York by the International Development Research Corporation (IDRC). Web enthusiasts have predicted doom for years,  yet the opposite is happening, said Dennis Yeskey of Deloitte & Touch Real Estate.  Gateway is opening 400 computer stores across the US and online wunderkind  Amazon plans a series of bricks-and-mortar outlets.

 Many European investors are just as sceptical. 'A decade ago you would have predicted the end of traditional centres if 30 per cent of their business was drawn out of town, yet that is exactly what has happened,' says Martin Barber, chairman of retail investor Capital & Regional.  Even when a  major chain such as C&A pulls out, closing more than 100 stores across the UK, queues of other retailers fight to take over its space in good locations.

 That does not mean landlords have ignored the enormous potential impact of new technology. In fact, some of the leading investors  are embracing it enthusiastically in a bid to protect their assets. A group of the biggest US operators - Simon Property, Macerich, Rouse, Taubman, Westfield and Urban Shopping Centres - have  created  MerchantWired [ONE WORD], a partnership with top technology suppliers aimed at equipping malls for the 21st century.

  They will be 'wired' with broadband communications facilities for linking stores with suppliers and customers. This promises the capacity for online shoppers - often put off by the 'world wide wait' - and  improving the efficiency of supply chains.

 The plans go beyond fast communications, however. 'This will open the door to generating  extra value, such as selling utilities to tenants and collating data on shoppers. It is a revolutionary move,' said one Wall Street analyst.

  Simon is also planning  another approach  by teaming with Turner Broadcasting to create entertainments which will keep its 100 million shoppers coming in the door. The partners have hired Edwin Schlossberg, a New York firm which designs and produces sports and live entertainment, to launch multi-media events later this year which will also be broadcast by Turner.

  General Growth Properties, the second largest US owner of regional malls, is testing a  web service on a Missouri centre which meets e-tailers head on. It enables shoppers to buy online from any store and then either drop in to collect purchases or have then  delivered.

 The company says this will help smaller stores in its malls which cannot afford to set up e-commerce sites. The landlord can also use its  financial muscle to organise credit-card transactions, bundling together purchases from several stores into a single bill.

 Merging conventional shopping into the web - already dubbed 'clicks and mortar' - will be a  crucial factor in the evolution of internet shopping, Jupiter Communications analyst Ken Cassar told a US conference earlier this year.  A physical presence to 'touch and feel' -  or return - goods was a major issue for shoppers, he said. The internet could become more important as a marketing tool, drawing in shoppers to physical stores, than as a revenue generator from online sales.

 Many Europeans stand back agog at the US-based revolution. 'This sort of technology is not cheap and retail ownership is much more fragmented than in the US,' says Vince Prior, head of European retail at Jones Lang LaSalle.

 Even internet-friendly regions like Scandinavia are trailing because investors are not in the same league as an operator like Simon, which has hundreds of outlets. Meanwhile countries such as Germany and France feel under less pressure from online shopping because credit cards are used much less than the US. 'They are also seeing internet retailers having problems with both their share prices and delivering goods to customers,' says Prior.

 The UK is probably 18 months ahead of the rest of Europe and running the US a close second, however. The industry will be closely watching The Printworks, a  retail and leisure centre in Manchester,  due to open this autumn. It was 'wired' with broadband connections  as part of a wider project to enhance internet services in the city and has ambitious plans for  a promotional web site. Even the leases could be wired, dividing the spoils of sales generated on the internet between retailer and landlord.

 Others are also considering following the US lead. 'We are the group that launched Egg as an online service, so we are well aware of the possibilities,' said Chris Taylor, director of investment at Prudential Property Portfolio Managers.

 The Pru is keeping an eye on the way groups such as Simon are levering extra income through sponsorship, advertising, or helping tenants drive sales. Each of the Pru's 23 centres across the UK  has a web site to promote tenants. New technology has already played a significant role via the latest  development by the fund,  Cribbs Causeway, in Bristol. PPM is able to track sales through  computers which link  returns  retailers tills.

  This kind of sales analysis is crucial for the future of shopping centres, according to Martin Barber of Capital & Regional. The company uses IT to measure the number of visitors to its chain of shopping centres, correlating the figures  with sales to judge the success of marketing and promotion. He sees the whole tenor of real estate changing, not just because of the Internet but the need for this kind of  scientific management to compete in an era of low-inflation and increased competition.

  It is all about exploiting assets - not just the bricks and mortar but the  bodies walking in and out. C&R has 150m visitors a year, and  there are businesses  that would pay a great deal to harvest them.