Impact of the COVID-19 pandemic
COVID-19 pandemic accelerated the retail market evolution, bringing significant implications on both retail and logistics real estate. This article will examine recent supply chain patterns relevant to logistics and retail commercial real estate markets which are influenced by the rise of e-commerce demand.
The recent pandemic outlined the potential of e-commerce growth within the European Union, with some countries recording more than a 25% increase in e-commerce activity. According to RetailX Europe 2020 Ecommerce Regional Report, out of the 578 million European residents, over two thirds shopped online in 2019 (67%).
Although e-commerce is not as widespread in Croatia as in the rest of the European Union countries, e-commerce activity is rapidly expanding. According to the same report, growth of online consumer numbers is the strongest in Croatia out of all European countries. Croatia recorded a 26.88% growth in 2019, more than double that of the 11.25% average of Eastern European countries. Croatia also ranked second only to Romania in online sales towards European countries with 50% of the companies offering their goods and services in other European countries and ranked first in online sales towards the rest of the world with 38% of the companies.
Source: Colliers International on Goldman Sachs Insights
Risks of stretched supply chains were clear in the lockdown economy. Potential benefits to the near-shore and domestic distribution and fulfilment centres are beginning to overweigh the higher costs. The typical consumer values quality of service over pricing, while advances in technology could drive down the costs.
E-commerce sales growth will require additional investment in the fulfilment capabilities
E commerce became a sizeable driver of demand for logistics real estate, which led to development of three distinct types of logistics centres:
- Large e-fulfilment centres where the goods are stored and picked at item level. The facilities are operated either directly by the retailer or a logistics service provider. Typically, their GFA is between 50,000 to 100,000 m2, however there are examples of even larger premises. These are often located on more affordable land plots close to airports (sometimes secondary airports) of large, well connected cities. The Croatian market currently saw investment in this property type exclusively from the national post operator, with a recently built sorting centre near the Zagreb Airport.
- Parcel hubs/sorting centres that sort orders by zip or post code so they can be delivered to the relevant parcel delivery centre for final delivery to the customer’s home or a designated collection point. These centres vary in size depending on their exact function, but as a rule, they are smaller than the full-size fulfilment centres. They are usually located in the vicinity of larger regional cities and transportation hubs and in some cases, last mile delivery is conducted directly from these centres as well. Again, the national post operator is seen positioning themselves in specifically selected locations near regional population centres, such as Kukuljanovo near Rijeka, Zadar and Osijek, with premises in Kukuljanovo and Zadar being completely newly built properties. This is however an exception, with most e-commerce customers adapting to traditional logistics facilities, rather than require extensive specialised configurations and improvements. On the margin, we see a greater emphasis on high-quality space, including superior infill locations, higher ceiling heights and lower coverage ratios.
- Parcel delivery centres that handle the “last mile” delivery to the customer are usually the smallest type of logistics centres, closest to the urban agglomeration they serve, however depending on the market size and needs, these premises can be omitted from the market if the market is not as developed to require an urban logistics centre. These centres can potentially be located within the brick and mortar retail centres in order to share inventory, offer in-store pickup as well as home delivery and more easily handle returns. This approach is part of the omnichannel retail approach, which refers to a multichannel method of sales, physical and e-commerce.
E-commerce requires around three times more logistics space as compared to the brick and mortar retailers. Online order fulfilment requires more logistics space because 100% of inventory is stored within a warehouse (vs. store shelves in retail premises), which allows for greater product variety, deeper inventory levels, space-intensive parcel shipping operations and additional value-add activities such as processing returns.
Nevertheless, demand profile for logistics facilities is highly variable. While e-commerce demand may be predominantly located in build-to-suit requirements, the demand is more diverse, with a broad array of business models, varying in terms of operational size, product focus and value, as well as retailer mode (the aforementioned pure e-commerce or omnichanel). These business dimensions affect the types and locations of the logistics facilities that are needed.
More than a quarter of Europeans will continue to shop online
Despite the traditional retail stores reopening, many Europeans continued to shop online, with a portion of consumers declaring not to shop in the traditional retail outlets in the future. A significant portion will continue to shop online for products they used to buy in the traditional stores. The trend suggests permanent changes in the consumer mentality.
In Croatia, approx. one third of the population shopped online at least once a month, while approx. one fifth shopped several times per week. The most commonly sold products included clothing and shoes, household items and electronics, while a sizeable portion related to services (events and tourist travel arrangements). Similarly to the European trends, Croatian distribution services recorded volume growth of around 100% in the domestic distribution department and 80% in the international distribution department, exceeding the peak shopping season results usually present in Q4.
The rise of online sales in Croatia affected the fashion and consumer electronics segments the most, due to those segments being prevalent offerings on the e-commerce market in Croatia. The least impacted segment were groceries, partly due to online grocery shopping being the least represented e-commerce segment.
Enterprises in the European Union are increasingly relying on e-commerce sales (online sales) in order to maximise their profits. Together with increasing use of the internet and improving security standards, it has become easier for enterprises to serve their customers online. During the current coronavirus pandemic, with high street shops in lockdown and businesses and consumers under social distancing restrictions, e-commerce sales can be expected to grow even further.
An estimated 20% of EU enterprises reported online sales of at least 1% of their turnover during 2019. A rise of 3% from 2018 and up from 13% in 2009.
With 39% of enterprises selling online, up from 36% the previous year, Ireland recorded the highest share among the EU Member States. Denmark came second (34%) and Sweden third (33%). The increase in enterprises selling online (of at least 1% of their turnover) was strongest in Austria, up by 6 percentage points (pp) from 18% in 2017 to 24% in 2019.
Source: Colliers International on Eurostat
Changes in the supply chain and potential outcomes for the logistics and real estate markets
E-commerce penetration rates increased faster in the first four months of 2020 than in the prior period, both in Europe and Croatia, due to the lockdown. In the post-pandemic era, the push for resilient supply chains will likely increase the intensity of use of logistics area for both e-commerce and brick-and-mortar customers, while persistently higher e-commerce space needs will drive investments.
Supply chains will need to be remodelled to become more resilient to sudden changes in demand volumes, underlining the shortages of global supply chain networks. Flexible and alternative suppliers will be in demand while re-patriating the remote industrial properties could reduce the risks of supply chain interruptions.
A trait of logistics real estate is the wide range of industries that occupy their premises, including retailers, wholesalers, manufacturers, and service providers. According to recent European trends, retailers account for around 40% of logistics real estate demand. Within this category, brick-and-mortar based retail represents around 60-70% of demand and around 30-40% is driven by e-commerce. In addition to generating incremental demand within the retail segment, the shift to e-commerce is increasing activity for B2B segments of logistics demand, including parcel shipping players and paper/packaging providers.
The e-commerce segment is likely to remain crucial to revenue generation even as societies re-open. While disruption on the traditional retail front may continue, under-investment in advancing the distribution activities of retailers could prove to be the underlying cause of its dwindling market share. Under-exposure to logistics real estate, particularly in the most in-demand locations on the part of retailers means that short-term recovery of turnovers will offer little relief. While retailers’ bankruptcy does not necessarily imply shutting down operations, even should all occupied retail space come to the market, it would have a very limited immediate impact on available logistics supply due to time and resources required to reposition the retail properties into logistics properties.
Although e-commerce is a global supply chain enterprise, operational real estate is local. With changing consumer sentiments and expectations in terms of delivery speed and reliability, fulfilment facilities will need to be located closer to the end-consumers. In both Europe and Croatia, retailers and logistics operators alike will be forced to balance choosing between centralized site locations that consolidate inventories with a distributed fulfilment model that reduces delivery times, but that requires a sizable investment in facilities and inventories given the breadth of territory they cover.
Colliers I&L sector services include: Land advisory and brokerage, Logistics properties brokerage, Valuation services, Landlord and Tenant representation, Development Recommendation, Financial Feasibility Studies.
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