Winners and losers in the race for space?

Citation

Pal, J. (2008), "Winners and losers in the race for space?", Marketing Intelligence & Planning, Vol. 26 No. 7. https://doi.org/10.1108/mip.2008.02026gaa.002

Winners and losers in the race for space?

Article Type: Viewpoint From: Marketing Intelligence & Planning, Volume 26, Issue 7

Retailers in the UK have, for many years, benefitted from a seemingly unstoppable rise in consumer purchasing power, and demand for the “must-have” goods of a modern life. The inexorable rise of a coterie of large retailers has gone hand-in-hand with them being seen as brands in their own right. Together with their increased and increasing power in the supply chain, the largest retailers have become feared adversaries for many suppliers, with nowhere else other than a few large retailers to place their goods. The marketing savvy of the largest retailers is there for all to see.

If we were to trace the development of these largest retailers, such as Tesco, we can see that a virtuous cycle of extending product ranges has allowed them to attract more consumers and increase the company’s returns. The economies of scale have then been ruthlessly applied, and the lowering of prices has attracted yet more customers. The next critical stage in the development of our retail giants has been in the grounding of that capital in the form of new stores. Serving efficiently and effectively yet more customers, and then increasing store sizes leads to further growth, more capital to be grounded and before we know it a stranglehold on not just one but many markets. Similarly the development of new formats to address the needs of different size markets has also proven a masterstroke of the best retailers with an innate understanding of customers’ needs. Straddling the middle market, a place where marketing wisdom suggests no one should occupy, with a clear three-point price architecture (good, better, best) has also proven extremely successful for some but not all retailers.

In the UK we have a retail landscape, and media, dominated by the omni-presence of Tesco to such an extent that the firm has become more bête noir than cause célèbre. But whilst the customer rhetoric might suggest one thing, the reality shows another, with yet more market share being sucked up by Tesco. Even faced with challenges posed by the limited line grocery retailers such as Aldi, Lidl and Netto, Tesco had already spotted that customers shop in a promiscuous manner and had its value ranges in place. By mid-2008 the grocery sector continues its price skirmishes – a full-blown price war being out of the question as this would ruin margin for all the players involved, something seen when DIY companies went head-to-head in the early 1990s – it is other retail sectors that real pain will be felt. Undoubtedly serious marketing challenges lay ahead for all retailers.

Meanwhile many of the UK’s largest towns and cities are in the throes of having major new shopping centre developments constructed – places where non-food retailers dominate. Such is the slow-moving government planning system that sets the policies for new retail developments, coupled with the equally slow local decision-making process for the granting of permission for new development, that much of the new floor space due to open in the next eighteen months will have been conceived and planned over seven or eight years ago. Getting bogged down in the local planning system has meant that getting new developments on stream has taken rather longer than envisaged. Whilst there are moves in government circles to speed up the planning system to avoid such bottlenecks, the real issue now facing retailers and shopping centre developers alike is that the new floor space due to come on-stream in the next two years will coincide with the downward curve of consumer and investor confidence. In short we are likely to see developers and retailers having to face up to the issue of massive over-capacity of retail space.

Notwithstanding the British predilection with property, much of the retail space is owned by retailers and large shopping centre companies who, in turn, may be answerable to large institutional investors and pension funds. The performance of pension funds such as those enjoyed by lowly-paid academics are, therefore, partly dependent on the returns from the grounded capital and concomitant income streams from large retail developments. But has the worm turned and, if so, what are the implications for marketers?

It is clear that a vast over-capacity of retail space, much of it new and unlet, is imminent. Allied with this, the early casualties of recession, real or imagined, sees the space of those failed retailers also become available. Having been protected by standard institutional property leases, where a twenty five year contract with a five yearly upward-only rent review system dominate, shopping centre developers now face a serious challenge to their marketing nous. Partly-occupied shopping centres speaks ill of schemes and pricks consumer confidence as well as retailer interest. This poses a number of questions for marketers from different areas of interest.

Firstly, shopping centre owners and developers will need to act creatively to secure tenants. In the past they have made attractive opening offers of initial rent-free periods and contributions to fitting-out costs – but can they still afford to do this to secure good anchor tenants? Or, perhaps more critically, can they afford not to? And will retailers moving into new centres be able to re-assign the leases of their abandoned stores given the downturn in consumer confidence?

Secondly, with such a surfeit of space will the centres of gravity in towns and cities change to deleterious effects for retailers stranded in “older” parts of town with the migration to new developments? It is almost unthinkable that retailers can afford to maintain their store networks given the undoubted cannibalisation that occurs with new store openings. Overlay this with the burgeoning impact of e-tailing and the challenges for store-based retailers become ever greater. Whilst retailers with lower and lowest cost bases have been thriving, aided by the benefits of price deflation, the onset of increased purchasing prices means that retailers’ cost bases are about to rise. As costs rise the only person to carry the cost is the customer, and it is increasingly clear that price sensitivity is but one driver of the purchase decision. Combined, these changes will also set major challenges for our town and city centre managers if a vortex of decline is to be avoided.

So is there any silver lining to be spotted from the cloud of recession and over capacity of retail space? Well, for retailers looking to expand, or the new innovator looking to enter a market, the laws of supply and demand will be seen in fairly sharp focus as more affordable floor space becomes available. Retailers will need to hold their nerve and not be brow-beaten into submission by large resourceful shopping centre developers. Shopping centre developers will no doubt be putting their marketing skills to the fore and will no longer be able to rely on attracting a couple of good anchor tenants to drive the success of the rest of a centre’s leasing programme. For once the property market will become a buyer’s market and the astute retailer will survive. The next few years will make for interesting times and there should be opportunities afforded by the over-capacity of retail space.

John PalMarketing and Retail Division, Manchester Metropolitan University Business School, Manchester, UK