European Retail Properties with the Brightest Futures are Those Occupied by Tenants Embracing Digitization

International tensions, political uncertainty and rising rents have failed to sour the mood of consumers in most of Europe. They go shopping as much as ever and are likely to continue doing so into the foreseeable future. However, the way they shop is changing. This is causing disruption in the Real Estate industry’s retail sector—disruption that is almost certain to intensify in the months and years ahead. The response of many asset managers and owners will likely be to embrace digitization, if they have not already.

Demand for Retail Properties

As an asset class, Europe's entire of stock retail properties are performing adequately despite the disruption caused by changes in consumer shopping patterns. Prime locations (those at the top of the class) are performing well above the average. These continue to command high purchase or lease prices, which suggests positive expectations for retail going forward (in Germany, for example, retail parks are still viewed as an investor’s darling).

However, assets at the bottom of the class are performing far below average, if they are performing at all. The primary change in consumer habits affecting these properties is use of the Internet to make purchases. The assets hit hardest by this trend are overwhelmingly those that have failed to incorporate at least some elements of e-commerce into their retailing strategies. By remaining exclusively brick-and-mortar operations they deny themselves the ability to compete on price against online competitors, which typically have minimal overhead due to the fact that they do not require physical floor space.

These die-hard brick-and-mortar retailers are indeed dying off and their disappearance is driving up vacancy rates (especially in the city centres of smaller communities where desertification is also a problem). Many of them would survive if they could somehow reduce their costs and become price-competitive with online shops, since many consumers still like to shop in brick-and-mortar stores. Indeed, surveys reveal that two-thirds of consumers who buy goods online visit a physical store as part of the buying process. They do this in order to see and touch the merchandise before making a purchase decision.

Notably, 90 percent of these shoppers while inside the brick-and-mortar store use a mobile device to go online and read product reviews or check if the item is available elsewhere for less money. Many brick-and-mortar retailers have caught onto this consumer practice and are responding in two ways. First, they are complementing their physical stores by adding an e-commerce site of their own through which they can offer competitive pricing. Second, they are focusing on providing to consumers the most exciting and engaging in-store experiences possible.

Digital Strategies Will Pay Off

That second form of response—in-store experience—is intended to dramatically increase the attractiveness of the physical store and so reduce the loss of customers. The strategy works best when supported by digitalization. This is why growing numbers of brick-and-mortar retailers are implementing digital technologies.

One such technology is the smart beacon. Here is how it works. As a consumer walks along the sidewalk in front of the shop, the smart beacon sends a text to the consumer’s mobile device and invites him or her to come inside. Making the invitation more alluring is an accompanying coupon or code entitling the consumer to a special discount. The beacon can also transmit additional coupons or codes while the consumer is browsing the aisles or examining a particular shelf item.

Another technology helping brick-and-mortar stores boost the appeal of their shopping experience is artificial intelligence. Here, advanced algorithms are used to analyze each shopper’s personal preferences based on prior purchases or simply on which merchandise items he or she stops to evaluate while browsing. The technology then reaches out to the consumer via in-store electronic signage or text messaging to recommend products likely to be of interest.

Perhaps soon to become a common feature among digitalized brick-and-mortar stores is “grab-and-go” shopping. Amazon is pioneering this concept with its Amazon Go convenience stores (of which it wants to have approximately 3,000 in operation across the U.S. by 2021). Amazon Go customers gain entrance to the store by passing their mobile device in front of a scanner. Once inside, they roam the aisles and take from the shelves whatever items they fancy. An array of networked video cameras and sensors record each item pulled. Instantaneously, the item’s price is added to a running tally. Customers directly exit the store and go their merry way (there are no checkout stands; Amazon collects payment by automatically billing each customer’s pre-authorized credit card).

Arcadis Helps You Go Digital

Clearly, digitization will help physical stores survive and thrive in the age of e-commerce, much to the delight of the owners and managers of the Real Estate assets in which those stores are located. However, asset owners and managers who themselves adopt digitization will find themselves delighted in other ways and for other reasons. Chiefly, they will gain the ability to make exceptionally well-informed decisions based on an unprecedented depth of understanding about the properties in their portfolios (and those they are considering for acquisition) at every stage of each asset’s lifecycle. The result in most instances will be lower risk, improved cost-efficiencies, and greater profitability.

Arcadis helps asset owners and managers go digital. We base our approach to digitization on value-driven innovation inspired by the actual experiences of real people. We take deep, rich data and use them for strategic, focused partnering of ecosystems as well as platform-enabled collaboration among ecosystem partners. Take, for instance, location. Since where your asset is sited plays a key role in determining its success, we can help you use Big Data (including property value development, urban connectivity, and more) to make the right investment decisions.

Then there is BIM and digital project-management. With Arcadis, you will be able to utilize those and other technology-based strategies to optimize your costs and timelines during the design-and-build process, as well as better visualize your property to enhance end-user experiences. Beyond all of that, Arcadis helps you embrace and financially benefit from cost-reducing smart technology to operate and maintain your assets’ heating, ventilation, cooling, lighting, elevator, and security systems with little or no day-to-day human involvement.

Read the Arcadis „Trend Report Retail“ for more recommendations.