The End of Retail as We Know it
A sector already in decline, retail endured a particularly challenging 2020, but a digital transformation may be its salvation
The End of Retail as We Know it
Retail was among the hardest-hit industries in 2020. National lockdowns imposed on almost every country in the world added to its pre-pandemic woes and prevented consumers from hitting the high street for much of the past year. Retail property owners faced a lack of tenant cash flows and many store locations had to close. The inability to keep up with rent payments led to numerous insolvencies and added downside risks to the income-generation potential of portfolios, negatively impacting the returns available to investors.
The decline of traditional retail is not a new phenomenon – Preqin data shows PERE retail deals have been sliding consistently since 2015 – but the pandemic has accelerated a counter-trend in the form of surging investment in e-commerce. As digital commerce continues to replace traditional bricks-and-mortar retail, how is the investment landscape changing in tandem?
The COVID Effect
Amid the economic fallout from COVID-19, we have seen several high-profile bankruptcy filings over the past 12 months. UK-based Arcadia Group, owner of household-name clothing brands such as Topshop and Burton, entered into administration in November 2020. Elsewhere, Japanese lifestyle retailer Muji’s operations in the US filed for Chapter 11 bankruptcy with a total debt of $64mn. A record 160 consumer-facing businesses in the US filed for bankruptcy in 2020, as per S&P data.
Deal-makers in the real estate space have certainly felt the repercussions; the number and value of retail deals were at their lowest levels in five years (Fig. 1). Preqin data shows the number of retail PERE deals fell by 43% over 2020, with only 747 transactions completed; total deal value reached $15bn, down by a substantial 55% from 2019.
Although not quite as severely as in the retail sector, deal-making stalled across private real estate as a whole. Total PERE transactions declined by 39% in number and 50% in aggregate deal value compared with 2019. Further downward pressure is likely going into 2021; among fund managers Preqin surveyed in November 2020, 58% say they will avoid retail investments over the next 12 months.
A New Digital Frontier
While the pandemic’s impact on the retail industry has been unexpectedly severe, Preqin data shows that PERE retail deals have been on a downward trend since around 2017. What’s more, data from CBRE’s Global Rent and CV Indices suggests retail rent and capital value have been sliding since 2018. As of Q3 2020, the rent and capital value index change over 2020 was approaching -8%. For comparison, the index change for office properties was around -2%, while industrial properties saw a positive change.
These figures underscore the speed and scale of the evolution taking place in the retail sector, as consumer behavior, technology, demand, and demographics change dramatically. The fast-growing emphasis on e-commerce is perhaps the biggest shift of all, as consumers swap the high street for the convenience of their laptops and mobiles.
Recent deals in e-commerce emphasize this trend, as tracked on Preqin Pro. In February 2021, Boston-based Thras.io, Inc. raised $750mn in Series D funding, co-led by returning investors Advent International and Oaktree Capital Management. Thras.io, Inc.’s fundraise is now the largest investment to date in the emerging industry for sprucing up small merchants who sell through Amazon. The equity round came only a month after Thras.io, Inc.’s $500mn debt financing, also led by Advent International. The firm has raised almost $2bn since it was founded in 2018.
In 2020, investors poured almost $1bn into companies looking to purchase successful brands on Amazon. The market for independent merchants is vast: they made an estimated $200bn in sales over 2020. Frederic Court, Founder of London-based technology investor Felix Capital, said: “Amazon is the new mall. It’s just gigantic.” Retail e-commerce sales worldwide amounted to $4.2tn in 2020 and are projected to grow 55% to $6.5tn by 2023. Amazon accounted for almost a third of all e-commerce sales in the US.
Adapting and Evolving
To engage consumers in more creative ways, retailers and landlords have already started to invest in more experimental forms of retail. Innovative technologies and new experiences are the name of the game, including but not limited to: augmented reality (AR), personalization engines, blended retail experiences, smart supply chains, and hyper-personalization. In London, Gravity Active Entertainment has already begun to turn a former branch of department store chain Debenhams into a new venue complete with games area, restaurant, and cocktail bar. Following the collapse of Arcadia Group, approximately 15 million square feet of space has been left redundant in the UK, offering a prime hunting ground for such experiential retail.
Traditional high street retail could soon become obsolete. As the technology evolves, retail spaces will continue to transform in an effort to engage consumers, rather than merely sell to them. To keep up with the rapid pace of change in an increasingly unforgiving sector, the key challenge for retailers and retail property owners will be effectively harmonizing e-commerce with retail spaces.
The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin accepts no liability for any decisions taken in relation to the above.
