Christine Miller, Head of Supply Chain Advisory – Pacific at CBRE explores the possibilities of converting shopping centres into hybrid centres for retail and last mile fulfilment.
Christine Miller, Head of Supply Chain Advisory – Pacific at CBRE says a conceptual shift is taking place among some pioneering investors and landlords, whereby “the distinction between a retail asset and an industrial asset is starting to blur.”
She elaborates that the notion of “mixed use assets” as a category may be expanding to encompass novel combinations of retail and logistics uses for assets, in particular the possibility of converting or combining retail shopping centres to incorporate distribution – particularly for the last mile.
“That blurring of distinction is really happening because, as soon as you fulfil an online order from a retail store, that retail store just became part of your logistics network,” Christine says.
A re-thinking of the nexus between retail shops and supply chain distribution has been pushed front-of-mind because of the COVID-19 pandemic.
“As an asset class, retail shopping centres struggled most under pandemic conditions,” she says. “If we look at a graph that shows their capital value index, shopping centres would definitely show a decline since the end of 2019. Naturally, owing to the pandemic we saw offices close, and we saw retail stores close. Conversely, industrial and logistics assets were really the heartbeat of so many retailers and other businesses because they were allowed to continue operations. Those that could react quickly to pull inventory back from retail stores and into warehouses to fulfil orders online were the players with an advantage.”
In addition to the closure of retail stores, those tenants that didn’t close shop often asked their landlords for rental relief. “As an asset class, retail has had a tough go since 2020,” Christine says.
TIME FOR A HYBRID MODEL?
Christine says that the pandemic jumped e-commerce growth five years ahead in just 12 months. The latest figures show 14 percent of total retail sales are online, and this figure will rise to 20 per cent by 2025, she says.
“There is no doubt that a permanent shift in consumer behaviour has occurred, bringing consumers online that previously would have preferred to maintain a physical connection to their retail experience,” Christine says. “No doubt – when we’re out of these lockdowns some of that will return – because people enjoy ‘retail therapy’ and the physical and social experience of shopping.”
That sense of human connection means that in-person retail isn’t going away, but it does beg the question of how best to utilise retail stores in the future.
“I think there is a real opportunity for landlords and tenants to consider a hybrid model that combines the human touch of personal service with the capacity to fulfil e-commerce orders from retail,” she says. “We know that 28 per cent of the cost of transporting a good is in the last mile. So, if retailers can use their store networks or urban locations to fulfil online orders, they’re actually able to despatch products more efficiently than from a warehouse on the outskirts of town – given shoppers’ usual proximity to where they do their retail shopping.”
But while there are clear savings in terms of transport, Christine cautions that conversion of retail stores to hybrid centres does incur other associated costs.
“The flip side of the transport savings coin is that there’s roughly 30 per cent more costs in terms of order fulfilment,” she says. “Because they’re naturally not in an industrial location, they’re paying a retail level rent, and in some cases the labour is also more expensive in that category. Added to that is the challenge of ensuring enough inventory in those retail stores – again adding more costs into the operation.”
Nevertheless, Christine is confident that the hybrid model is not a mere speculative possibility, but a definite oncoming reality.
“This opportunity to act as a hybrid and combine online, omni-channel, and physical, is actually the way of the future in terms of effectively managing consumers’ market expectations for how fast things should be delivered,” she says. “Putting distribution centres closer to the points of consumption makes sense, and we don’t have to look very far – particularly in Victoria – to see the real challenges of moving parcels through the current network. So, I think the hybrid model is a really good direction for landlords and retailers to go.”
Christine adds that for retailers, the potential of hybrid stores provides an opportunity to re-think their store location networks. With one space serving a dual function, it opens possibilities to enter new locations that might not otherwise make sense. “The opportunity to put logistics into shopping centres gives retailers options to serve customers in locations where they wouldn’t traditionally have a retail store. It allows for a fresh take by retailers to consider what their future network should look like.”
IT’S ALREADY HAPPENING
While the notion of the hybrid model for retail and distribution is not new, Christine says it’s definitively moved from the domain of speculation to action.
“It’s unfolding right now in the market today,” she says. “We have e-tailers as well as parcel providers that are taking sites that specifically focus on last mile activities. There are pilot programs already taking place in shopping centres right now.”
CBRE has taken an active role – even prior to the pandemic – in consulting with asset owners on the hybrid course.
“We started working with one particular asset owner at the end of 2019, who saw a future where they felt they were potentially at risk of having underutilised space at shopping centres, and that the right way to future-proof their assets was to introduce logistics into those spaces,” Christine says. “While the conversation has picked up pace because of COVID-19, it was quite visionary for this owner to be thinking of this already in 2019. So, right now we have pilots underway to capture some initial learnings to make sure that when a network does roll out, it’s been fully tested.”
Christine says that CBRE’s Advisory Services group has developed a 13-point matrix to evaluate assets for their hybrid conversion potential.
“We’ve been brought on board by property owners and investors who specifically want to have their portfolios assessed from this perspective,” she says. “On behalf of a couple of investors we’ve run their assets through the matrix and been able to identify high potential locations. Now we are having discussions in cooperation with parcel providers and retailers to put together pilots in facilities that have been deemed as having high potential. Because not every shopping centre is the same when it comes to conversion.
“For the high potential sites we’ve identified, we’re now going through the process with asset owners to conduct pilots in those sites and capture some initial learnings and information before we run full-speed into a solution.”
Christine says that this re-thinking of the retail-logistics locational network is an exciting development in the industry. “I think everyone in this space right now needs to be thinking about what the future looks like for them. It’s certainly not easy with lockdown conditions – and the industry is anxious to get a sense of what the post lockdown ‘normal’ looks like – but we will get there,” she says.
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