How is the low-touch economy permanently changing global retail and what does it mean for retail real estate?
The low-touch economy has permanently reduced the role of physical retail in consumer purchase journeys, compressing the traffic volumes required to justify traditional lease economics. Retailers without genuine omnichannel capability are losing share that will not recover, and retail real estate investors must underwrite to e-commerce-adjusted rent assumptions rather than prior cycle peaks.
1. E-commerce penetration is permanently reducing the traffic volumes required to justify traditional retail lease economics. 2. Consumer preference for convenience and digital interaction has lowered the threshold of acceptable in-store experience relative to digital alternatives. 3. Retailers who have not built genuine omnichannel capability are losing market share that will not return when economic conditions normalize. 4. Retail real estate investors must underwrite to sustainable e-commerce-adjusted rent assumptions rather than pre-2015 peak assumptions.
COVID-19 will have many losers, but let's focus on the winners. The shock of the Coronavirus brought us to party, celebrate, and hold business meetings on Zoom; to download and experiment with grocery apps; and to attend religious services on YouTube. Choices that the majority of us would have never considered before became necessities.
The Winners
Online marketplaces like Amazon and Walmart saw foot traffic to non-grocery retail stores decline more than 97% during the last two weeks of March 2020, while experiencing demand they could barely fulfill. Digitally native brands outperformed forecasts, seeing increases in mobile engagement and sharp drops in Customer Acquisition Costs. Grocery apps saw record downloads: Instacart, Walmart Grocery, and Shipt saw respectively 218%, 160%, and 124% increases in average daily downloads. Streaming services like Disney+ attained more than 50 million subscribers within weeks of the Coronavirus outbreak. Retailers of essentials, cleaning products, disinfectants, and paper goods, sold out everywhere from store shelves to online marketplaces.
What Changes Will Persist After COVID?
From these examples, we can clearly expect many changes and clear shifts in consumer behavior. Some changes were already happening gradually; however, COVID-19 accelerated and made immediate behavioral changes that would have taken years under normal conditions. Delivery and inspection robots, already appearing at airports, hotels, and supermarkets since 2018, will expand. Contactless payments became standard, with chains like Publix deploying systems to add safety measures for customers and associates. Remote work, virtual court proceedings, and online religious worship moved from exception to default.
The Strategic Response
Organizations need to set up their new economy growth initiatives. Assess the impact: how will the Low Touch economy impact your industry, your customers, your workforce, and your markets in the mid to long term? Develop a growth strategy: how can you outperform competitors and what are the new rules of investment? Go on offense: develop a short-term pipeline of new business opportunities driven by new customer behaviors and expectations. Develop an M&A roadmap for inorganic growth opportunities. Many companies are very late in digital transformation. The companies that use this moment to reinvent their operating model will define the next decade of their industries.
The global retail industry is transitioning to a low-touch model driven by digital commerce, changing consumer preferences, and cost pressure that is permanently reducing the role of physical retail in consumer purchase journeys and forcing a fundamental rethink of retail real estate economics.
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