Technology

The State of Inner-City Retail

In the face of continued rapid growth of e-commerce sales, traditional retail has been declining for years. We take a look at the current status of inner-city retail in Germany (& beyond) and its prospects for the near future.

The Importance of Retail Trade for Cities

City and trade have been living in close symbiosis for centuries. Trade hubs were often the starting point for the foundation and rise of a city. Wherever trading centres were formed, larger settlements and cities quickly followed.

To this day, trade has remained one of the biggest economic drivers for cities and municipalities. Above all, the retail trade industry is one their most important taxpayers through trade tax as well as one of the largest employers. It represents Germany’s third largest economic sector, with three million employees and an annual turnover of about € 513 B.

In recent decades, inner-city retail proved to be the “business card” of cities as flourishing and lively shopping streets attracted shoppers from the surroundings areas and tourists from abroad. But to be such a thriving industry, retailers are dependent on public transport, a modern infrastructure and an attractive environment. The cultural offerings, green spaces and historic buildings can make shopping in the city an experience. Conversely, the retail trade makes an important contribution to permanently attractive and vital city centres, establishing economic clout.

A Continuous Structural Change in Retail

Today, retail is at an inflection point as vacancies are on the rise and retailers struggle with inefficient operations and increasing competition from online stores. The consequences will likely include an ever-increasing vacancy rate in shopping streets, but also ever shorter usage cycles of retail properties, the desertification of public spaces and the deterioration of the supply situation in some areas.

In a recent article by Derek Thompson, writer at The Atlantic, New York was likened to a “rich ghost town” as surveys by Douglas Elliman, a real-estate company, and Morgan Stanley determined that at least 20% of Manhattan’s storefronts is vacant or about to become vacant. In Berlin-Friedrichstraße, a prominent and central shopping street, almost 25% of all storefronts are shuttered.

This development will worsen in the next few years. As footfall will continue to decrease, it will simply no longer be worthwhile for many inner-city retailers to keep operations up and running. Their business model is highly dependent on high visitor numbers. A study by the IFH Köln projected that every tenth store (45,000 – 50,000 stores) is threatened by closure in Germany until 2020. This certainly involves not only the closure of old-established shops and a decreasing variety of goods on offer, but above all a loss of individual local color. Although this development is also a reaction to customers’ purchasing preferences, the criticism that shopping miles are increasingly becoming “monotonous” is strong.

The reasons are manifold. E-commerce’s continued strong growth has surely proven to amplify the structural change of traditional retail (it is projected that the online revenue share will climb to up to 15,3% in Germany by 2020), but it is not the sole cause of it.

The demographic development and the migration of people to larger cities are further contributing factors. If the population in smaller city shrinks, footfall automatically drops and thus retail sales are also effectively reduced leading to more shuttered storefronts. In the future, e-commerce will thrive in these structurally weak areas as it helps to solve supply gaps and guarantee a standard of living similar to urban areas. Already today, almost 60% of e-commerce revenue in Germany comes from municipalities with less than 50,000 inhabitants.

Digital Transformation of Traditional Retail

Following the success of discounters, digitalization is triggering the next major transformation as online retailing continues to grow. In 2018, online orders are projected to generate revenues totaling € 52.7 B in Germany.

As traditional retailers face increased competition from digitally savvy companies like Amazon and Alibaba, many are rethinking their operations to strengthen their digital presence.

Especially larger chains have started to think of their stores no longer solely of as retail spaces but rather as storage capacity. They are effectively moving the warehouse closer to the customer as they rely less on larger distribution centers. A strategy that is not too different from adding new storefronts, as they are now establishing local delivery outposts to move as close to the customer as possible. Finally, they are strengthening their last-mile delivery infrastructure to combat the logistics capabilities of the e-commerce giants. This lays the groundwork to successfully implement multi- and omni-channel infrastructures.

Walmart, for example, has acquired a number of tech startups to build up sophisticated digital capabilities in their last-mile logistics, e-commerce marketplaces and in-store operations. Already in 2014, Walmart was granted a patent for an “automated shopper checkout” something they are seemingly exploring further to allow an automated cashier-less in-store checkout. Moreover, two of their bigger acquisitions, Jet.com and Parcel, have recently announced to join forces to allow most New York customers to schedule three-hour windows for same-day or next-day delivery.

Most small retailers don’t have the funds to establish a similar comprehensive online market presence. However, they are increasingly managing their online distribution through regional aggregators like TrouvaAtalanda, Locamo or larger platforms like Amazon Marketplace and eBay. Also, with the support of ‘fulfillment’ platforms they have access to established delivery capabilities to also supply customers beyond their regional reach.

If you are interested in learning more, please take a look at our article on ways how to reimagine and future-proof retail stores [will be published soon].