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Clicks and bricks paving way for future of retail

Retailers are recognising the importance of seamless integration between physical and online realms.

An employee scanning a handbag's bar code at the Reebonz headquarters. The local online luxury product retailer has been setting up pop-up stores in malls and subsequently set up a showroom within its eight-storey building in Tampines in March 2017.

Local fashion retailer Love, Bonito (above) set up its first physical store right in the heart of the Singapore's shopping belt, Orchard Road. Clearly, the value proposition of having physical shops remains a key consideration for local retailers in their business strategy.

SINGAPORE'S retail scene has been under the spotlight as structural shifts in consumer demand, competition and mode of retailing evolve faster than before.

The health of Singapore retail also hinges on consumer sentiments and economic performance, which saw improvements in 2017.

After witnessing negative retail sales growth since 2014, the retail landscape has finally seen a modest respite, recording a 1.3 per cent overall yearly increase in the Retail Sales Index (RSI) for 2017.

The uptick in retail sales is a reprieve for retailers as they contend with stronger headwinds in a competitive landscape which has yet to lift demand for retail space.

According to the Urban Redevelopment Authority (URA), the average annual occupancy for island-wide retail slipped from the high of 94.9 per cent in 2013 to 92.2 per cent in 2017. The retail space rental index for the Central Region also fell for 12 consecutive quarters and recorded negative growth of 15.9 per cent between Q1 2015 and Q4 2017.

Despite the sharp decline in retail rents, island-wide prime retail rents tracked by Knight Frank Research held relatively firm, falling only 1.3 per cent year-on-year to S$30.70 per square foot per month (psf pm) in 2017.

Compared to its last peak in 2013 (S$32.60 psf pm), island-wide prime retail rents declined by 5.9 per cent. Average yearly rents across different areas in Singapore for 2017 saw varying extents of annual decline, with Marina Centre, City Hall and Bugis areas facing the greatest downward pressure (minus 5 per cent), followed by the suburban areas (minus 1.7 per cent).

Come 2018, an estimated 2.1 million sq ft nett lettable area of potential new retail space will come onstream, bringing total island-wide retail space to 67.4 million sq ft for the entire year ahead. This onslaught of retail space might further exert downward pressure on retail rents and occupancy.

Faced with a mixed bag of performance indicators and the wave of structural change in consumer demand that is to come, what are some of the key business considerations and strategies that local retailers can adopt in 2018?

Opportunities from strengthening sentiments

Knight Frank carried out its annual Retailers' Sentiment Survey, its third instalment since 2015, with 55 Singapore-based retailers with an Asia-Pacific (Apac) presence.

The survey revealed the top three countries outside of Singapore that retailers have handpicked to establish a retail presence in within Apac - Malaysia (62 stores), Indonesia (31 stores) and Australia (10 stores).

The survey further revealed that business optimism from 2017's moderate growth in retail sales performance has spilled over into 2018, with less concern over the top three business challenges - cost of rental, sales performance, and hiring and retention of staff - over the past three years.

Cost of rental, in particular, remains the chief challenge for the respondents. Notably, retailers demonstrated growing concerns over consumers' online-buying behaviour year-on-year over the last three years, though the latter is still ranked as the business challenge they are least concerned about at the moment.

Respondents' sanguinity for 2018 is further reflected in the survey, with more than 55.6 per cent of respondents anticipating positive growth in business profitability in the year ahead, while 25.9 per cent expect a scale-back. The remaining 18.5 per cent predict similar levels of profits as the year before.

In comparison to our previous 2017 survey, business sentiments were bleaker in 2017, where only 48.1 per cent of retailers anticipated a positive growth in business profitability, while a higher proportion of 36.5 per cent expected a dip in the same year.

Retailers from the food and beverage service line (restaurants, cafés, kiosks, bars and pubs) this year reflected similar sentiments to the year before, and were the most optimistic, with 35.3 per cent envisaging at least a 10 per cent growth margin in business profitability in 2018.

The other key trades of education and enrichment, fashion and accessories, and health, fitness and wellness saw a mixed bag of growth expectations. This optimism by retailers dovetails with improving consumer confidence levels seen in the region.

The Mastercard Index of Consumer Confidence showed that consumers in Singapore, Malaysia, Indonesia and Australia reported an upward shift in their levels of optimism in H1 2017.

Enduring bricks for the future of retail

When asked about their strategies with regard to physical store development in 2018, 78.2 per cent of respondents indicated that they were looking to open more outlets both locally and overseas.

In the same vein, 92.7 per cent of respondents indicated the importance of developing and maintaining a physical store presence, which has resonated especially among e-commerce retailers.

Uptake of physical spaces is increasingly evident among global e-commerce giants such as Alibaba and Amazon, where their aggressive entry into the brick-and-mortar realm included the setting up of Hema and Amazon Go supermarkets with large floor plates.

Back at home, local fashion retailer Love, Bonito set up its first physical store right in the heart of Singapore's shopping belt, Orchard Road. Local online luxury product retailer Reebonz followed suit, setting up pop-up stores in malls such as Suntec City and VivoCity, and subsequently setting up a showroom within its eight-storey building in Tampines in March 2017.

Clearly, the value proposition of having physical shops remains a key consideration for local retailers in their business strategy.

Physical stores allow e-commerce players to capture walk-in patrons, and double up as warehouse and fulfilment stations for the delivery of online purchases.

E-commerce players have also realised the intrinsic value of occupying a physical space, as shown by the 2017 survey results from the International Council of Shopping Centres.

The findings revealed that 69 per cent of consumers who shopped online and went to the physical store to pick up their orders were likely to purchase additional items during the collection.

Improving return on investment for stores

When surveyed on the qualities of shopping experiences and products that customers value, respondents picked value for money, good customer service and quality products as the top three values that they deemed most important.

While these values and experiences can be addressed by an e-commerce platform, the 'human touch' aspect remains the crucial differentiating factor at the physical store.

Rather than have both online and offline platforms running independently, how can retailers drive a more seamless transition between both platforms?

Respondents believe that showrooming, exclusive in-store advertising and promotions, and the adoption of social spaces in-store were strategies that could help drive traffic back to brick stores.

Major retailers like Hermes, Gucci and Apple have also developed 'showrooms' in their physical shops to showcase products under thematic formats that reflect the trends of the season, allowing customers to touch, feel, and experience their current range of items.

Interestingly, 20 per cent of respondents now choose to market their products on established, multi-brand e-commerce platforms such as Lazada, Tmall and Qoo10, over developing their own online platforms to reach out to customers.

Only 5.5 per cent of respondents in the 2018 survey indicated an interest in building an interactive smartphone app, as compared to 11.5 per cent in the 2017 survey. Likewise, a lower proportion of 50.9 per cent of retailers surveyed were keen to engage customers via social media portals in 2018, as compared to 61.5 per cent in 2017.

Looking ahead, conventional retailers can explore integrating click-and-collect services in their existing physical stores, which may help reduce warehousing and additional manpower costs over the long term.

E-commerce players can seek to partner existing brick owners, to allow customers to collect their merchandise at their partner's physical stores.

An example of such a partnership is between e-commerce player Lazada and real estate giant CapitaLand, where Lazada leverages CapitaLand's existing mall infrastructures by setting up item collection lounges.

There, e-shoppers can collect, test, and even return defective items on the spot. Such partnerships not only create an ecosystem to drive traffic to both the online and offline stores, but also offer added convenience to customers.

This seamless online-offline relationship, with the added emphasis of convenience to customers' shopping experiences, will set the stage for the future of Singapore retail, at least for 2018.

  • Ms Low is executive director and head of retail, and Ms Tan is director and head of consultancy and research at Knight Frank Singapore.

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