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Shopping centres: the new rules of engagement

Mckinsey modern retail collective (attributed to mckinsey & company)

In the battle to attract footfall, shopping centres are redefining their relationships with retailers and transforming into venues for experiences.

Once retail emporiums, anchored by crowd-drawing department stores, shopping centres are facing the squeeze of retail company voluntary arrangements, rising vacancy rates and changing consumer shopping habits.

Landlords are having to think outside the box, heralding a new era of shopping centres that focus on experiences to drive footfall, harness technology to understand their customers, and bring offices and homes into the mix.

Hamerson's Bullring and Grand Central

Hamerson’s Bullring and Grand Central

1 Tenants are friends, not enemies

Key to understanding how shopping centres will evolve through uncertainty in the market is the change to tenant leases. Where once retailers would sign double-decade contracts, leases are now much shorter. Deals are now increasingly capped at five years with turnover-based covenants, which allows both retailer and landlord to exit earlier if the store is not performing well, one shopping centre property agent tells Drapers.

“Right now, deals are very tenant friendly,” he says. “My clients are being a lot more flexible and I think shorter-term leases will probably be a long-term trend. Landlords are keen to get new brands in, and a lot of these brands recognise it’s an opportunistic moment to test the market because there’s big availability in every shopping centre.”

Shorter-term leases will probably be a long-term trend

Shopping centre property agent

Mark Bourgeois, UK and Ireland managing director of shopping centre owner Hammerson, agrees: “We’re needing to be more flexible around certain lease terms. There have been some interesting conversations around turnover rents and how they’re built up, but there’s also been increased collaboration and sharing of information.”

In what is a difficult time for the industry, retailers want a fixed combined price that is based on what they can afford, rather than traditional zoning rates.

“Retailers are looking for a combined rent and service charge on a turnover percentage basis,” one high street CEO tells Drapers. “And with that we want a ‘white box’ unit to keep fit-out costs to a minimum.”

However, turnover-based leases require landlords to undertake more rigorous tenant management.

“In the past, there was no incentive for landlords to proactively manage shopping centres [because of the length of the leases]. Now it doesn’t work like that,” the property agent says. “If you’ve got more deals linked to turnover of the retailer, it obviously incentivises landlords to do more to try to bring footfall through the malls.”

Axiom

Axiom will combine 600,000 sq ft of retail with a 40 acre country park and 10,000-seat rugby league stadium

2 Experiences rule for shoppers

A new 106 acre shopping centre to open in 2022 in Castleford, West Yorkshire (pictured top), is arguably one of the UK’s most futuristic approaches. Developed by Lateral Property Group and Highgrove Group, Axiom will combine 600,000 sq ft of retail with a 40 acre country park and 10,000-seat rugby league stadium.

The centre has already secured leases from retail heavyweights including Marks & Spencer, Next, Primark and H&M, and its more focused retail offering is a draw.

“With only 70 shops, it’s not going to be facing the issue of oversupply, there will be competition for units. It will mean that spend isn’t diluted across multiple different retailers selling the same product,” says Mark Disney, executive director at CBRE and letting agent for the development. 

“The amount of online spend and the role of stores has changed dramatically and it’s significant that this is the first regional centre to be designed with all that in mind.”

At Axiom, consumers will be able to take part in adventure experiences, including two lakes with water activities, a 10,000-person amphitheatre, zip-lining, climbing and bike hire, all designed to connect with the local communities.

Positioned as a “brand playground”, as part of negotiations, retailers are encouraged to think beyond their stores as simply places to sell, and to explore partnership opportunities with activities at Axiom. One example is a lifestyle brand interested in branding the incorporated skate park.

Intu Lakeside's leisure extension has increased footfall by 20%

Intu Lakeside’s leisure extension has increased footfall by 20%

Existing centres face barriers when trying to adapt. Nevertheless, Intu Lakeside’s £72m leisure-led extension, which opened at the Essex shopping centre this summer, has led to a 20% increase in footfall, reports customer performance director at Intu, Rebecca Ryman.

And as centres expand, experiences are a focus with fruition.

“Events have been an investment for us this year,” says Hammerson’s Bourgeois. “We rolled out [interactive installation] the Festival of Light across Dundrum Town Centre in Dublin, Westquay in Southampton and the Bullring and Grand Central in Birmingham, and saw an 10% uplift in footfall as a result.”

And key to its success was the attraction of new customers. In Birmingham, 31% of visitors were new, and those coming from beyond the destination’s core catchment area rose by 5% during the Festival of Light.

Hammerson's Festival of Light at Westquay Southampton

Hammerson’s Festival of Light at Westquay Southampton

“If you can have live events, it brings people that wouldn’t perhaps normally come to shopping centres,” says retail research associate at Nottingham Business School Nelson Blackley, who suggests looking overseas for destination dynamite. “The Mall of America, the largest in the US, has got the largest indoor theme park and even a wedding chapel – which apparently 7,000 people have used.”

One high street CEO agrees: “Centre events drive traffic, which we monitor in our store – and it is positive. Whenever we do in-store events, be it simply a cocktail or pop-ups such as nail bars, we always see a conversion uplift.”

However, he called for landlords to be less segmented in their approach to the retail offerings, adding: “For the past few years centres have focused on either food and beverage (F&B) or retail and kept them quite separate physically. It seems that increased traffic year on year has been driven by increased F&B offers but I would suggest a more integrated approach in terms of physical locations – a bit more like outlet centres.”

Wolf & Badger at Coal Drops Yard

Wolf & Badger at Coal Drops Yard

Wolf & Badger at Coal Drops Yard

3 Independents have pulling power

At the other end of the market community and niche offering centres are flourishing as the draw of big brand chains lessens to a degree.

“[Large brands] are no longer necessarily the go-to anchor tenant, as good-quality independents can ground a [retail destination], emphasising local culture and individuality,” says retail editor at trends intelligence company Stylus Rebecca Hobbs.

“We have seen steps towards integrating independents into developments such as Coal Drops Yard, which includes local businesses such as Wolf & Badger, denim brand Blackhorse Lane Ateliers and lingerie brand Beija London alongside brands such as Cos and Samsung.”

For international inspiration, she points to Singapore’s Funan mall, which gives 60% of its retail space to homegrown brands. Closer to home, Intu has been trialling the integration of innovative and independent brands not normally present in large-scale developments at Nottingham’s Broadmarsh centre.

Hammerson too has introduced independents through five pop-up spaces available in Birmingham on Link Street. The 128,000 sq ft retail corridor that joins its Bullring and Grand Central developments benefits from an annual footfall of 36 million.

Independent designer childrenswear chain Base has stores five stores including one in Grand Central, Birmingham and Bluewater shopping centre in Kent.

Managing director Marc Granditer tells Drapers: “Shopping centres may have no choice [to include independents]. As retailers disappear there should be big flexibility to allow opportunities for independents. An independent needs something that is sensibly costed until they’ve had a chance to prove their worth.”

British Land’s Canada Water masterplan will create a 53 acre town centre in Southwark with 1 million sq ft of retail, leisure, entertainment and community space, 3,000 homes and 2 million sq ft of workspace, accommodating 20,000 jobs

British Land’s Canada Water masterplan will create a 53 acre town centre in Southwark with 1 million sq ft of retail, leisure, entertainment and community space, 3,000 homes and 2 million sq ft of workspace, accommodating 20,000 jobs

4 Masterplans are mixing it up

Increasingly landlords are recognising the potential of mixed-use developments. By combining retail with office space and a strong residential offering, centres generate an assured footfall base to drive sales.

“There are [historic] mixed-use developments but now it’s at the forefront of what people think about, particularly in London,” one property expert says.

British Land’s Canada Water masterplan will create a 53 acre town centre in Southwark. It will combine 1 million sq ft of retail, leisure, entertainment and community space, as well as 3,000 new homes and 2 million sq ft of workspace, accommodating 20,000 jobs.

By integrating retail, leisure, arts and co-working in one location, we could develop an alternative business model that is less exposed to economic cycles and changes in consumer spending

Beate Mellwig, senior principal at architecture pratice HOK – read her comment, below

Hobbs says: “Occupied retail space is decreasing. If the UK government relaxes planning laws, we could see more empty or poor-performing retail stock converted into residential – an early example [being] Manchester’s Circle Square.”

International shopping centre owner Unibail-Rodamco-Westfield last year asked its UK team to imagine the shopping centre of the future in its Destination 2028 project.

“What came out of that was a real focus on hyper-connected micro-cities,” Europe and group director of brand and strategic marketing Myf Ryan tells Drapers. “There is a much stronger focus for us in creating destinations that span beyond traditional shopping centres and moving towards a mixed-use nature adding offices, but also residential and hotels.”

Mckinsey & Co's Modern Retail Collective concept trials new in-store technology

Source: McKinsey & Co

McKinsey & Co’s Modern Retail Collective concept trials new in-store technology

5 Trading with technology

In-store technology is often seen as magic bullet to create a seamless online/offline customer experience. However, Drapers Connected Consumer report into multichannel shopping habits highlights the complexity of knowing where to invest. Although large proportions of customers appear ready to use it to avoid queuing (39%) or find a specific product (36%), 39.6% see “no reason to use it”, albeit down from 52% last year. 

Management consultancy McKinsey & Co’s first-ever retail concept (pictured above) aims to help retailers to target their tech investment. Launched in September, Modern Retail Collective is a store within the Mall of America in Bloomington, Minnesota, which provides retailer partners the opportunity to test new available technologies and analytics.

Praveen Adhi, partner at McKinsey & Co, tells Drapers some of the most interesting first trials include embedded interactive product tags from Smartrac: “With most retailers, when you walk in if you don’t have their app, there is no way to interact with their store. Now, through embedded tags, all consumers have to is tap the product and it will bring up information on their phone without the need for an app.”

Also notable is new camera technology from RetailNext, which watches and analyses consumer behaviour in store, including how certain demographics engage with product and how presence of a sales associate affects purchases. 

Shopping centres must combine this futuristic approach with the practicality of well-designed centres, and transforming historic retail spaces into experiential footfall drivers. However, fashion retail will continue play a vital part.

“Aspirational fashion brands, in particular, are looking to do more with us as there’s more uncertainty around department stores as a traditional channel,” says Bourgeois. “There’s always going to be a place for fashion in flagship destinations.”

 

Beate Mellwig of HOK

Beate Mellwig of HOK

‘The alternative business model’: Beate Mellwig, senior principal at architecture practice HOK 

The decline of the shopping centre has coincided with the demise of department stores, the traditional anchor for large, destination malls. One of the primary challenges facing many towns and cities is how to adapt and reposition these for today’s consumer.

When addressing this challenge as designers we have sought to apply our approach from workplace and office design. By employing similar principles, we believe these iconic buildings can have a new lease of life.

The fundamental difference is that, as interior designers, we no longer just design the environment. We are now designing the experience. By placing an emphasis on experiential design, we can create a different type of anchor for the community.

The centres of the future will be designed with a focus on social interaction. Places such as Bluewater and the London Westfield centres are successful, as these provide retail, and are supported by a vibrant mix of restaurant, cultural and entertainment. Applying this principle to department stores, we are beginning to see a shift in combining leisure and cultural experiences. Retail becomes a backdrop yet remains an activity.

Most retail outlets are operational for only about 10 hours or so, depending on the city and local planning policy. By integrating retail, leisure, arts and even co-working in one location, we could develop an alternative business model, which is less exposed to economic cycles and changes in consumer spending.

The next generation of shopping centres and department stores will continue to be in urban places, supported by good public transport connections. This will reduce the need for parking spaces which will help the environment. These places could also include hotels, perhaps a pod module, which creates 24-hour footfall and activity.

We believe shopping centres and department stores will endure in our towns and cities if we are prepared to rethink the challenge.

 

 

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