Re-inventing retail - the future of bricks and mortar shops

These days, online shopping could not be easier. You are able to browse a huge online inventory, make your purchase in a few clicks and have your items delivered straight to your door. Online retailers, without any physical shops, can minimise costly overheads such as rent and business rates. However the vexed question is whether bricks and mortar shops will become redundant.

Despite the continuing rise of e-commerce and the disappearance of a number of notable retailers from the high street, it is safe to say that bricks and mortar shops are very unlikely to completely disappear any time soon.

In fact it is very interesting to see that heavyweight online retailers such as Amazon are now beginning to embrace bricks and mortar. Amazon has recently opened a physical book store in the US and apparently has plans to open a further 400 shops.

This shows that retailers realise that a physical presence can complement an online offering. The two are not mutually exclusive. Online retailers with a physical presence can showcase their products, giving customers a chance to try before they buy. Staff can interact with customers in person thereby improving customer relations. This all adds to a positive shopping experience and drives up sales in both the physical shop and online.

The competition between e-retailers is fierce and there is little to differentiate brands in a list of results from an internet search. Inevitably it will be the biggest brands that have the resources to ensure that their brand comes top in the results of any customer internet search. However, it seems that even internet giants such as Amazon are turning to bricks and mortar to drive sales.

A physical shop enables retailers to promote their brand, increase visibility and ultimately attract customers. Furthermore, given that almost a quarter of all online purchases are returned, customers who are able to return goods to a physical store will reduce that retailer’s logistics costs for processing those returns and at the same time the customer has a further opportunity to shop in store.

Can bricks and mortar work harder?

Of course, there is no denying that these are challenging and unpredictable times for retailers. Profits are being eroded by rising costs and retailers are dealing with increasing business rates, fuel prices, staff costs and a weaker pound following the Brexit vote.

Therefore retailers know they must innovate to make their physical space work harder. This means looking at new technologies and embracing change. In turn this will enable retailers to achieve efficiencies and reduce costs, but at the same time improve the customer’s shopping experience.

A number of retailers have taken the simple step of introducing more technology in store. In this way customers can still access the full range of online support and information while enjoying the benefits of seeing and buying the products in a physical shop.

Retailers are also improving the design and layout of their physical shops to attract customers inside. In this way customers are enticed away from their computers to enjoy a social shopping experience. Now you can visit a shop and at the same time you might enjoy a cup of coffee while browsing, and also take advantage of the complementary services on offer or speak to dedicated experts who can provide bespoke advice. This generally means that customers are likely to stay longer and hopefully spend more.

Retailers are also considering the type of space that will work best for their mode of business. There is no one-size-fits-all. A stand-alone flagship store may work for one retailer whereas another retailer may opt for a unit in a shopping centre where footfall is guaranteed. You only have to look at the proliferation of pop-up shops to see that retailers are looking to use physical space more creatively.

Department store John Lewis is one example of this creative retailing. John Lewis has introduced “highlights” outlets which display a small fraction of their stock, while the rest of the inventory is available online. Internet furniture retailer Made.com recently opened a shop in London where designer furniture can be viewed but is purchased via an internet terminal located in the shop. In essence, the physical space is just a showroom.

Of course, this brings its own challenges for landlords of retail tenants as landlords have traditionally relied on the turnover lease. This lease model enables the landlord to take a fixed rent (usually at a discount-to-market rent) plus an agreed percentage of the tenant’s store turnover. This essentially creates a situation where the landlord and the tenant are sharing both the risks and rewards of the tenant’s business. If the tenant’s business is successful then the landlord will achieve a higher rental income. However, if the physical store is nothing more than a shop window then the turnover generated will be minimal. The rise of online shopping means that it is no longer possible to equate footfall with turnover and landlords are now considering how a retail tenant’s online revenue should be treated when calculating turnover rent.

Of course, attributing the source of a sale is a matter for negotiation. For example, purchases made online and collected from the physical shop and purchases made from in-store internet terminals could all be said to fall within the definition of turnover generated at the tenant’s premises. Furthermore, landlords may argue that items purchased online but returned to a physical store should not reduce the tenant’s turnover for those premises. It is therefore critical that the lease clearly records the parties’ understanding of how online sales will be treated in a turnover calculation. This may meet with resistance from tenants, but it is vital that online sales are addressed. Of course, it may ultimately mean that the parties do not use a turnover lease at all and resort to a rack rent lease. However, it should still be possible to use turnover leases successfully provided both the landlord and tenant keep in mind that at the heart of the arrangement is an agreement to share the risks and rewards of the tenant’s business.

Smart buildings 

We are seeing that both building owners and occupiers are embracing a plethora of advanced new technologies that are now available to make their buildings smarter. Again, it is all about making the most of bricks and mortar premises. It is possible to capture myriads of data which can be used in many ways to increase footfall, inform retailers of customer shopping habits, manage stock and supply chains and reduce maintenance costs. Of course, as we discussed in the previous edition of this publication, the use and storage of personal data raises a number of legal issues particularly around the use, protection and security of that information.

Conclusion

So, it does seem that bricks and mortar shops are here to stay for the foreseeable future, but retailers cannot afford to stand still. Invention and adaptation are key to success and bricks and mortar shops can be instrumental in driving that success.

Article written by Ben Richardson of The Capture Agency with contributions from Henry Moss and Alison Murrin.

Ashurst and the Built Environment 

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