A new report from Savills indicates that turnover leases and an integrated omnichannel strategy will lead the way as the European retail sector returns to a new normal.
Impact of Covid-19 on European Retail from the international real estate advisor suggests that, despite the uncertainty created by the Covid-19 pandemic, retail sales have been slowly recovering (+ 0.7% year-on-year (y-o-y) in July) and some countries have seen a return of consumer confidence. In July total retail trade was above last year’s levels in Norway (13.8%), Ireland (9.1%), Netherlands (6%), France (5.8%), Denmark (5.6%) and Germany (3.5%), amongst others.
Eri Mitsostergiou, Director in the European Research Division, commented: “Despite the cloud of negativity Covid-19 has bestowed on the retail sector, there are green shoots of positivity as Europe slowly returns to a new normal. Footfall is recovering thanks to the re-opening of retail and leisure formats across the continent.”
The report goes on to identify the key trends that have been supporting the European retail sector:
Omnichannel
E-commerce has surged across Europe during the lockdown, fast becoming the safest way of shopping and the only channel for buying non-essential goods during this time.
Despite the penetration rates falling away slightly since a peak in early summer, CRR estimates that online sales in the UK, Germany, France, Spain, Italy and the Netherlands will be close to €325bn, a rise of 31% y-o-y, pushing up their average share of total retail sales to 16.2%. The same forecast predicts that the average online retail penetration will stand at 24.3% by the end of 2021, which will be five years’ worth of progress in one year alone.
Eri Mitsostergiou added: “There have been many discussions about Covid-19 having accelerated the trend towards shopping online and it’s clear from the last six months and from the predictions for e-commerce penetration that retailers must take note of this in order to survive. However, we also need to retain perspective on where the majority of retail trips are made. Creating an omnichannel strategy will be paramount for customer retention, especially in those countries such as Spain, Poland and the Czech Republic who are behind the curve when it comes to the digitalisation of the retail market.”
Turnover leases
In response to the discordance between retailer and landlord when it comes to timely rent payments, Savills report anticipates an increase in the number of operators opting for a turnover-based lease as a result of Covid-19. Already a common concept across the outlet centre model, the report highlights that in the UK alone, turnover rents requested by retailers averages at around 7% of total leases.
Larry Brennan, Head of European Retail Leasing, Savills, comments: “We may well start to see more landlords opting for a hybrid model with a base rent plus a turnover top-up as a result of the uncertainty caused by Covid-19. This can be preferable for a retailer compared with a fixed-rate lease and also still provides the landlord with some level of income security.”
Shop local
According to the report, retailers that were planning to jettison their regional and local stores in favour of prime city centres are now reconsidering their strategies. Indeed many convenience food outlets and medium-sized supermarkets in the urban areas have been relatively resilient over the lockdown period.
Tom Whittington, Director in the UK Retail and Leisure Research team, Savills, adds: “Even if people are only working from home an extra two or three days a week in the ‘new normal’, that’s still an increase in local demand and decrease in city centres and business hubs. This follows a trend that Savills Research has been reporting for some years now, on the importance of community and convenience retailing. We have previously forecast local retailing to be more resilient to the impact from e-commerce than prime retail destinations and in the aftermath of the pandemic people will favour local community focussed retail compared to destination schemes, for the immediate future.”
