Copyright: David Lawson- first published Property Week January 1999Home page
Two key factors have shaped the map of modern retailing: technology and transport. How could food superstores work without computerised tills and stock control? How could out-of-town malls exist without near-universal car ownership?
These two influences will become even more crucial in future. Everyone has by now heard of the Internet and futuristic projections about the death of the high street. That seems to meld perfectly into warnings that global warming will force heavy restrictions on traffic flows: we stay at home rather than drive to the shop.
The prospect of retail Armageddon is farfetched but there is a much more complex picture hiding behind this hype. Advances in computer systems and tighter transport controls could still interact to change the size, shape and location of shops and warehouses.
How that happens remains a matter of debate. Major retailers are probably the most sophisticated users of computers outside the defence industry, yet they rarely reveal details of systems hidden away in backrooms and warehouses: 'Everyone plays their cards close to their chest because the competition is so intense,' says one analyst.
Many of these secrets have been dug out by researchers at the Institute of Grocery Distribution, however. Its annual report on IT trends shows just how much retailing is shaped by new technology, stretching to 120 closely-packed pages of analysis.
Working out the implications of this secret world on retail property is another matter. 'The retailers themselves have asked few questions,' according to Ajay Punatar, retail systems director at Arthur Andersen. Developers and investors seem even more in the dark.
'I have enough trouble working out what the market will be like next year without speculating five or ten years down the line,' said one fund manager with major retail holdings.
Guesstimating the future is easier if the sector is split into three areas: in-store, distribution and, inevitable, online.
Who can forget the Piggly Wiggly? And what about the Keedoozle? In case it has slipped anyone's mind, the nursery-rhyme name marked the world's first self-service store, opened in Memphis around the time of the First World War, when sugar came in sacks and rabbits hung outside J Sainsbury.
Today, boutique malls sell sacks with designer labels and rainclouds hang in the rafters of gigantic superstores. Poor little Piggly Wiggly would be lost in some remote corner.
But what of the Keedoozle, which emerged around the same time? This enabled shoppers to select goods from display cabinets with a mechanical 'kee'. It triggered a conveyor to deliver products and even calculated the bill. The system disappeared without trace but retailers are experimenting with similar systems today, and these could transform the e way space is used.
Safeway has introduced equipment which the customer uses to scan prices for automated billing. The group expects to expand use to more than 100 stores by this year. Waitrose is trialing similar 'wands' which customers use to scan barcodes. NCR has invented a shopping trolley which reads 'intelligent' tags on products.
They are all aimed at one target: getting rid of the till. US research shows each checkout lane costs more than 60,000 pounds a year. In a cut-throat market, this can be a crucial cost. Queues have also been pinpointed as a problem which drives away custom.
Eliminating checkouts could lead to a major rethink on space. 'Supermarkets might redesign to take on the ambiance of a market,' says the IGD study.
Going one step further could be even more revolutionary. Why use expensive sales space for endless rows of tins and cornflakes boxes when you need only one of each for scanning? Stack them out of sight instead.
The technology is not yet sophisticated enough to pick up commands from hand-held wands then select from automated warehouses at the back. When it is, ratios between costly sales and cheap storage space could change - along with the returns to landlords.
The IGD found that retailers saw this Argos-style operation was possible within the next couple of years, although expert observers pushed it another five years or so into the future.
The gap between 'kee' and wand shows that talk of a revolution in retailing may not be as predictable as it seems. There is a saying among forecasters that it is common to overestimate the short-term impact of technology and underestimate the long-term. But perhaps the day of the Keedoozle has finally arrived.
Advances in IT and environmental pressures appear to be taking contradictory paths. New technology is increasingly geared to match demand and supply, keeping stock supplies to a minimum. But that implies more road trips as shops top up stocks every time a microchip reports they are running low.
There is growing evidence, however, that technology could can help retailers meet environmental pressures by rationalising distribution systems. That, in turn, could have a powerful influence on the size and location of warehouses.
Ever-enthusiastic to cut costs, retailers are keen to control stock inventories. A recent US study showed that reducing storage time by two weeks cuts sales costs by 1%. Closer to home, Tesco is rolling out a system this year linking tills with suppliers, which it predicts will cut costs by up to 5%.
Development of just-in-time (JIT) delivery systems have already affected warehouse property. All the big foodstore groups now rely on a handful of giant regional distribution centres, where optimal location for swift delivery to outlets rather than rents are the major influence.
But more trips mean more vehicles and more wages. In the US, computers are already being employed to reduce deliveries by more efficient use of waggons. The IGD report says this has cut the number of trips by as much as 20%. So technology could gives retailers an escape route from demands for tighter controls on deliveries to reduce environmental damage and road congestion.
More fundamental changes could be waiting in the wings, however. Closer links between retailer and manufacturer and less stock in the pipeline will mean less demand for warehousing space. Barry Pople of Fuller Peiser says one client has already got rid of one of its three 200,000 sq ft warehouses.
'That has taken a 10m pound investment out of the loop,' he says. One example may seem insignificant. Yet CBHillier Parker points out that retailers such as Sainsbury, Tesco and Argos make up 40% of institutional holdings in this market.
Pople sees even bigger structural changes looming. Pressure to cut both delivery and environmental costs could see different manufacturers sharing warehousing operated by a specialist rather than sending out part-empty lorries from their own facilities. That will strengthen the role of third-party distributors and boost the market for rented property.
It may also ease the crisis over distribution leases. Fund managers are uncomfortable with the fact that these contractors are demanding terms closer to the five-year contracts they hold with clients. If distributors can rely on several overlapping contracts, they will be more willing to accept institutional leases.
Retailers' own distribution centres may also change - or even disappear. Ajay Punatar points out that stores could share deliveries of basic produce such as bread and vegetables. 'These are so standard nowadays that there seems little advantage in having separate delivery systems,' he says.
In fact there is a case for retailers holding no stocks at all. Suppliers will have so much information on customers' needs and the state of stocks on shelves sent down a phone line by store computers that they could respond automatically to demand. They could maintain ownership of the produce from factory to shopping basket, says Punatar.
The store of the future may merely rent out its location and presentational skills to manufacturers. The profits would then be split. That could have immense implications for property values. It would free up massive amounts of capital for retailers to compete for the best sites and add a new dimension to the trend towards turnover rents.
Distribution networks could also feel the influence of online retailing (see below). The vast majority of retailers moving into this area will need new kinds of warehousing, according to a survey by FPDSavills.
Most non-grocery retailers operate from central distribution depots but this will not suite delivering to homes, says Fiona O'Callaghan of FPDSavills Research. A mix of local, regional and national centres will be needed - but no-one knows what mix.
'There is a lot of uncertainty, with few examples to follow,' she says. Almost a third of retailers interviewed did not know what they would need.
One early example is Asda, which has set up a 55,000 sq ft warehouse/call centre in Croydon for home delivery. Somerfield is also launching a string of 20 urban warehouses for its online shopping service. Outside the food sector, the book retailer Amazon, now one of the world's fastest growing companies, has taken a 40,000 sq ft warehouse from Slough Estates to service its move into the UK online market.
The M25 seems a likely location for other ventures, as it runs around the highest concentration of people - and computer owners - in the country. 'There is a fundamental mismatch of distribution centres, and other retailers will need to gear up to provide goods within a day or two of ordering,' she says.
Warehousing required by Retailers for Online Shopping
Local distribution centre 14%
Don't know 29%
(Source: FPD Savills)
About the only good news to emerge for retailers from the Christmas non-rush was a surge of electronic buying. This has led to yet more mumblings from futurologists about the impending death of the high street. And yet again, they are counting chickens.
Verdict Research says the number of purchasers doubled to 1m in 1998 and sales of more than 400m pounds will multiply to over 6bn by the year 2003. So it will become a 'viable distribution channel' within five years.
But this must be set against the massive bulk of conventional outlets. Electronic shopping represents a mere 0.2% of total retail activity. Even in five years, this will grow only to 2.5% of the market. 'Electronic shopping.....will not replace the high street,' is the blunt Verdict conclusion.
Another leading analyst, Fletcher Research, estimates the figures differently, putting today's sales at almost half Verdict's estimate and forecasting 3bn pounds annual turnover in five years. Perhaps this is because it strips out financial services, one of the prime driving forces. Online broking alone is expected to reach 19bn pounds by 2003.
Some of the biggest retailers appear to be taking the whole thing very seriously. The Institute of Grocery Distribution lists trials by Budgens, Iceland, Safeway, Sainsbury, Somerfield and Tesco. But food will not disappear off the shelves and onto computer screens in a hurry. Fletcher says delivery problems are still a big barrier to growth. Online grocery shopping will remain a niche sector for the foreseeable future, worth around 73m pounds by 2003, it says.
That still leaves a latent demand which UK companies are proving slow to consider. Almost half the top 100 retailers have dipped a toe in the water by publishing Internet pages but only just over a dozen can be used to order goods online. They are missing a trick, says Verdict, as around 350,000 online shoppers said they would not have bothered to buy at all unless they had found such an outlet.
The rise of computer ownership, free access to the internet and the advent of TV-based interactive services are all expected to increase this potential. Retailers will struggle if they do not at least offer this as an alternative to core services. They may have to if proposed parking restrictions keep customers away, suggest the IGD analysts.
How it will impact on retail property remains hazy. Dire warnings come across the Atlantic from Mark Borsuk, a US retail broker who has made a speciality of forecasting the impact of technology through his Real Estate Transformation Group.
Certain products are ripe for transition to electronic sales, such as travel, software, financial services and specialised foodstuffs. These will be the empty gaps of the future high street or mall and investors should be considering this when planning their tenant mix today, he says.
Retailers face a big challenge from newcomers and financial vultures. Amazon has soared within a couple of years to take a huge chunk of business from conventional book stores. Banks are closing branches like there is no tomorrow and opening up online. Borsuk says they are pointing the way for retailers: holding onto customers they would otherwise lose to new Internet services.
A Christmas Cracker - US style
(Source: Mark Borsuk - Retail Transformation Group)
A further shock awaits retailers from a new kind of operator. They will bundle up a variety of services and goods ranging from groceries to health and consumer electronics to give buyers a one-stop shop of well-known brands.
'Bundle buying' could devastate community shopping centres anchored by supermarkets because they would operate locally, overcoming the barrier of delivery costs, says Borsuk. This uncertainty will change the attitude to leasing. Retailers will seek more flexible terms and possible breaks if they feel the demand for physical space will fall.
Big retailers slow to embrace the new sales channel risk incurring financial problems. Credit rating agency Fitch IBCA recently expressed concern over the implications for traditional retailers which fail to adapt.
Borsuk warns of a new class of corporate raider which seek retailers ripe for downsizing, and move in to make a killing. 'Cybersurgeons will substitute software for staff to reduce headcount, impose telework programs on employees to cut back on space needs, sell corporate holdings, and renegotiate leases,' he says.
Property owners and lenders will be forced into a new round of retail consolidation and should be already planning for alternative uses. 'The idea of converting a mall into a Necropolis is not so far fetched. Cemetery space is running out, says Borsuk, quoting one Canadian developer already building a five story high-rise for the dead in a residential neighbourhood.