European markets are shifting. Find out what trends and challenges European brand retail faces and learn how to navigate shifting markets to sustain growth into the future.
With the European economy showing positive signs of growth and consumer markets improving, this year’s MAPIC is set to be an interesting one. The FSP team is looking forward to attending the conference to explore the opportunity for real estate investment with clients and colleagues.
Peripheral Vision
While the UK’s retail economy has seen a marked dip in recent months, there are a number of trends and challenges which are set to impact European brand retail.
The population is aging. By 2030, the proportion of Europe’s population (EU28) over 65 years of age will have increased from 19% in 2016 to 24%, suggesting a growth in demand for classic brands offering excellent customer service, particularly in Germany, Italy and peripheral parts of Spain such as Galicia.
Technological change continues to be a disruptive driver. Europe’s comparatively slower digital uptake, however, has meant investors are only starting to face the challenges experienced in the UK in terms of the omnichannel-led restructuring of store portfolios. Brands such as Coast, Seasalt and Ted Baker now generate more than 25% of sales online and Zara has recently abandoned a number of top 50 but less profitable cities such as Hull.
Online Shopping (photo: HutchRock)
Following decades of homogenization, diversification within European brand retail now prevails. Dominant shopping centers and large city center malls are performing relatively well as brands increasingly seek to maximize exposure to consumers by establishing flagship stores and showrooms in high footfall locations.
Medium size shopping centers in second and third-tier towns, however, are struggling to find a sustainable, future-proof proposition. Consumers, who increasingly refuse to settle for second best, opt to find their ideal purchases online or in the major cities. In France, for example, there’s been a shrinking presence of brands in peripheral medium-size towns, with traditional anchor stores like Printemps closing in smaller towns such as Poitiers.
Neighborhood centers are subject to the fortunes of their grocery hypermarket anchor stores. These are increasingly under pressure from discount supermarkets and home delivery.
Glacis Galerie Shopping Center Neu-Ulm (photo: Hans)
The future for secondary centers is therefore likely to include a shift in offer towards convenience and service providers, with fashion becoming increasingly restricted to Family brands and ‘top-up’ shopping. In the short term, increasing vacancy and limited occupier demand will create opportunities for those retailers who can operate profitably in smaller locations, particularly value-focused businesses.
Shopping centers still have a strong role to play, but landlords need to realize that the value of physical space has declined and that their shopping centers in mid-tier and lower tier centers need to adapt to this new environment. Initiatives which seek to reduce occupancy costs and increase sales should be front of mind and strategic thinking needs to focus ‘outside the box’ and work in co-operation with municipal authorities
Food & beverage turns shopping centers into attractive destinations (photo: Igor Ovsyannykov)
Despite the changes in the UK, it should be remembered that more than 85% of retail sales still involve a physical store, so from a brand and a real estate investor perspective, there remains a lot of opportunity in smaller regional towns. Success within European brand retail, however, will require much more attention to retail performance, getting closer to consumers, exploiting tourism and leisure markets and creating future-proof, attractive, multi-purpose environments which are fit for the 21st century. And of course, well-curated retail and food & beverage (F&B) offers will be at the heart of every successful shopping destination in the future.
Learning From the Past
In these transformational but exciting times, investors and brands need to remember the lessons from the past, and not repeat the mistakes made in the lead up to the Financial Crisis of 2008. This means ensuring developing the right package in the right places for consumers and adhering to the old retail maxim, ‘sales are vanity, profits are sanity’. The best physical spaces will always command substantial rents and while there is a temptation to pay key money and outbid rivals, businesses lose more money, more quickly in the largest centers, so the focus should always be on sustainable expansion.
Landlords also need to recognize the true value of brands. The barrage of complaints from consumers about identikit retail centers in the early noughties illustrates that the highest rent doesn’t always result in the best choice of brands for shoppers.
Brand stores in Dubai (photo: brand pilots)
So, while it is exciting times for Europe’s faster-growing economies, it is also the time for investors and brands to remember that continuing to respond to the changing needs of consumers and ensuring that investment decisions are profitable are key to sustaining this growth into the future.
Strong Centers
Meanwhile, Europe’s powerhouse centers remain completely untouched by the pressures of digital expansion. Experiential city centers such as Berlin, Rome and Paris are simply not under the same pressure as regional counterparts, as they’re powered by the international expansion of brands.
The challenge for investors looking at this area of European brand retail is to find growth against a backdrop of stagnant or declining footfall. Many of London’s submarkets, for example, have an increasingly similar line up of duplicate brands, and the winning locations will be those that maximize visitor conversion though unique stores, attractive environments, strong positioning and effective marketing.
Gerngross shopping center in Vienna (photo: brand pilots)
Looking Ahead
While most of Europe is behind the penetration achieved in the UK, digital retailing is starting to take hold. This is likely to have a growing impact on traditional models such as the retail galleries, traditionally found adjacent to hypermarkets on the continent, and middle tier towns.
Smart investors in European brand retail are already mapping out their response, adapting their center offers and even disposing of potentially troublesome assets. In the UK, this has created opportunities for players such as New River Retail and Elandi to purchase shopping centers relatively cheaply and then achieve income and value growth through effective and proactive asset management. Understanding customers, improving tenant mix, adding leisure and catering facilities, focusing on sustainable occupiers and using appropriate research to attract new occupiers are key elements in their local strategies along with old-fashioned hard work and determination.
Looking to Europe, FSP sees further consolidation of the traditional retail hierarchies ahead but also the possibility of F&B becoming more important in strengthening the destination credentials of shopping centers. To date, F&B mix has been under-represented but as consumers expect more from their days out, demand is quietly shifting. The combination of new F&B operators together with the re-positioning of shopping centers will be a major opportunity as landlords recognize that the future of successful retail destinations is increasingly linked with leisure.
MAPIC 2016 (photo: S. Champeaux/Image & Co)
Together with the team, I look forward to sharing how investors and brands can navigate this shifting European market at MAPIC. Do come and meet us at Stand R7.C26.
About the Author:
Ken Gunn is Managing Director at FSP and looks back on 30+ years of experience in retail property. He uses his deep understanding of consumer shopping habits, retail centers and leading edge analysis to support FSP’s projects and help clients realize the true potential of their shopping center and retail park investments. He is a widely-respected authority on designer outlets and has worked on over 100 outlet projects in 30 countries over the past decade. Visit him at MAPIC or get in touch via e-mail.
