After a year of limited social interaction, consumers are ready to spend in the experiential and service-based retail categories; however, retailers will feel increasing pressure to adapt.
Top of Mind
The pandemic has turbo-charged the digital economy and consumers are shopping online at unprecedented levels.
Globally, retail foot traffic and sales continue to increase from the COVID-19 pandemic lows. As markets gradually ease mobility restrictions and more consumers are vaccinated, retail will continue to rebound and consumers will return to their pre-pandemic shopping behaviors. Despite a return to normalcy, the pandemic has left a lasting impact on the retail industry.
SHIFT IN CONSUMER SPENDING BEHAVIOR
After a year of limited social interaction, consumers are ready to spend in the experiential and service-based retail categories. The restaurant industry is especially poised for a strong comeback.
In addition to service-driven spending, consumers will focus on the high- and low-end retail categories. Mainland China will see its strongest growth in luxury spending as a lack of international tourism will drive Chinese consumers to local retail. The U.S. and EMEA luxury rebound will be mixed, relying heavily on the return of events and tourism and on high consumer saving rates throughout the pandemic. On the low end, discount retailers across regions will benefit from bargain shopping as many consumers will still be recovering from job losses caused by the pandemic.
The homeware and athleisure categories, which experienced strong growth throughout the pandemic, will continue to post gains driven by a shift away from traditional business wear. The rise of remote working is creating quick, midday shopping trips, forcing retailers to focus even more on access and convenience.
Figure 11: U.S. Food & Beverage Spending
Source: US Census Bureau, CBRE Research.
PHYSICAL RETAIL EVOLVES TO COMPLEMENT ONLINE BUSINESS
South Korea has the world’s highest online penetration rate at 36% of total retail sales, followed by the U.K. at 24% and the U.S. at 20%.4 The physical store is evolving to accommodate the multichannel shopper, as well as complement the online business.
The high cost of last-mile delivery will see retailers expanding omnichannel strategies such as click-and-collect, curbside pickup and ship-from-store. In many cases, retailers are implementing a hybrid store model that fully integrates retail with logistics. In addition to distributing online orders, brick-and-mortar stores will continue to provide a physical experience that does not exist online.
As online sales grow, retailers will reevaluate their store portfolios in terms of store size, location and use. The overall level of occupied retail space will continue to shrink in some U.S. and European markets, while APAC markets will be relatively unchanged.
4 Euromonitor International, CBRE Research.
Figure 12: E-Commmerce Penetration Will Grow Worldwide
Source: Euromonitor, CBRE Research.
Note: For more information, see CBRE’s 2021 Global E-Commerce Outlook.
Inflation will be uncomfortably high for the next 12 months and then recede. The labor shortage that is pushing up wages and restricting supply will ease, as enhanced unemployment benefits and direct stimulus payments diminish. The global microchip shortage that has restricted the production of cars, computers and other goods will end in the next two quarters. Ultimately, surplus labor, globalization and increasingly hawkish central banks will lead to inflation reverting to the target of 2%.
New store openings are expected to remain somewhat limited in the near term, as most retailers focus on upgrading or closing existing locations.
Leasing markets will remain tenant-favorable despite rent collections and foot traffic returning to pre-pandemic levels. Landlords will retain a flexible stance toward incentives, capital expenditure contributions, shorter lease terms and percentage rent lease structures.
CBRE expects future leases will include more detailed break clauses or force majeure terms, as retailers build greater flexibility into portfolio management. As online shopping grows, landlords will seek to have online sales included in lease structures.
SUSTAINED DEMAND FOR SUBURBAN CENTERS
Suburban centers will experience increased demand from population migration driven by more work-from-home options. Urban retail’s recovery will lag, given reliance on daily office population, international tourism and mass transit usage. Globally, urban high street retail will see the largest rent correction, creating opportunities for the strongest retailers. In the U.S., retailers are shifting their store portfolios from enclosed centers to suburban open-air centers that benefit from catering to consumers’ health concerns, as well as support omnichannel strategies for curbside online order fulfillment. In Europe, retail parks have been performing better than other retail asset types.
THE RISE OF GEN Z
Generation Z includes consumers currently between 9 and 24 years old and is now the largest demographic in the world. Despite its youth, this group has incredible spending power and, through social media and sharing, influences nearly $500 billion in spending.5 Diversity, sustainability and a digital-first mindset are extremely important for this group and retailers must reflect these needs in their brand identities or risk losing this generation for good.
5 CBRE StreetSense.