Blog Post

Retail’s Great Transformation: How the UK Market Is Changing

March 11, 2021

As was the case for many industries, the COVID-19 pandemic accelerated many trends within the retail space. Now, retailers have to contend with a whole new paradigm in their industry. How can one adapt to the new emphasis on online shopping? What should the new in-store experience look like? Let’s dive into the post-pandemic changes we’ve seen in this industry and identify the new strategies retailers need for success.

A diminished role for high street and shopping centers

With the massive migration of office workers away from crowded urban shopping centers and into the comfort of their own homes, consumers have had to buy their products online more and more. This fact has been obvious for anybody with even a cursory interest in the retail industry, but COVID-19 accelerated the transition to a rate of change that few were prepared for.

In fact, coming into 2021, card handlers have observed a 20 percent growth in online sales. Applications for retail spaces in the UK are down 22 percent. This trend towards online sales holds true even for grocery retailers, who fared relatively well throughout the pandemic given their essential nature: Today, 30 percent of UK consumers currently shop for groceries online.

As a result, the expensive rent for downtown shopping centers and high street locations are no longer making economic sense to retailers. Does this mean that high street is dead? Not exactly. High street stores still have a place in a retailer’s real estate portfolio, but if a retailer is to see an ROI on their leases, they’ll need to deploy a real estate strategy that considers several new, key factors.

What new factors define a successful retail real estate strategy?

Buy online, pickup in store

Foot traffic may never return to pre-COVID levels, especially since it was already on a long-established downtrend. Building a robust online channel is essential, but so is preserving and refining your physical retail presence.

With diminished foot traffic, retailers are focusing instead on optimizing their stores for click-and-collect models, or buy online, pickup in store (BOPIS). BOPIS models ensure that shoppers save on shipping fees, can get their purchase quicker and interact with a brand representative if they so desire.

These benefits are dependent on having a physical storefront. Thus, even though digital channels are growing, physical space is always going to be an essential tool in a retailers’ toolkit — or at least, it should be if retailers want to meet their customers’ wants and needs. According to a McKinsey study, nearly 60 percent of consumers said they intended to continue to rely on BOPIS models to purchase products even after the pandemic ends.

Emphasize the in-store experience

Just as a BOPIS model depends on possessing a physical store, retailers should focus on maximizing the benefits that only their physical channels can offer and that their digital channels lack. That means retailers need to deliver an in-store experience.

Elevating the in-store experience will look differently depending on your industry, but generally, retailers should dedicate their physical space towards allowing their customers to tactilely experience their product (with the proper health and safety precautions, of course) — trying on clothes, trying free samples, testing out sporting equipment, interacting with devices and so on.

Physical stores should also serve as an important brand and marketing experience. Your digital brand is limited to your customers’ laptop; a store can provide a much more immersive experience that can better cement your brand in your customers’ mind.

Focusing on the in-store experience, of course, isn’t anything new. What is new is the heightened, almost exclusive focus on the experience — in fact, there might not be any expectation for an actual transaction to take place in your store. Rather, a typical customer journey might be to try out a product in-store, consider their experience, buy online at their home and return to the store to pick up their purchase.

Respond to reverse urbanization

With the success of the mass experiment known as remote work, many will leave urban centers in favor of the lower cost of living and greater space available in suburban and rural communities.

That means fewer office workers stopping by the mall on their lunch break, less overall foot traffic in expensive high street real estate and less ROI for retailers leasing store space in the places where people no longer gather.

Coupled with new BOPIS- and experience-optimized retail models, reverse urbanization requires retailers to be highly strategic about where they locate their stores. Following people outside of urban areas will be essential, but retailers must strike a delicate balance; even though more people are moving to suburban and rural areas, there must still be enough population density to justify the cost of leasing space.

But at the same time, we can still expect there to be value in locating stores in urban centers. These areas will still host a significant population of people, just to a lesser degree than before the pandemic. After all, the denser cities still afford networking and cultural opportunities that may prove to be more attractive than the space and low cost of living offered by less dense regions.

In this sense, the basic rule of where you should locate your store hasn’t changed — you need to place it where the people are. Rather, retailers need to develop a capability to better track the more fluid and less dense populations of shoppers of the post-pandemic world.

Agile lease management will be key

In order to be strategic about their spaces, retailers will need to negotiate for greater flexibility in their leases. What does this flexibility look like? As a non-exhaustive list, retailers should consider the following:

  • Multi-use space: In order to attract shoppers into their stores, retailers could negotiate for language that permits them to use their leased space in different ways than a traditional retail experience.
  • Turnover-based rent: Rather than rely on the traditional upward-only models that dominated commercial real estate, many UK retailers are pushing for leases whose rent is calculated as a percentage of their sales.
  • Shorter lease terms: Wary of being locked into space that’s seeing a dwindling population, retailers may grow tired of the typical years-long term length of their leases. Being able to move with an increasingly fluid and remote-enabled population is key, and that can’t happen if your half of your lease portfolio is made of low-performing stores in areas with no foot traffic.

Source the right data

Negotiating for flexible leases will ensure that retailers can keep up with the faster rate of change we expect to see in the modern, post-pandemic world. To inform this negotiation and to ensure their existing lease portfolio is as lean as possible, retailers will also need to leverage contract analytics technologies.

Centralizing, structuring, identifying and extracting lease data will provide key insights that can help direct a retailer’s real estate strategy. This could include identifying uninvoked concessions or abatements, analyzing costs and occupancy levels, tracking key renewal or expiry dates, compliance issues and more. Contract analytics are especially important for leases since they are so often written on landlord paper and have a high degree of variance.

We’ve seen how robust, tech-enabled contract management practices can translate into tangible financial and strategic benefits for retailers. In fact, the Exigent team helped one organization reduce their property-related costs by 10 percent and improve their asset utilization 20 percent, all through the use of sophisticated contract analytics technologies coupled with legal and technical expertise.

For retailers looking to gracefully manage the on-going transformations facing their industry, we recommend they begin investigating contract management solutions. Naturally, adaptation will require more than just a sophisticated approach to managing your leases, but having an agile lease management capability in place will serve as a foundational element of your post-pandemic retail strategy.