Let's be positive!

The slope is steep, but the road is straight. May we be forgiven for pastiching a former formula-loving Prime Minister in this way. While times are indeed extremely difficult, the crisis teaches us that the rebuilding of trade is on the right track. And that there is an urgent need to speed up.

The knock-on consequences of the COVID-19 epidemic are worrying: severe difficulties for shopkeepers, the likely acceleration of vacant space in city centres and shopping malls, the fall in property values which risks accelerating the obsolescence of assets...

For all that, fatalism being fatal by definition, let us instead look for good reasons to act.

An undeniable outcome of this crisis is that it now makes it very clear that trade needs to be rebuilt on new foundations. This is not a new concept, we have been talking about it here regularly for several years.

Accelerating trends

 

However, the current crisis is accelerating several trends that are already present among consumers, and which are partly integrated within the distribution sector. 

1. The need for proximity. This is reflected in the renewed taste for local shops (a long-standing trend, but one that is strongly accentuated by lockdown) and by increasing support for local production, particularly in the food sector (short circuits). It is partly explained by a desire to be anchored in a local community in which trade is one of the pillars.
2. Environmental awareness. Even if it is not always reflected in action, it is becoming more and more prevalent at all levels of society. It may result in less consumption, but also in a new distribution of spending and new ways of consuming, for example by resorting to second-hand purchases, which are growing strongly. It is in keeping with the need for proximity.
3. The attractiveness of medium-sized towns. While we should not extrapolate too much from the lockdown, it is clear that this trend offers an opportunity for cities which want to take advantage of it to rethink their reception strategies. By relying on the opportunities offered by distance working, but also by creating the conditions for satisfying the two previous trends: intelligently supporting authentic local commerce, with the urban environment that goes with it, and enabling the residents to live in line with the ecological values they defend.

What is striking here is the extent to which these trends form a coherent whole on which it is possible to build.

Transformations

 

Having said that, let's not be naive. Enormous, pressing projects are already underway - or pending - by players in the distribution sector.  The crisis, moreover, gives credence to the frontrunners who have understood two things:

1. The key is powerful upstream-downstream coordination. The winners will be those capable of mastering the supply chain, from procurement to making items available to consumers, wherever they are (in-store, delivery, drive, click & collect...).
2. The need for the digitalisation of commerce, at all levels of value creation: logistics, sales, service.

In terms of real estate, this also translates into profound changes.

1. The shop remains a hub of commercial operations, but it integrates new functions, particularly logistics.
2. The networks are evolving towards a more finely woven network, which implies very diverse formats, adapted to the specific context of each location.

These projects will undeniably be very demanding. That said, one simple observation offers a powerful antidote to fatalism: the direction in which they are driving distribution is very consistent with the three trends mentioned above. Meeting consumer expectations will always be the alpha and omega of commerce. 

 

Change of economic model

 

Obviously, these transformations are synonymous with a change in the retailers' business model and affect the financial equilibrium of commercial property.

1. For chains, the shop's contribution to value creation is becoming increasingly complex. Its real estate cost must therefore be adjusted, especially in a context of strong investment in logistics and digital technology. In addition, there is an increased need for flexibility to experiment with new formats.
2. For lessors confronted with these new requirements, adaptations will be necessary. Rent adjustments on the one hand and lease conditions on the other.
   Asset values will also be readjusted, downwards for prime assets with massive customer flows and upwards for secondary assets that have become attractive for their contribution to the local area network.

 

Faced with these substantial financial stakes, it may seem excessively optimistic to "connect the dots" in this way to reveal a positive image of the future, notwithstanding the difficulties. 

But, on the one hand, the transformation dynamic brought about by the crisis in a number of companies (beyond retail) is sometimes astounding, contradicting the prevailing gloom.

On the other hand, a positive image of the future is necessary for action, and we have delayed for too long. If the above analysis seems to have acquired some truth in light of current events, it is not entirely new. The overhaul of commerce is becoming more and more urgent, but the direction is also becoming more and more obvious.