The retail industry is, at the best of times, an unpredictable one which results in a number of different uncertainties that merchants must contend with every day. There’s no denying that events and circumstances over the course of the past year-and-a-half have ratcheted this notion up significantly, forcing much of the industry to shift and pivot in order to remain successful and continue servicing customers. However, with a gradual reopening of communities and economies across the country and a return of foot traffic to physical brick-and-mortar retail locations, the outlook on a near-term recovery for the industry seems optimistic, albeit cautiously so. Despite the lingering headwinds, there will be opportunities for growth, says, Roelof van Dijk, Senior Director, National Research & Analytics, Canada at Colliers, adding that the critical element likely required to attract customers back to the physical store will be centred around the experience.
“It’s been an incredibly uncertain time over the past 18 months,” he says. “And, although there are still a number of regions and provinces with capacity restrictions still in place, as well as some areas that are experiencing a resurgence of the virus’ spread, much of the country continues to reopen. Consumers are returning to physical stores as well. And so, there’s quite a bit of optimism around a brick-and-mortar retail recovery over the months ahead and opportunities for those retailers to offer the experience that today’s consumer is looking for. People are very much social beings. And there are many Canadians across the country who have saved money during the pandemic, unable to spend on things like travel, entertainment and eating out. They’re craving experiences. And the developers and landlords that can create the right mix of experiential components within their properties, making them destinations, will be the ones who enjoy the most success going forward.”
van Dijk goes on to explain that although retail was one of the hardest hit commercial real estate sectors throughout the pandemic, total retail sales continue to be strong. In fact, according to Colliers’ recent Mid-Year 2021 Canada Retail Update, the retail recovery is well and truly underway as total retail sales have already surpassed pre-pandemic levels. However, the report also points out some nuances in the recovery, citing an unequal rebound as a result of massive gains in ecommerce in addition to a disparity of gains among different retail sectors. As a result, says van Dijk, the road to recovery is set to be just as disproportionate for the industry.
“There are some sectors, which have not been able to open up and serve customers, that have been suffering a lot more than others during the pandemic,” he says. “Restaurants, malls and downtown commuter-based retailers are all starting to see a return of foot traffic. But what we’re seeing looking ahead is a potential slowdown in overall retail sales, a shift that will impact the sectors that have been doing extremely well through the past year-and-a-half, like home improvement and renovations, furniture, appliances and other similar types of retail. So, the trajectory of recovery and a rebound in sales may be extremely unequal through the next year-plus.”
Headwinds to growth
He recognizes the fourth wave of the COVID-19 virus as the obvious headwind to growth and impediment to an increase in physical retail sales over the short-term. Any further lockdowns and tightening of social restrictions and protocols could be devastating for some. However, there are a number of other factors, he says, that retailers and other businesses will need to contend with going forward as they continue to navigate through to a post-pandemic environment and a return to something as close to normal as possible.
“The potential for retailers to truly make some sort of recovery through the fourth quarter of the year and into 2022 is directly linked to their ability to ramp up their operations,” he asserts. “Currently, a big piece of that equation is being impacted significantly by a labour shortage. There are certain areas through the country where restaurants, venues and other establishments can’t hire enough staff to fully reopen, turning customers away and closing early because they don’t have enough staff. On top of that, there are still increased costs associated with PPE and cleaning and sanitization. So, operating hours are being impacted for some, reducing their revenue while their costs continue to increase. And, of course, there continue to be major concerns and disruptions related to the global supply chain. All of this creates a major issue for some. If you don’t have staff to service customers or product to sell them, it’s hard to generate revenue.”
As mentioned, the Colliers report also cites the dramatic increased adoption of online channels for purchases as the most significant impact of the pandemic on retail. Ecommerce as a percentage of total retail sales (excluding automobiles and gasoline) reached a peak of 14.5 percent in April of 2020, doubling the pre-pandemic peak of 7.2 percent in December of 2019. On a dollar basis, e-commerce sales peaked at $4.8 billion in December of 2020, surpassing the pre-pandemic peak of under $2.8 billion in December of 2019. And, although online purchases have slowed of late, they still sit around an estimated 12 percent and will, according to van Dijk, continue to impact total retail sales going forward.
“We know that ecommerce is still growing at a much faster rate than that of total retail sales,” he says. “And it will likely continue to grow at a faster rate. During the pandemic there were many individuals who were perhaps a bit reluctant to purchase orders online prior to the pandemic who became quite comfortable doing so over the past 18 months. There’s an obvious ease and convenience to the experience that a lot of consumers appreciate. And, given the high ceiling of ecommerce penetration in the country, we’re expecting the trend toward online to continue for some time.”
The cost of returns
The increased adoption of ecommerce is not the only challenge that the digitization of today’s consumer presents retailers. With the shift in shopping behaviour comes additional costs associated with returns logistics. The report points out the fact that the handling of product returns at physical retail locations is far less problematic than through ecommerce platforms. In addition, as a result of the inability for the consumer to touch and feel the product in a physical setting, product returns have increased significantly through the pandemic, from anywhere between the pre-pandemic average of 5 to 10 percent to 20 percent and, in some cases, as high as 40 percent today. And, as the total general costs of returns are still estimated at nearly 10 percent of the product sale price, it’s proving to be an extremely costly challenge for many. Indeed, retail returns are ugly. However, there are some things that van Dijk suggests might help alleviate the challenge and the costs associated, particularly for those operating within malls.
“An omnichannel shopping environment is where we’ve been heading for some time and where we’ll continue to move toward,” he says. “What landlords do to help tenants deal with ecommerce returns is going to be really important going forward. We’ve seen many institutional retail landlords across the country working on solutions at scale to help make the process swift and cost-effective for all parties involved.”
In fact, the report points to Cadillac Fairview as one example in which the landlord has partnered with ReturnBear in order to provide an improved return experience for customers of its shopping destinations. The service offers the ability for customers to return items from a number of retailers at once, either at a single drop-off location at a CF shopping centre or shipped back together in a single box to a ReturnBear processing centre. It’s an inventive and holistic way in which shopping centre landlords can work with their tenants, becoming part of the solution.
Commercial real estate stabilization
Van Dijk goes further to suggest that anything landlords and developers can do to strengthen their relationships and develop collaborations with their retail tenants will be critical to ensure the success of their properties going forward. And with the right collaborations and a return of footfall to retail stores over the coming months, he says that it could mean very good things for the commercial retail real estate market.
“When it comes down to the performance of retail assets, we anticipate some improvements. As soon as capacity limitations are lifted, social restrictions are removed, foot traffic really starts to return and commuter traffic is restored, there’s a lot of upward potential for retail properties over the next 6 to 12 months. And if retailers continue to drive traffic to their stores and mall landlords can keep tenants in their buildings, creating opportunities to continue driving engagement, vacancy rates will continue to decrease, which will in turn help drive rental growth. And, as we continue to move forward into the fourth quarter of the year and into 2022, we expect to see a return to downtown activity across the country and a bit of a stabilization of the commercial real estate market.”