Debrief: The coming rebirth of retail
Lessons from the world’s first retail property platform
Retail rent is now server space and bandwidth.
I spent five years running the world’s first, and most advanced, retail leasing platform. Proptech before proptech.
While my team had huge success catalysing a global movement of creative retail and new occupiers for retail space – both large and small — ultimately, conversion rates remained low. Too low to reach escape velocity.
In the startup triad of product, market, and team, this is my reflection on market – the retail and retail property markets.
How, after five years, three pop up retail platforms with a combined user base of 100,000 people around the world, proved a new life awaits.
In 2016, retail property competes with digital services. Offline margins evaporate. Of the billions of square feet of high streets, malls, and shops, fewer and fewer remain relevant. Chore retail disappears, leaving behind only the pleasures. The beautiful, the sensory, and the tactile. And hundreds of millions of square feet of space waiting for new uses and new purposes.
Property technology is currently focused on efficiency — how to reach the same goals in better / faster / cheaper ways. For residential and office property, that’s the right way to do it.
For retail property, the problem is not only the processes, it’s also the price. Ecommerce devalues retail space at an accelerating rate. The comet has come, and as the dinosaurs fall, the world belongs to a growing army of small, agile new businesses.
Retail will remain a fundamental part of human trade. People will always shop — and people love spaces. Prime retail remains vibrant, and as cities grow, and grow richer, we will see that space grow and evolve in ways we cannot yet imagine.
Regardless of location, use value is the new asset value. Ecommerce gave people new channels to market and forces online margins onto offline businesses. Property technology gives us high-velocity, truly transparent real estate markets.
Now it’s up to retail property owners and local tax authorities to revalue retail assets in the age of Amazon.
There is a ladder.
The ladder is always there
close to the side of the schooner.
We know what it is for,
we who have used it.
it is a piece of maritime floss
some sundry equipment.
— Adrienne Rich, 1973
What if I told you that — today — there’s over 100,000 businesses in the United Kingdom and the United States looking for space to trade?
Hundreds of thousands of jobs. Hundreds of millions of dollars of rental income. Billions in economic activity. And that collectively, the top three pop up platforms sourced those business for less than $100 each.
Over five years, I had the pleasure of spending time in the community of architects, artists, chefs, fashion designers, entrepreneurs, independent retailers, makers, manufacturers, product designers, people with dreams, restauranteurs, writers, and thousands of others who believe that the world is an unlimited canvas — and the spaces around us have unlimited potential.
So many new ideas priced out of possibility by overvalued retail property.
We’re having the wrong conversations about retail.
‘The future of retail’
A popular topic at conferences dotting the globe is ‘the future of retail’, looking to connect the dots from retail’s past to a future that looks broadly similar. Disruption takes the form of better tools to to achieve today’s ends.
Increase footfall. Maintain sales per square foot. Decrease operating costs. Build apps. Build apps that map. Build maps of malls. Build maps of maps. Online content. HD content. VR content. The store is the new app .Be in the store without going to the store. Click and collect. I know, let’s put a cafe in.
We want places to gather and places to play. Places to eat, places to dine, places to drink. We don’t need more places to shop, in fact, we need less. Less places to shop and more places to go.
The price of hosting offline content — retail rents — needs to change in the age of Amazon Web Services.
We speak about the economies of retail and retail real estate in the language of the past, and therefore those features in our cities and communities continue to represent the past.
What we are really talking about is the future of space and the beating heart of global commerce, of trade itself.
The world’s largest market rebalances
In 2015, global GDP was $77 trillion. Retail represents $24 trillion of that. 1/3 of the world’s economic capacity. And today, in the centres of the world’s greatest cities, shops sit empty as retail chains downsize, shed jobs, and eventually collapse and disappear. Outside city centres, local High Streets consolidate into a successful few and malls slowly fade into dereliction.
What is the future of retail? It’s online. Alibaba, Amazon, Apple, and Facebook already won.
As retailers recede, they leave behind hundreds of millions of square feet, poverty, vacancy, underemployment, unemployment. And that doesn’t begin to account for retail jobs that will never be created.
Retail is also theatre–staged productions to drive consumption. UK retail employs 3 million people directly — 10% of the UK’s workforce. Retail is the face of global supply chains that accounts of millions and hundreds of millions more jobs, both domestically and globally.
2005, enter Amazon.
The accelerating pace of innovation is undeniable. Ten years ago, ecommerce meant buying books and electronics online for delivery.
Now, ecommerce means:
- Every album (apart from Taylor Swift’s) available for $10 a month
- Hollywood’s new releases and back catalogues available on-demand
- Take a photo of a chair and sell it someone in your neighbourhood
- Order restaurant food delivered by bicycle within 30 minutes
- Send instant P2P payments to most countries without a bank
- Every private car is a digital taxi
- You can rent your house out as a hotel
- There’s an online social network for your dog
How did that all happen? Amazon launched AWS in 2005, drastically reducing the costs to start new software businesses, from millions of dollars to hundreds and thousands.
LA VC Mark Suster provides a great write-up on the impact of AWS:
Enter Amazon. They started by offering cloud storage (S3) on a super cheap, pay-as-you consume basis. Every startup I knew in 2005 (when I started my second company) was using this. They then launched processing capabilities (EC2) and we startups suddenly didn’t need to buy production servers.
Amazon has changed our entire industry in profound ways… When I built my first company starting in 1999 it cost $2.5 million in infrastructure just to get started and another $2.5 million in team costs to code, launch, manage, market & sell our software.
Amazon changed our industry. This is mind boggling. That little online book company. Amazon gave us a 90% reduction in our total operating costs. Amazon allowed 22-year-old tech developers to launch companies without even raising capital.
2015, retail property’s AWS moment
Consumers only have so much money to spend. When Amazon launched AWS, it first cannibalised the tech industry. Reducing startup costs by 90% allowed a new economic ecosystem to bloom. A startup programmes now dot the growth agendas of most countries in the world.
Those startups, in turn, cannibalise other industries. Retail is one of the largest sectors in the world — a natural target where technology companies have made huge inroads already, while only cannibalising 5%-8% of the market.
Given the disruption seen in retail and retail property from the first 5%–8%, imagine the balance sheet view of of the next 45%. As the disruption accelerates, more offline retail businesses will fail, leaving millions without jobs and hundreds of millions of empty square feet of property.
We, as societies, face a choice. Either devalue retail property now and throw open the doors to millions of new offline startups, or keep focusing on asset value and ride the disruption all the way down.
The five year pop up
The takeaway lesson from from five years founding and running the world’s first pop up retail platform:
There are hundreds of thousands of jobs and billions in economic activity waiting for space.
The caveat is that it doesn’t involve paying market rent, filling a store with product, and selling at a 66% markup.
People don’t need retail space anymore. They’re over stuff, and they don’t want the chores of shopping.
They want gathering spaces. Showrooms. Creative spaces. Maker spaces. Cafes. Restaurants, and art galleries. Classes, communal kitchens, gyms, reading rooms, and yoga studios. They want high ceilings and heritage. Shared experiences and memories. Real communities, meaningful jobs, and actual prosperity.
If it doesn’t go on Instagram, it’s not working
The companies now rising — AirBNB, Amazon, Apple, Facebook, Google, Uber — connect people on a fundamental level. Offering not only products and experiences, but also tools to build — and that build — community, connection, knowledge, meaning, and relevance.
Do you hear them at retail conferences and retail property conferences? Sometimes. But the major values are sales per square foot, and rent.
Going to a technology conference, you hear the higher values constantly. While a lot of that is hyperbole — very few apps will individually change the world– it’s the revolution of empathy, those values spoken and made real.
Retail rent is now server space and bandwidth.
Let’s talk about rent. Online, rent is never a problem. Thanks to Jeff Bezos, rent is affordable. Rent never stops a great new product from coming to market. Digital products that not only provide experience, community, connection, meaning, and relevance, but rather are fundamentally based on those values.
If that’s the conversation about the future of retail, then the conversation about the £150 billion retail real estate market is not if it needs to be devalued, but rather how much it needs to be devalued. The answer? At least 50%. In some cases, all the way to the goose egg.
The life of a brand
For four years, We Are Pop Up captured people’s imagination — from brands, entrepreneurs, property owners, and retailers to bloggers and the press, to government and community leaders, to women and men online and around the world.
The idea simply makes sense — bringing creativity, democracy, and new energy to shops, stores, and the places we live.
Pop up retail began rising in 2008, when consumer spending collapses hit retail and retail property hard. Slight but sudden rises in retail vacancies and unemployment foreshadowed the coming financial crisis. By the time Lehman Brothers folded, retail vacancies were already at 10% — a full 2% over average. Over the next four years, UK retail vacancies rose above 15% of total stock in the UK.
Despite exploding excess capacity, commercial agents could not profitably transact short-term leases — costs and frictions were high, margins were low.
Asking a commercial agent to rent pop up spaces was akin to asking Christies to auction Pez dispensers.
The first iteration of pop up retail platforms shifted retail space on short-term contracts using the AirBNB online marketplace model, which was quickly becoming proven by shifting secondary use of residential property.
Over five years, those platforms proved the capability of online marketplaces to profitably (on a unit economic basis) transact a small fraction of the tens of unused and underused retail space in London.
And then pop up retail saved the world, right?
That was the goal, yes.
At first, the primary constraints looked to be the dominant logic of long-term leasing, and the related processes around that. Despite huge leaps forward and advances in moving leasing online and fully automating it, pop up agencies and platforms find clearing contracts at volume to be difficult.
Customer conversion rates are enviably high (compared with existing agency numbers). Unit economics are solid, coming in between 3:1 and 50:1. Yet transaction volumes simply do not grow quickly, despite continuous demand and heaving supply.
Estimated and indicative customer funnel numbers across Appear Here, Storefront, and We Are Pop Up:
On the left: millions of people interested and 100,000+ users.
On the right: thousands of new shops.
In the middle: a broken step.
While pop up platforms reduce frictions and enable bulk reuse of commercial retail space, the model itself cannot create new consumer spending in those spaces. The fundamental problem is not interest in space, but rather sales volumes and margins.
For all the innovation, animation, and novelty pop up concepts create, short-term retail leasing fundamentally remains retail leasing, albeit with shorter time commitments and lower transactional overhead.
The required rethink is not of the pop up retail model, but rather pricing retail property to its real relevance.
The pop up model works. Overflowing interest and tepid adoption show the model does not yet work at scale for the demand side of the equation. Retailers and customers. The direct buyers from the services, and buyers that ultimately power the chain.
Buyers are always right
Trends from delivery, digital goods, and ecommerce, to on-demand services, shared services, and urbanization shift consumer attention and spend.
There is huge demand for space from entrepreneurs, foreign brands, independent brands, non-traditional uses, existing services, and new services. The caveat is that retail property now competes with online services as a channel to market.
Ecommerce reduces the costs of commerce itself, forcing a new margin structure onto the offline world.
What we’ve seen today is the supply-side version of pop up retail — renting vacant shops between leases. That fails to scale because it pairs secondary use (meanwhile use) with primary use (customer-facing propositions) in a market shedding its easy product distribution role and becoming more demanding of experience, design, and service.
Hence, the self-defeating loop that keeps emerging creative retail movements both niche and stunted:
1) consumers increasingly look for experiences, design, and service
2) retailers must go beyond product and create engaging spaces
3) short-term lets reduce periods to amortise design and service costs
4) retailers minimise investment in design
5) low investment in design and service fails to engage customers
6) low consumer engagement leads to low sales
7) The industry says ‘short-term doesn’t work’
Short-term retail is stuck for the same reason retail is stuck — there’s not enough margin to create engaging consumer experiences. A demand-side solution looks like marking retail space to market — continuously cutting the price until it leaves healthy margins that attracts and retains new retailers.
Mark it to market
Ultimately, the primary problem of retail is not contract duration and leasing frictions, but rents that fail to reflect the value of retail space to consumers and the margins retailers can earn.
How to mark retail property to market: Put empty retail space on Appear Here and cut the price 10% every 7 days until it rents continuously. That’s the new market rate.
We will save the High Street when property owners are willing to take increasingly significant haircuts on rents.
In some cases, that will be zero. At which point, it makes sense to either redevelop or write down properties. Crystalise losses. Hand over to alternative users (like community ownership).
A key failure of imagination
There is one group of stakeholders — the gatekeepers — whose imagination the pop up platforms fail to capture — agents and property owners. Ultimately, scientific management and treating retail property strictly as an asset prevents property owners from repricing retail property to compete with digital goods and ecommerce.
In December 2014, CBRE wrote the following assetment of retail property in the UK:
Prospects for the retail sector in 2015 are perhaps the most uncertain of all sectors. With over 75% of chain shopping located outside the South East, the heavily London-centric nature of prosperity growth is not yet showing through in a wider confidence or spend across the UK. Although we do expect the rest of the UK to grow in 2015, there is a risk of a two-speed consumer economy: London, and everywhere else. For retail markets to prosper, growth needs to be sustained and broadly-based.
That said, prospects for retail property markets are determined by sector profitability more than they are by aggregate sales trends or indeed consumer confidence. The grocery market and parts of the non-food market remain deflationary. Internet price comparison and the inability of many retailers, particularly grocers, to claw back online fulfilment costs, is putting further pressure on margins.
Unsurprisingly given margin pressures, chain expansion remains at a recessionary low. Rental growth (outside London) is difficult to discern, and the shops development pipeline continues to contract across all sectors (shopping centres, parks and grocery) as landowners try to find alternative uses for surplus capacity.
Despite strong growth in all other sectors of property (residential, office, logistics, industrial), retail remains uncertain. (That continued through 2015, and into 2016.)
Given the ongoing adoption of ecommerce, property owners struggle with volatility and excess capacity, leading to a market where demand cannot be accurately discerned, predicted, nor priced. Decreasing abilities of supply to determine clearing prices means ecommerce slowly turns property owners from price-setters into price-takers.
Ecommerce broke the property monopoly
The greatest shift coming to property is the split between property’s role as a financial asset, and property’s useful underlying economic value to communities and customers.
The current malaise stems directly from the treatment of property first and foremost as a financial asset — rent-seeking — and secondarily in service of the as spaces people inhabit and enjoy.
That worked when offline retail was the only game in town. Economic trade is essential to life. Retail property was the dominant channel. Hence, retail property had a monopoly on consumer economic activity — trade itself.
Those paths now diverge, ushering in a new reality where consumer trade no longer requires any type of retail.
Welcome to Trajan’s Market
The shops varied in size, though most were rather small. The customer would most likely approach the shop keeper at the door and then be served there, rather than actually entering the room. The main hall provides a spacious vaulted chamber on which shops line the walls on two floors. Walking through the market, there seems no end of alleys and corridors with little shops in them.
Trajan’s Market was one of the first malls in history — an advance in technology bringing previously unseen efficiencies to trade and consumption. Rather than trade in hundreds or thousands of different places around Rome — the city and the empire–Trajan’s Market concentrated and consolidated buyers and sellers, leading to higher gains for each.
The same description fits today’s shopping destinations — subdivided spaces, aggregating shopkeepers and products, and customers.
Spacious vaulted chamber on which shops line the walls on two floors. Walking through the market, there seems no end of alleys and corridors with little shops in them.
There are over 1.2 billion square feet of retail space in the UK and 12 billion square feet of retail space in the United States. Two-thirds of that becomes irrelevant before Amazon’s fiftieth birthday.
Welcome to Bezos’ Market
“Real estate is the key cost of physical retailers. That’s why there’s the old saw: location, location, location.” — Jeff Bezos
After 2,000 years, ecommerce displaces the shopping mall.
There’s a storm coming
While some growth remains for offline retail, it is slight compared to growth in ecommerce. So far, the growth of ecommerce has largely reflected increases in spending — not necessarily replacement spending.
That means for all the upheaval that’s gone on to date, dotted line. We have not yet seen the true impact of online sales offline and retail real estate.
By 2030, when over 1/3 of all consumer spend in the UK is done online, ecommerce will have significantly cannibalized offline retail.
In terms of growth, ecommerce will have taken 25 years for the first 20% of retail spend, and 10 years to take the next 20%.
Evaporating consusumer demand not only hits retailers, but also retail property. Current retail vacancy rates are not a temporary condition, but rather a permanent move from productive capacity to excess capacity. The latter reaching 40% in the next 15 years.
Maintaining current retail sales levels as ecommerce grows over the next fifteen years requires that the UK downsize its total retail footprint by 700 million square feet.
That means removing 128,000 square feet of retail property from the market per day, every day for the next 15 years.
(That is heady. And it is worse in other places. The United States has to reckon with 4 billion square feet of excess capacity and needs to remove it from the market at the rate of 36,000 square feet an hour to maintain current sales levels).
25 years after Amazon launched, offline retail peaks. 15 years later, online retail accounts for 50% of all consumer spending.
Far from the world of 1995, we sit at the apex of offline retail sales. While some minor growth remains in offline retail sales in the UK, it is quite minor.
Not all retail property is created — and located — equally. Prime retail property (dark blue), the best 20%, remains both viable and vibrant, showing continuous gains of 2% a year for the foreseeable future — roughly tracking overall gains in consumer spending.
Non-prime stock (the light blue line) not only shows low sales values today, that value all but disappears completely in the next 25 years. Rescaling the figure shows a consistent annual decline of 2% a year, first subtly and then accelerating.
To fully grasp the change this suggests require that we change our thinking from this…
Reclassifying “vacant retail property” and “empty shops” to prime, non-prime, and excess. Prime remains stable, although decreasing in volume over time (which in turn helps drive its appreciation).
The change hits non-prime, which remains relevant, but decreasing in relevancy in proportion to the growth of online spending.
But dude, pop up was supposed to be ultimate answer to excess capacity! The AirBNB of retail property right?
Dude, the most advanced online marketplace in the world can’t sell overpriced assets.
There’s a storm coming (con’t)
Online commerce — on the other hand — hasn’t even begun to take market share. As both millennials and boomers alike flock online, ecommerce has recognised a fraction of its potential.
Offline retail simply cannot compete with the efficiencies of online retail . Assuming economic growth continues, and consumer spending continues to rise, there is demand destroyed — the demand for retail real estate.
Far from being cataclysmic, the creative destruction of retail frees space for ideas and will reshape our cities and communities to be more engaging, more interesting, and — ultimately –more human.
Finally, that coming shift in demand is largely unavoidable, for it is structural. Given the speed and breadth of gains digital commerce shows, traditional retail simply cannot compete.
What was lifted, and what remains
While retail property is generally oversupplied today (and significantly oversupplied tomorrow), the prime/secondary split of spending shows that the retail trade itself does not wholly disappear.
Rather we can segment retail into two core categories based on “Carried Away: The Invention of Modern Shopping” (Rebecca Bowlby, 2000):
While the text focus on the shopping experience of women in the United Kingdom, the themes are undeniably human. Shopping as a desirable and social exchange — Pleasure — and shopping as a necessary, utilitarian, and generally unpleasant experience — Chores.
The end of Chore Retail — First 10% goes online
Amazon’s rise continues to be formidable — and seemingly unstoppable. Far from the bookstore that launched in 1994, in 2015, the company generated $107 billion in sales from 340 million customers worldwide.
Measured as a country, Amazon has the same population as the United States.
Amazon’s initial innovation reversed the model from push — “distribute and sell” to pull — “sell and distribute”. That model takes so much friction and waste out of the system that existing models cannot compete with it.
The retail that Amazon takes online is Chore Retail — the private, asocial shopping moments that are at best chores, and at worst both lonely and distressing. And Amazon’s not alone taking Chore Retail online. Across the board, digital goods and ecommerce companies alike have backed traditional chore retailers into a corner. A corner of low margins and no growth.
Offline retail in the age of demand destruction
Wal-Mart occupies 770 million square feet of retail property — 6% of total US retail space, and 124 million square feet of logistics space — a total of 900 million square feet of property.
Despite nearly a century of scale and supply chain optimization, perhaps previous unparalleled, it cannot compete with Amazon’s efficiency.
Wal-Mart sells four times the volume of Amazon, the former has stopped growing, and the latter grew 20% last year. Amazon’s advantages scale with density. At it’s peak, Tesco took 10% of UK consumer spend.
There, Amazon is 60% more efficient per square foot, and 300% more efficient per employee.
That relentless dedication to efficiency shows on the balance sheet, where Amazon spends $11B on R&D (10% of total revenue), Wal-Mart spends $1B (2.2%) and Tesco spends >1%.
Wal-Mart and Tesco dedicate that light innovation spend to moving customers from retail stores to online sales — an already-run race from 20 years ago. Amazon’s R&D moves customers from online purchasing, to purchasing by voice via Echo, a rounded device that acts as a portal to machine learning and artificial intelligence.
Pull, pull, and then keep pulling…
With Echo, Amazon becomes a subtle centerpiece of customer homes. While Amazon built a formidable pull infrastructure, there was one push left that required constant attention — pushing the continuously drawing customers back to Amazon.com to order.
Echo interweaves Amazon into customer’s daily lives. The ultimate pull, customers speak to Echo, and it places orders. Your own personal product delivery system.
Over the past 20 years, Amazon has sold over $500B worth of products and services. And $100B of that $500B was sold last year — when few people knew about, and fewer routinely used, Echo. Yet whether called Echo, Siri, Cortana, or WeChat, the impact of having the global supply chain available for delivery from the comfort of home 24/7 cannot be understated.
Watch ecommerce infrastructure replace retail real estate
As mentioned, prior to ecommerce, retail property had a monopoly on consumer trade — a monopoly going back 2,000 years will be dissembled in a fraction of that time. Represented by four clippings from the Harvard Business Review over the last 15 years.
2001: “The key is focusing on the total customer experience.”
(filed under ‘Marketing’)
With the advent of ecommerce, retail property remained the dominant channel for consumer consumption — although the threat became clear.
2006: “The era of standardization is ending”
(filed under ‘Financial Management’)
As ecommerce and digital products grow, retail property becomes a competitive channel. Total consumer spend continues to rise, but brick and mortar sales and profit growth begin to decelerate.
Despite a breaking model, retail property remains trapped in complex world of leases, rental yields, commission structures, and service fees. Property owners redouble on asset returns and focus on making assets ‘sweat’.
2011: “Retail isn’t broken. Stores are.”
(filed under ‘Change Management’)
Ecommerce was first and foremost a problem for the retailers, not for property — which was protected by long-term leases. Yet, the truth was evident even in 2011. Consumer spending isn’t broken, the offline channel is broken — the monopoly of property on commerce and consumer trade.
Today, retail property’s competitors range from Apple, Amazon, eBay, Facebook, FedEx, Google, IBM, Microsoft, Royal Mail, Salesforce, Tencent, and UPS, to AirBNB, Deliveroo, NetFlix, Steam, and Uber. Digital value chains that offer product discovery, social interaction, purchase, and delivery directly to customer, wherever they are.
2016: “There’s too much physical real estate.”
(filed under ‘Business Models’)
Biological organisms will exploit an environment to depletion, unless they are in some way checked by competition with other organisms…— Collapse
Colonies, organizations, and socities grow largest right before they enter terminal decline. Generally, by the time a colony peaks, it has already exhausted its supply of resources.
As we approach peak supply of retail property, it’s supply of resources — offline trade between retailers and customers — already peaked and has likely already entered freefall.
Collapse is a response to overexploitation — a system rebalancing. Understanding and managing the coming collapse of offline retail and retail property means looking at the drivers underpinning it.
Wealth inequality is core. While ecommerce began rising before the financial crisis in 2007, it has accelerated drastically in the time since. Strained consumer incomes through the period drove people to look for the least expensive — most efficient — option. Creating technology is half of bringing innovation to market. The other half is behaviour change.
If the financial crisis broke consumers from their consumption patterns and drove them toward ecommerce, wealth inequality has cemented ecommerce’s dominance. While consumer incomes and spending have rebounded for many, gains now increasingly go to ecommerce balance sheets. Once efficiencies become entrenched, they rarely lose traction.
More importantly, the largest retailers — those whose dominance and market power comes from scale and price — predominantly serve markets where incomes haven’t rebounded and substantial gains have not been made. Stagnant incomes continue driving consumers toward lowest-priced options — which will always be ecommerce.
Here, the snake eats its own tail.
The same virtuous cycle which led Wal-Mart and Tesco to dominance is now their own undoing, for they, at the peak of their market power, cannot compete with the efficiency of Amazon in its early adolescence. In a whiplash, value extracted by the monopoly power of retailers and retail property owners have left communities economically weaker and continuously searching for less expensive options — which now drives the next wave of efficiency.
The financial crisis forced consumers to make different consumption decisions.
However, the last recession was unique to previous recessions because people were constantly connected through it. Far from the loneliness and social isolation of previous downturns, technology enabled people to stay connected — discovering that they preferred connection to consumption.
Hence the rise of the experience community and all that comes with it.
P2P networks recycling products (form of demand destruction).
The rise of food and beverage spend over product consumption.
Runaway gains of social media and messaging apps.
Travel, powered by the sharing economy.
Co-working and co-living.
Climate change. The omnipresent driver of a volatile climate — and the greatest challenge we face. A challenge of tremendous complexity: maintaining global economic growth while also reducing consumption of natural resources.
How do we move from an industrial age where economics gains were made from extraction, production, and consumption, to a sustainable economy?
The challenge of sustainability is not a challenge of technology. We’re making what’s needed. The challenge comes from handling the economics.
In the past twenty years, there has been a shift in global consciousness toward contemplative consumption, and people increasingly look for ways to live the same and better qualities of life — better experiences — while not only consuming less physical resource but consuming with greater efficiency.
The trials of efficiency
For the retail industry and retail property — business models based on rising consumption — the spectre of reduced consumption and greater consumptive efficiencies is damning.
To take full measure, consider what is looks like when supply chains have been replaced by digital consumption. Film, music, postal mail, and video game distribution have all been entirely replaced by copper wires. Books, electronics, furniture, sports equipment, and white goods are ordered online for delivery.
The seven dominant subcategories of retail that have thus far escaped wholesale dominance by online efficiencies — beauty, convenience, fashion, FMCG, grocery, luxury, and pharmaceuticals. In each case, there is a fundamental experience driver preventing either online ordering and/or fulfilment.
The next to go online will be those where consumption is both a Chore and time sensitive. While I’m happy to wait three days for a book, flat panel screen, or football, the same is not true for food, loo roll, pet food and shaving cream. The FMCGs go online when groceries go online, as FMCG purchases are generally aligned to grocery purchases.
As goes the groceries, so goes the world
The barrier to adoption for grocery delivery has been timing flexibility, which is solved by rising volumes. As long as Amazon used postal mail or UPS for delivery, it was bound by the delivery environment (first and foremost) and scheduling. Designed to shift boxes and envelopes, the delivery services are not designed for perishables, which require specific delivery timings and transport vehicles. As Amazon’s total volume of ecommerce and market share rises, the economics of its own delivery fleet become tenable.
That splits the grocery category into two — chores and pleasures. Commodity grocery items are measured and packaged, with little variance. The well-known items customers buy every week or month. Liters of milk. Blocks of cheddar. Boxes of cherry tomatoes. 500 gram bags of pasta. Packs of bacon. Cartons of yogurt. Whole chickens. Bottles of house wine. Click. Click. Click.
(Pleasure grocery is the opposite. Items carefully savored and selected. Specialty cheeses. Steaks. Fresh fish. Avocados. Fresh bread loafs. Specific wines.)
Convenience is in itself unreplaceable (for now) for it is in design the ultimate on-demand retail. There are few efficiencies to be made, for convenience is not only inefficient, convenience is inefficient by design. Said another way, the off-license is forever.
So in one fell swoop, we’ve accounted for convenience, commodity grocery and FMCG, leaving beauty, fashion, luxury, pharmaceuticals. All the good things in life.
“But above all, buying is a profound pleasure”
Back to the two categories of shopping represented in Carried Away, so far, we’ve witnessed in detail the demise of Chore Retail.
Pleasure retail is self-evident. The places customers enjoy.
Time spent browsing and lingering, not shopping. There is conversation, conviviality, and community. Where ‘experience’ doesn’t describe a product experience, it describes the ‘human experience’.
- Intoxicating aromas of fresh coffees or teas
- Beauty and fashion, where products become part of personal identity
- Knowledge of antiques, art, books, butchers, fishmongers, pharmacists
- Communities like surf shops, skate shops, running stores, sneaker stores
- Curated brands like Apple, Louis Vuitton, Tesla, Selfridges, Whole Foods
Each category offers warm, emotionally-evocative experiences of community, connection, knowledge, meaning, and/or relevance. Values that favour both large, curated brands as well as refined independents.
Retail looks like places where the Chores disappear, leaving only the Pleasures.
Based on the data we generated over the past four years, a perfect mix looks like the following:
- 30% mainstream beauty/fashion/luxury
- 30% food
- 20% independent fashion
- 10% home
- 10% technology/experimental
The caveat to that is the new value mix:
- 20% high-value retail
- 40% low-value retail
- 40% excess capacity
Pop up redux
Far from being cataclysmic, the creative destruction of retail frees spaces for ideas and will reshape our cities and communities to be more engaging, more interesting, and — ultimately — more human.
As Chores disappear and demand for non-prime retail property recedes, rents fall. As rents fall, breakeven margins fall. As breakeven margins fall, new users of space for space enter the market, and experimentation begins.
One key learning from pop up retail is that neither customers nor retailers have a distinct preference for short-term leasing nor long-term leasing.
Many retail concepts require levels of investment in design where long-term leases are necessary to amortize costs. Similarly, many customers enjoy consistency and routine, preferring familiar places to high variability and volatility.
Then, there’s a whole raft of concepts that are either inherently limited — such as concepts attached to an event or specific fast-burning trend — or highly experimental and unproven. In those cases, short-term leasing not only makes sense, it’s required because either customer markets or company fundamentals do not support long-term engagements.
The legacy of pop up retail
“Pop up” was synonymous with “not permanent”. Lexically, it’s moved away from a shop on a short-term license to occupy, and increasingly sits in the vernacular as ephemeral occurrences. From pop up shops, to pop up hotels, to pop up offices, to pop up parks.
The definition of pop up has become, “Here, now.”
That shift — from “not permanent” to “here now” is subtle and fundamental, because it represents a shift from a negative — in the language of real estate, “not a permanent lease” — to the language of the customer in the age of social media — “this happens here, now.”
There’s also a middle market pop up retail exposes, which is “Here now to start, here later if it works” — variable-length subscription leasing models that engender both innovation and consistency, both experimentation and amortization.
Given the learnings from thousands of pop up projects that have been executed, either the project design is ephemeral and permanence is antithetical to the concept itself, or people want to carry on with successful concepts. Successful independent retail stores become offline startups — new employers.
Next generation retail leasing
The first wave of platforms already have already demonstrated technology that source leads on social media, match supply and demand, and execute real estate contracts completely online with no human intervention.
The next step is to appropriate the innovation from niche specialty leasing (pop up retail) into the main market.
Pop up’s legacy provides the following framework:
- Short-term — retail property as a media space
- Variable-length — retail property as a service
- Long-term — traditional retail property
Retail as a media space looks like short-term space sold through mechanisms similar to Google AdWords. Auto-pricing and auction pricing features that sell retail space by target demograph. Similar to AdWords, you either buy a search ad — a full space–or you buy an ad on someone else’s page–ShopShare.
Retail property as a service looks like co-retailing (the retail equivelent of WeWork). That looks like an umbrella intermediary creating both a consumer-facing brand, as well as providing retail infrastructure. That intermediary operates the space and subleases it on a fractional-use basis.
Traditional property leasing goes online, with assets full digitised and managed through a portal. This is the target of most other proptech platforms in the office/residential markets. The primary challenge here is ensuring demand, for while the platforms drive efficiency, value comes down to consumer spending.
Digital platforms that take ecommerce functionality up a step, from retail itself to retail property. Allowing the retailer to consume property in the same low-cost, flexible manner that customers use to consume retail itself.
The greatest change applies across all types, which is breaking down the barriers of price and use types. The greatest innovation for the market as a whole is the combination of dynamic pricing, and flexible leasing duration, truly turning the market — regardless of the segment–into a demand-driven market (effectively a price-taker).
Penultimate: Business Rates, the broken tax
This piece focused primarily on five actors — retailers, property owners, consumers/customers, Amazon, and the would-be entrepreneurs priced out of retail space — and set up a strawman prediction of retail’s future value in the face of ecommerce.
Empty and under-utilised shops are not only wasteful, but also have second-order effects in local neighbourhoods — unpriced externalities.
Further, the UK business rate system is a broken tax that not only limits new business activity, but also has driven the UK to lead the world in the ecommerce adoption — which is beyond the reach of taxation.
As advertising becomes a tax on the poor, retail vacancy and dereliction is a cost bourn predominately by middle and lower income communities. Communities where large retailers first displaced local businesses, and now leave vacuums in their wakes as ecommerce hollows out big box and chain stores.
The business rates policy already favoured large businesses and inhibited small business development.
Business rates penalise UK business that face declining brick and mortar sales, without taking commensurate tax revenues from online sales.
On a margin basis, as sales decline, business rates become progressively more costly. Stores close, decreasing overall tax revenues. Given that technology will continue to atomise retail, sales per square foot and related ‘valuations’ no longer accurately measure value. To capture full tax as retail goes online, the government must shift tax from store locations to corporate entities — wherever online revenue is recognised.
Similarly, scrapping business rates immediately increases margin — both incentivising new space use, and protecting existing businesses.
Further, we’ve already seen tremendous reduction in waste thanks to the landfill tax. The landfill tax works on the basis that waste represented an underpriced externality. The solution brought up the cost of waste in line with its true cost. We would do well to do the same thing with shops.
To save the High Street (and potentially the shopping malls), the government would do well to relocate business rates to corporate income tax, and add a progressively increasing vacancy tax.
In the UK, between 250,000 and 500,000 retail jobs have been lost as chain retailers disappear. If Amazon were to replace Wal-Mart tomorrow, US employment would rise between .75% — 1.25%, between the jobs directly lost, and second-order lost economic activity and jobs affected. The livelihoods of 1.5M — 2M people lost.
While unemployment is at post-crisis lows in both countries, there’s considerable debate about the dignity and quality of that employment. While it is always favorable to have people in work than out of work, rich societies cannot simply count income as success. Rather, the extended measures include community, education, income security, independence, opportunities for personal and professional development, pension contributions, and training.
By any measure, the shift of retail sales online will not only continue, but also accelerate. Further, given the efficiencies of online retail, less than half of the jobs will be directly replaced. Then there’s the economic disruptions of closed/derelict stores, lost agency fees, lost legal revenue, lost maintenance revenues, lost service revenues, and lost tax revenues.
Nature abhors a vacuum, and there are hundreds of thousands of jobs and billions in economic activity looking for space. When we let them have it.
However, those new jobs and that economic activity will look different. We’re in a knowledge economy now, and that changes everything from the rents new businesses can afford to pay, to the uses communities will find for space itself.
While I wrote this last blog of one journey and first blog of the next, one of Europe’s leading landlords sold off a retail asset moderately below book value, as they continue a programme to consolidate their portfolio on prime assets.
The value of retail space will continue to collapse as spending does online. And in the end, we will not be left with retail spaces, but with spaces.
Spaces for ideas.
Spaces for gathering.
Spaces for communities.
Spaces for people.
The retail property monopoly has come to end, and the most advanced online marketplaces in the world can’t sell overpriced assets.
We will all be better off as property owners increasingly mark their retail space to market, and in the process, enable new businesses to emerge.
Four years, out.
Appendix: On property marketplaces
Based on the last five years, the following works:
- Brand social network
- P2P messaging interface — facilitates fastest transactions (and requires next item to scale…)
- Nudging user journey (ask me to explain this)
- Single template contract changes platforms from brokerages to online marketplaces
- Host brands that provide high-quality infrastructure (like StreetFeast, Brixton Village, Borough Market, and Boxpark — the WeWork models of retail)
What doesn’t work
- Endless listings. Don’t do it.— filtering like residential sites fails because location<>customer engagement. Everyone chases footfall, and that’s increasingly a siren song — especially for boutique retailers with strong social media followings
- High cost of digitising assets that don’t convert. (Also contributes to endless listings problem.)
- Focusing on ‘retail’ uses, and not creative uses and the concept of ‘space’
The next waves
As the vast majority of platforms and agents serve supplier pricing and terms, the next platforms will do well with the following features:
- Single or multiple user journey support for short, variable length, and long-term leasing
- Dynamic pricing (incorporating both property pricing and brand value)
- Thoughtful, considered UX
(e.g the huge efforts required to make Uber four screens deep)
The heterogeneous nature of property transactions means that operating on strictly an intermediary model runs the risk of serious leakage, as the business model only monetises at the end of the funnel.
Moving to an online marketplace model suggests there are two opportunities to monetise — at the time of property listing (with a commensurate fee based on expected value), and a second at the time of transaction, based on recognised value.
- Dual fee structure
1–3% monthly listing fee (manages leakage/enables revenue generation as a social network)
Transaction fee (maximises revenue)
- Machine learning driven contract structure
- Hunting automated pricing system to vary pricing and find ‘market rent’
Proptech platforms–whether commercial or residential–would do well to recognise that there are three valuable services:
1) advertising/awareness value of listings,
2) transaction execution,