Retail malls: Rest in peace? Not so soon …

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An abandoned shopping cart: will retail malls face the same fate?

The rising penetration of online retail sales has dampened the occupancy and rental prospects of physical retail malls. This has led to many observers to question their relevance. Some are even predicting their demise and that there’s no future for them. We think contrary to this. We believe physical malls are here to stay, and they still have a role to play. However, it will not be business as usual. Malls will need to reinvent themselves, evolve, and find ways to complement online retailing. There will be fresh rounds of consolidation, new partnerships and new strategies. There will be winners and losers. The market may also rethink ways to assess mall values and rents.

Key summary:

  • We monitor mall rents = Footfall x Spending per footfall x Occupancy cost ratio. With a rise in online retailing, physical malls are working harder to increase their footfall and spending per footfall, by reconfiguring tenant mix and increasing loyalty programs.
  • Market studies of the US and Europe showed that physical and online retail can co-exist and complement each other. Multi-channel retailing* is an opportunity not a threat to mall operators.
  • Even online retailers like Amazon and Alibaba are opening physical stores and buying over malls, which is further testament to the importance of physical stores. According to them, physical stores help to better engage customers, breed brand loyalty and gain trust, which in turn drives online sales.
  • Overall, physical malls remain relevant but they need to evolve. An ultimate “future-ready” mall is one where they create a seamless retail ecosystem, supported by multi-channels, with added components of big-data technology and logistic supply chain management. At least, until they get disrupted again in the future.
  • The winners are physical malls that have strong location attributes (like all real estate), optimal mall configurations, and roadmaps in place to roll out digital strategies. The losers will be those located in bad locations, limited scale and capital to invest in digital strategies, as well as strata-titled malls that lack mall management control.

* Multi-channel retailing is a marketing strategy that offers consumers multiple ways to buy products anytime, anywhere and from any medium, such as physical store, shopping website, mobile phone, interactive TV, and catalogue order mails.

 

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A quick primer on how to assess a traditional mall’s success

To understand how to assess a mall’s success, we look at how effective it is in raising rents. In our rent-derivation formula, we show that rents depend on the mall’s ability to boost its footfall and spend per footfall, which can then translate to higher tenant sales. With higher tenant sales, it will be easier to negotiate for higher rents with tenants.

We analyse the rent-derivation formula by breaking down the three components:

formula

Source: DimSum Property

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Footfall: probably the most important component to make a mall tick

 

  • Footfall, or shopper traffic, is probably the most important component to make a mall tick. Malls constantly think of ways to attract shoppers and increase footfall. Our channel checks suggest footfall per mall (with size of 70k-100k sqm) in Asia typically peaks at around 20-25m p.a. All things equal, it takes about 4-5 years for footfalls to peak, from mall inceptions.

 

  • Spend per footfall depends on shoppers’ income levels. It is higher in developed countries with higher income per capita. Mall managers play an important role too. They can make shoppers spend more by implementing successful marketing strategies.

 

  • Occupancy cost ratio measures the proportion of rental costs to tenant sales. A high ratio limits upside for rent negotiations. All things equal, malls would prefer to achieve a stable ratio. In Asia, they range between 15-20%. They tend to be higher as malls mature, reflecting higher bargaining power for landlords on their proven capability of its malls in attracting footfalls and sales. They also tend to be higher for malls located in gateway cities, as tenants feel they can stomach higher rents because of their perception that gateway cities offer greater certainty of market growth, spending propensity and brand awareness.

 

Defending their turf    

To strategize against online retailing, many Asian malls we surveyed have already started to reposition themselves to create “mall stickiness” to boost footfall and spending per footfall.

Malls are thinking of ways to encourage shoppers to visit their malls more often, and to stay longer during each visit. The essence behind each strategy is to offer a “unique and experiential” shopping experience that cannot be easily replicated online.

Some defensive strategies are highlighted below.

  • Reconfiguring tenant mix. Malls are changing their tenant mix by reducing exposure to book shops, CD shops, low-end fashion and apparels that are easily found online, and increasing exposure to F&B stores and restaurants (destination centres). Leading Asian malls such as Wanda, Joy City, Frasers Centrepoint and Link REIT have gradually increased their F&B exposure to 25-30% of their net lettable area, up from 20-25% several years ago.

 

  • Increasing entertainment, thematic and event-driven contents. According to retail & brand consultancy FITCH, malls need to reposition themselves from being “Places To Buy” to being “Places To Be”. In China, we have Joy City’s themed shopping streets “Joy Yard” and New World’s art-themed K11 Art Malls (e.g. Monet art exhibition). In Philippines, there’s Dreamplay (created by Dreamworks) at Melco Crown- SM Prime’s City of Dreams Manila Mall. In Singapore, Funan Digitalife Mall, when reopened in 2019, will consist of an indoor cycling path, rock-climbing wall, experiential cinema and smart food-court.

 

  • Ramping up loyalty membership programs. A recent Nielson survey of 353 shoppers in Singapore showed that 67% shopped more frequently and spent more at stores with loyalty programs. In China, Joy City, guided that members accounted for 15-20% of retail sales and they tend to stay longer (>2 hours), spend more than average and visit more frequently (3-4 times/month vs 1-2 times average). As well, CapitaStar is a rewards program launched by Capitaland in 2011. It has since signed up >2m members across 70 malls in 5 countries.

 

  • Targeted marketing campaigns. As more shoppers sign up for rewards programs, malls can create useful information platforms about shopper preferences. They can then empower their tenants to better understand and engage shoppers, resulting in targeted marketing campaigns that are more efficient and persuasive.

 

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Chart: China – rising online retail sales, leading to defensive responses from traditional physical malls

Source: Euromonitor, National Bureau of Statistics

 

Market studies of US and Europe show the co-existence of physical and online retailing

Matured market studies of US and Europe suggest that physical and online retail can co-exist together and complement each other, rather than compete. There, consumers are using a combination of physical and online channels for their research and final purchases.

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73% of shoppers of a huge US retail company surveyed by Harvard Business Review in 2015-16 used multi-channel retailing

According to Harvard Business Review’s survey of over 46,000 customers of a US retail company (with hundreds of retail stores across the US) in 2015-16, customers were asked about every aspect of their shopping journey with retailers. Of the study participants, only 7% were online-only shoppers, and 20% were store-only shoppers. The remaining majority, or 73%, used multiple channels, including storefronts, during their shopping journey. They still rely on physical stores as part of their retail purchase journey, for example, to try out goods as well as to return goods. This shows that physical malls remain relevant.

In fact, physical retailers in the US and Europe have been making big strides in tapping online capabilities to “extend and deepen customer engagement”. According to Deloitte (2015), out of the top 50 e-tailers in the world, 39 of them were traditional physical retailers with online capabilities, such as Walmart, Tesco and Macy’s.

 

Leading Asian retailers and malls have studied these examples, and started to work on providing both physical and online channels for shoppers, such as Wanda, Joy City and Capitaland.

 

Chart: Survey of 46,000 US customers of a huge US retail company between Jun 2015 and Aug 2016, showing the skew towards using multi-channel channels

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Source: Harvard Business Review, 2017

 

Chart: Purchase journey of a US shopper – store versus digital or multi-channel shopping journey preferences

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Source: AT Kearney, “Omni-channel shopping preference study” 2014

 

Chart: Traditional physical retailers tapping online opportunities

Traditional physical retailers tapping online opportunities

Source: Company data, DimSum Property

 

Even (pure) online retailers are “getting physical” too

Even pure online retailers have also been opening physical storefronts and buying physical malls in the past few years, which is further testament to the importance of physical stores.

Many have opened what are essentially showrooms, which allow customers a place to try on, sample products and allow them to make informed decisions about what they’re buying. According to surveyed shoppers, they commented that “nothing beats holding a product in your hand, feeling the fabric, and seeing the minute details, something that cannot be done online.”

nothing beats holding a product in your hand, feeling the fabric, and seeing the minute details, something that cannot be done online.

As we move from an age of transaction-based retailing to one of relationship-based and advice-based retailing, consumers are looking for more than just products to buy. Online retailers find it hard to develop these types of relationships when their main interactions are conducted through a computer screen or smartphone. That is why online retailers are looking to physical stores to meaningfully engage customers, build long-lasting relationships and breed customer loyalty, which in turn drives online sales.

Chart: Even pure-online retailers are also opening physical storefronts

Even pure-online retailers are also opening physical storefronts

Source: Company data, DimSum Property

 

What defines a “future ready” mall?  

Overall, physical malls remain relevant but they need to evolve. The ultimate “future-ready” mall is one where they create a seamless shopping experience or ecosystem, supported by multi-channel capabilities, with added components of big-data technology and logistics supply chain management. At least, until they get disrupted again sometime in the future.

We believe a “future-ready” mall will get more interactive and more personal with their shoppers. The more they understand their shoppers, the more interactive and personalised the content is going to become. Physical malls can build these capabilities on their own, or they can partner with experts in online marketing, big-data and logistics supply chain management, to create the ultimate retail ecosystem.

 Chart: What a “Future ready” mall and “New Retail” may encompass

Functions Details
Tech enabled “experiential” shopping Providing support for shoppers, such as online parking navigation, store finding functions, restaurant queuing systems, and cinema booking systems
Online marketing for offline stores Directing online flows to physical malls, by converting interests generated online into higher footfall for their physical malls; Implementing online marketing platform and promotional channels to push notifications to shoppers for retailers in malls; The Israeli start-ups that we talked to, such as Trendiguru, Hexa and Winkapp, are all tech-enablers that help enhance to marketing and advertisements online for physical malls
E-payment systems Some malls are moving one step further by controlling e-payment systems to manage cashflow, lending and credit terms to retailers in the malls, as well as parking fees and membership reward systems; e.g Alipay, Unionpay, Wechat, etc
Big-data analytics Through loyalty programs and e-payment systems, more shopper information is collected, e.g. taste and preferences, average stay per visit, frequency of visits, etc; Over time, shoppers entering a physical mall might be able to consult an app that would know their tastes so well it would steer them directly to an article of clothing they would like
Logistics supply chain To provide a seamless service for multi-channel shoppers on “Click and Collect”, ” Buy Online, Pickup in Store” (BOPUS), “Order in Store, Delivered to Home”, as well as Returns Goods management
Geo-technology Some malls turn to “Geospatial” technology to analyse a wide range of retail factors, from footfall, to share-of-wallet per shop. Malls can use this data to justify rents. Boustead in Singapore provides Geospatial Information System (GIS) to allow malls to track mall performance, and to compare data of surrounding competitor malls to shape response strategies
Personalised marketing campaigns Retailers tap geo-location technology to know whereabouts of consumers, and consumers are more than willing to share this data for better deals; Allows retailers to hyper-personalize marketing campaigns, deliver location-based promotions and place timely mobile ads; Consumers can also use geo-location services for delivery services, taxi services, food search, etc (Example: Snapchat’s geo-filter); As well, retailers like Walmart are now able to advertise directly to the consumer with their SavingsCatcher feature on the mobile app. The app RetailMeNot, in a similar vein, pings a user’s phone when they are passing a store with a deal or promotion; Israeli start-up FST Biometrics offers retailers the apps to recognise shoppers via their facial and motion features, which allows direct marketing as they enter malls
“Just walkout technology” Amazon announced the launch of “Amazon Go” in 2016, an automated, checkout-free convenience store in Seattle, Washington, powered by technologies such as computer vision, sensor fusion and deep learning. Still at beta-testing, shoppers at “Amazon Go” need to log-in to the app, which provides them with a QR code they scan when entering the store. Shoppers are then allowed to pick up and return items freely from the shelves. Amazon’s technology detects shoppers through biometrics when they walk out of the store and charges their purchases to their Amazon account. There are no checkouts, cashiers or physical payments.
Concept of “New Retail” Alibaba recently introduced the concept of “New Retail” in Oct 2016. It is more than online and offline channels (O2O), and has added components of big-data technology and logistics supply chain management. In summary, this implies that Alibaba believes that the era of pure-play online retailing will soon be a thing of the past, and that New Retail will be the focus over the next 10-20 years.

Source: Company data, FGRT, DimSum Property

Rethinking mall values and rents

The importance of multi-channel retailing strategy could have significant positive effects on the real estate side of the retailing business. Online retail giants (such as Amazon and Alibaba) know it, and they are merging their businesses with retail real estate. They have concluded that physical malls are effective customer acquisition vehicles, that can build brand awareness to drive online sales. As such, online retail giants are assigning value according to the benefits these malls may bring to their businesses.

Near-term, the physical mall outlook may continue to be clouded by the immediate impact of online retail sales that are dampening the occupancy and rental prospects. This is causing the market to adopt a more cautious view on mall valuations. However, longer-term, as more online retailers start to partner or acquire physical malls, the market could accord higher valuations to physical malls, especially those with strong location attributes.

Lastly, some market watchers are concerned about how malls should measure rents, especially with more shoppers adopting multi-channel shopping (For example, “Try products at store, but buy online”, “Click and Collect”, and “Buy Online, Pickup in Store”). We expect malls to consider a higher component in fixed rent, relative to variable rent (the latter is usually pegged to tenant sales), unless mall managers are able to effectively monitor tenant’s sales that are made online, rather than at malls.

Implications – Winners and losers

From the perspective of physical malls, the winners are malls that have strong management teams who have prepared themselves with optimal mall configurations, roadmaps in place to roll out digital strategies, scale required to invest meaningfully in online capabilities, and partnerships with strong online retailers. Winners are also malls with the best locations (like all real estate). These malls will remain highly relevant and valuable not just to shoppers, but to online retailers who may partner or make mall acquisitions in future.

The losers will be those that are located in bad locations, with limited scale and capital to invest in digital strategies, and strata-titled malls that lack mall management control. As a result, these poor-quality malls may become irrelevant in the new digital era.

Disclaimer: Our research is based on public company information and presentation, as well as channel checks and interviews with various retail industry players.

 

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