Clicks & bricks: the evolving landscape of Canadian retail April 2014

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1 April 201 Omni-channel retailing in Canada Omni-channel retailing is a process of integrating all available shopping channels (brick-and-mortar, flyers, catalogs, television, mobile phones, computers, etc.) into one unified consumer experience. To be successful, all touch points with the consumer must work consistently, with the same pricing, products, and promotions. This paper explores how retail and industrial property types may be affected by the emergence of omni-channel retailing in Canada. Our belief is that strategic locations for both property types may become more important. Additionally, creating the desired shopping experience is important to success in retail. Logistics and distribution centres in the industrial property type should also evolve to cater to changing market conditions. Who is leading the shift? Global retailers are leading the way. Companies, like Amazon, are expanding omni-channel retailing in Canada by aggressively implementing online grocery strategies and doubling their product offerings. 1 In contrast, many Canadian-based retailers are lagging when it comes to omni-channel retailing. In Canada, $20.6 billion of retail purchases were made online accounting for 5.7 of retail sales in U.S. online sales accounted for. of overall retail spending, 3 even though internet use in Canada was higher (see Figure 1 for a comparison of North American online usage). A major reason for this gap is Canada s large geographical size and sparse population, which makes distribution of goods relatively costly. Figure 1: Internet usage for Canada & U.S. Online retail sales as a of total retail sales Smartphone penetration among mobile phone users Broadband penetration of total population online Canada United States Source: Connecting with Consumers: Retail in Canada 2013: comscore Total Internet, Aug-13 (U.S./Canada); GroupM via emarketer, Mar-13 (U.S./Canada.); Mary Meeker Internet Trends via KPCB, Dec-12. What is the impact on retail? There is no denying that the retail landscape is changing due to omni-channel retail strategies. Collection points are being established (Figure 2), where consumers can collect an item ordered online from a secure locker. The concept of showrooming is also gaining popularity. Showrooming is where items are displayed in the store but ordered online. Canadian retailers are recognizing that they need to evolve as Canada s online sales are growing approximately three times faster than traditional retail sales. 5 Figure 2: Amazon locker The online experience has gained more traction in dense populations within small geographical areas, which makes the distribution of goods relatively efficient. For example, South Korea and the United Kingdom are two of the most advanced countries in the area of omni-channel retailing. 1 Financial Post: Online retail sales to hit $3-billion in Canada by 201, Jun-13. 2,3 Ibid. Henderson Research: The impact of technology on real estate: Implications for 5 Forrester: Canadian online retail shifts up a gear, eh? Jul-13. Source: Daily Mail.co.uk Order something from Amazon collect it from your tube station; Nov-13. Page 1

2 In the future, the shift to shopping online may lead to smaller square footage demanded by tenants. But this by no means is the end of retail. Retail tenants who are able to adapt to the changes in consumer behaviour and execute an integrated omni-channel retail strategy should not cannibalize their existing store sales, but should gain a competitive advantage and drive net sales higher. 6 A recent survey by PricewaterhouseCoopers notes that consumers are not focusing on one channel for their purchases; instead they are integrating all available options and spending more with those retailers who provide multiple channels. The same report also states that even though shoppers might do their research online, they still prefer to purchase products at a physical store. 7 Omni-channel retailing is a process of integrating all available shopping channels into one unified consumer experience. Hence, Amazon and ebay are opening traditional brick-and-mortar stores to complement their online presence. Available retail space and sales in Canada & U.S. Canada has less supply of retail space per person: Canada: 1 square feet/person U.S.: 23 square feet/person Canada has higher retail sales per square foot: Canada: C$551 U.S.: US$69 Another reason the retail property type is attractive is due to U.S. and European retail chains recognizing the opportunity for growth in the Canadian market. Target, Marshalls, J. Crew, Bloomingdale s, AllSaints and Nordstrom are a few of the chains crossing the border. 9 With foreign competition entering Canada, the demand for strategic retail space has increased; this has led to lower vacancy rates. The average vacancy rate in Canadian retail property from March 200 to June 2013 was 5.. As at June 2013, the vacancy rate was.9 and the property market is considered to be in equilibrium at 5. Figure 3: Canadian retail vacancy Vacancy rate (national) Average rate Source: CBRE Limited, Jun Given the shift to omni-channel retailing, landlords who are able to create the desired experience for shoppers - where they have convenient access to entertainment, social interaction and transit - will be able to attract tenants. This experience would be difficult to duplicate with only an online presence. High Street retail (e.g. Bloor Street in Toronto, Robson Street in Vancouver, and Fifth Avenue in New York City) and dominant shopping centres at key transit hubs should continue to see demand but will also need to adapt to changing consumer behaviour. Certain types of retail will fade because their products are easily accessed online (e.g. books, electronics, and music). There are new offerings, such as Netflix, where an online-only presence has done well. Categories where the look and feel of the product is important will continue to see demand in the physical store, which will be strengthened or complemented by an online presence. For example, House of Fraser is a retail firm based in the United Kingdom that has large urban formats, as well as a significant online presence. The urban formats allow consumers to examine a product before making a decision to purchase, and consumers can order a product in store and have it delivered to their homes. 6 Digital Prospects Multi-Channel vs. Omni Channel. 7 PWC: Demystifying the online shopper 10 myths of multi-channel retailing, Jan-13. International Council of Shopping Centers, cbc.ca 6 U.S. Retailers set to invade Canada s Malls. Aug-12. Page 2

3 Consumer retail trends: read online reviews and recommendations 33 use social media for shopping 5 of smartphone users access social media every day 72 of smartphone users research products on phones before purchase 5 of smartphone users follow links on social media outlets to brand websites 0-90 customers pre-shop shop online for convenience and promotional opportunities What is the impact on industrial? The emergence of omni-channel retailing will likely lead to an increase in space demanded for logistics and distribution centres. The size, shape, and location of these centres are changing due to the requirements of omni-channel retailing. The percentage of sales conducted online, the speed of delivery to consumers, and the product offering, will all impact the nature and location of logistics and distribution centres. 11 In traditional retail, trucks are loaded and products are delivered to the same specified location at a specified time. With increased use of online shopping, customized orders will have to be fulfilled by distribution centres and products will have to be sent directly to consumers. 12 With more customized deliveries, storing inventory on pallets may no longer be optimal. Easy access and floor locations may also be preferred over storage racks. The ability for consumers to return a defective or unwanted product ordered online will create a new responsibility for employees at logistics and distribution centres. 10 Deloitte Business Class Omni-channel, Henderson Research The impact of technology on real estate: Implications for 12 CBRE Limited Logistics and E-commerce, May Statistics Canada, Jan-00 to Nov Cassidy Turley The E-Commerce Imperative, Channeladvisor - Fulfillment by Amazon, 2013 and Colliers International, Henderson Research The impact of technology on real estate: Implications for 17 PWC: Emerging Trends in Real Estate 201; Increasing the speed of delivery and reducing cost are two main goals for businesses and consumers. One way of accomplishing these goals is by being strategically located and having access to multiple major land transportation routes, as well as being in close proximity to airports, railway hubs, and sea ports. Access to a large labour pool will also help in meeting seasonal increases in demand and additional resources required to fill customized online orders. This is important as peak-to-trough retail sales over an average year vary by approximately Establishing satellite hubs (smaller industrial space) will also be necessary to increase speed of delivery or to serve areas where there is a sparse population. For densely populated areas, fewer but much larger distribution centres might help reduce shipping costs and allow for faster shipping times. 1 Currently in the U.S., Amazon is building large scale distribution and logistics centres in major cities. Amazon is planning to build in the most densely populated areas of Canada and the U.S. Their goal is to provide cheap or free delivery within 2 hours, seven days a week. 15 Figure : Income return for industrial property type All industrial income returns Source: Investment Property Databank, Sep As illustrated in Figure, the industrial property type has delivered a consistent income return over time. With the space that will be required to accommodate online retailing and Canadian industrial transaction volumes picking up, 16 rental growth may see an upward movement in 201. According to the Emerging Trends in Real Estate survey, 66.7 of respondents assigned a buy rating for the industrial property type in major cities for Due to growing demand and limited supply of modern logistics and distribution centres, we expect new, strategicallylocated buildings with high, clear ceiling heights - to be the primary beneficiaries of the increase in demand. Page 3

4 Canadian retail investment strategies to watch Figure 6: Holt Renfrew Centre, Toronto, ON Retail space is expected to continue to serve environments with growing populations and economic vibrancy. Brick-and-mortar space will need to become leaner and more agile. Technology is making it possible for suppliers to get by with less inventory, leading to less space demanded by retailers. The concept of showrooming is starting to be embraced by stores like J. Crew and Brooks Brothers. To attract customers and increase foot traffic, the experience level must be high for consumers; this will entail more service and entertainment-oriented offerings at malls. Figure 5: Bramalea City Centre, Brampton, ON Canadian industrial investment strategies to watch Bramalea City Centre (BCC) is a super-regional shopping centre located in Brampton, Ontario that has enhanced the shopping experience of their customers. BCC has created a children s play area, Wi-Fi lounge, coffee bars, and multiple food courts for shoppers to enjoy while they shop. This has led to an increase in foot traffic (from 11. million people in 2010 to 13.9 million people in 2012). 1 In addition, urban retail locations will continue to be in demand. High Street locations like Holt Renfrew Centre on Bloor Street in Toronto, Ontario will continue to be attractive due to the lack of substitutes available to replicate these locations. Expansion of online retailing and the establishment of omni-channel retail strategies will contribute to the strengthening of logistics and distribution centres. Construction of large logistics and distribution centres near major cities and along major transportation routes will be the key to competing for same-day delivery capability and cost reduction. Tenants will prefer modern logistics and distribution space with amenities over older, less functional industrial space. Whirlpool Distribution Centre and Sobeys Distribution Centre located in Milton, Ontario incorporate all of the above criteria. The strategic location of these distribution centres is a major factor for tenants. These centres have easy access to the 00 series highways, as well as air and rail transportation. In addition, they are in close proximity to a skilled labour pool, public transit, restaurants, shops and other services. Figure 7: Whirlpool Distribution Centre, Milton, ON 1 Morguard Investments Ltd. Page

5 Closing remarks In summary, omni-channel retailing is slowly reshaping the retail and industrial landscape in Canada. Landlords need to be prepared to adjust to these changes. In the retail property type, our strategy targets areas with economic and population growth, located near high household income levels, that are transit-linked, and in urban locations. When looking at the industrial property type, we look for locations where there is an ample labour pool, access to public transportation and parking for employees. We favour modern facilities that are larger in size, with high ceiling heights, near courier services, and in close proximity to transportation hubs. For further information, please contact: Nazmin Gupta Vice-President, Product Specialist (16) Andrew Croll, CFA Product Specialist (16) This document is for informational purposes only. It is not meant as investment advice and is not an offer, solicitation or recommendation to purchase or sell any security. There is no assurance that any predictions or projections will actually occur. Past performance is not necessarily indicative of future results. Commentary reflects the opinions of Greystone Managed Investments Inc. as of the date of the document. This document was developed from sources believed to be reliable, but is not guaranteed to be accurate or complete. Greystone Managed Investments Inc. All rights reserved. Page 5