Online retailers drive home the cost advantages

A recent study by Deloitte and Touche found that over the last 15 years, the floor plates utilised by the top brands in America had shrunk by up to 20 per cent in Tier 1 malls. The impact on the secondary malls was even higher.

Not surprisingly, In the REIT (real estate investment trust) space, mall REITS have systematically moved lower in prices with a number of hedge funds aggressively adding short positions even as other commercial REITs move higher.

A closer examination reveals that this anxiety in the investment community along with the reduction in floor space has primarily been due to the burgeoning impact of online commerce, a trend that is now taking the Middle East by storm.

Paradoxically, even as high-end brands move into the digital space in increasing numbers, it is the impact on mid-level brands where online disruption has been the highest. Not only in America (most recently highlighted by the brand Bebe stating that it will close all of its stores and move entirely online), but is already being witnessed in the UAE, as platforms offering a wide variety — from clearance sales concepts to “lucky size” websites — proliferate with an exponentially higher frequency.

In the UAE, the amount of experimentation in the digital space is considerably higher, given the fact that a much lower percentage of overall retail sales are generated online. However, with the superior growth rates of online sales, along with greater investments in the logistics and the payment gateway space, it is equally likely that the trajectory of growth will quickly (if not already) eat into traditional brick-and-mortar retail space.

This is perhaps the single greatest factor behind the move of traditionally large retailers moving into online platforms. Equally compelling has been the fact that it has been the spawning of entirely new marketplaces that have thus far captured the zeitgeist of the online shopping market.

This not too unfamiliar trend has already been witnessed in America and Europe, where for the most part, traditional retailers have struggled to replicate their success in the brick-and-mortar world. Even more importantly, the advantage that online retailers have (in the form of avoidance of high mall lease rates) has now started to impact mall rents in America and Europe, with leases falling by more than 20 per cent in the last five years in certain areas.

This disruption in the mall industry has had interesting results that are already starting to be played out. In areas where malls have not been rezoned, they have started to become dominated by F&B and entertainment concepts as traditional retail floor space is shrinking by double digits.

In the UAE and the Middle East, a similar (perhaps even accelerated) trajectory is expected, and the response of mall operators, as well as traditional retailers will be crucial as new online marketplaces build upon the cost advantage that they have in the form of lower start up costs.

Unsurprisingly, it is the customer that stands the most to gain with this disruption, and even with the eventual consolidation in the online space that is expected to occur. A lower price trajectory along with enhanced customer experience across all income, demographic and market segments is already underway and will likely continue.

E-commerce can be looked under a kaleidoscope of factors; one of them certainly happens to be the arbitraging of mall rents. In America, with online sales at a sufficient critical mass, there already has been a ricochet effect on a number of malls, as occupancy and lease rates move lower.

It is perhaps under this lens that Emaar Malls bid for Souq.com makes perfect sense; not only does it allow for the mall operator to integrate into the online community and offer its tenants access, but also for a morphing of its business model onto the online space and a digital footprint that acts as a counterbalance when rents come under pressure in the traditional mall space.

The writer is the head of digital retail operations at GCP Group.