INSIGHTS
CBRE INVESTMENT MANAGEMENT pink is digital first
CLICKS TO BRICKS: yellow is partner retailing
blue clicks to bricks
PHYSICAL RETAIL AS A SOLUTION
TO DIGITAL DETERRENTS
AUGUST 2021
Even before the current pandemic, the retail sector faced mounting pressure from
increasing rates of e-commerce penetration and shifting consumer behaviour.
Retailers pivoted online and prioritised distribution efficiency as real estate investors
adopted an increasingly cautious approach towards the sector. These tendencies
became further entrenched over the past year and a half as mobility restrictions
negatively affected engagement with physical retail. This simultaneously catalysed
logistics sector growth. Current market fundamentals justify investor enthusiasm, but
medium-term risks to the sustainability of e-commerce activity are potentially being
overlooked.
In this paper, we discuss several potential deterrents to e-commerce growth that
physical retail can readily provide a solution to. We specifically assess the impact Author
of digital advertising and goods fulfilment on retailer profitability. We also consider
the environmental and social impact associated with e-commerce. While we expect Darya Frolova
online retailing to account for a greater share of total sales over time, necessitating a Associate
net reduction of total retail floor space, we also believe that physical stores can help European Real Asets Research Team
operators navigate the risks associated with a fast-changing retailing environment. [Link]@[Link]
GROWTH OF TOTAL RETAIL SALES AND E-COMMERCE SALES, IN % SHARE OF E-COMMERCE IN RETAIL SALES, IN %
40% 32% 30%
26% 25% 24%
30%
18% 18%
USA 15%
13% 14%
10% 12% 12%
20% United Kingdom 9%
Netherlands
10% Total Retail Sales
E-commerce Sales
United Kingdom
France
Spain
Netherlands
Germany
Italy
USA
0%
2017
2018
2019
2020
2021
2022
2023
2024
2025
-10% 2020 2025
Sources: Euromonitor.
A GAME CHANGER store-based sales would get increasingly cannibalized by
Shoppers have pivoted online as the pandemic spread across those online, leading to subsequent closures of more stores, a
the world. In the US, consumers spent more than $1 in every trend that was accelerated by the pandemic.
$5 online. A similar trend was evident across Europe, where
physical shopping was most affected by virus containment Digital has become an attractive way for new retailers to test
measures and e-commerce growth rates reached historic their business models without incurring large upfront costs or
proportions. E-commerce Europe, an association representing making medium- to long- term leasing commitments. New
companies selling goods and services online to consumers in business applications in retail grew by 54% in the US in 2020
Europe, expects that the pandemic will accelerate e-commerce according to the US Census Bureau. Many of these fledgling
adaptation by nearly a decade. We concur. Consumer retail entrepreneurs will, at least initially, rely on online
behaviour has changed permanently, and proportionally channels. However, as digital retail becomes saturated with
more time will be spent shopping online with mobile devices competition, other well-established Direct-to-Consumer (DTC)
driving the boom. e-commerce players are increasingly considering bricks-and-
mortar retail to complement their offer as they gain scale. So,
The pandemic-induced e-commerce push has resulted in an what is pushing them to consider physical store expansion?
overwhelmingly positive public perception of its relevance. We believe that there are several business constraints
Euromonitor is now forecasting that e-commerce sales on profitability for pure e-commerce players. These
worldwide will increase by 60% from 2020 to 2025. To bring present existential risks, and include new operational
that number into perspective it should be noted that overall regulations, sustainability requirements or changes to
retail sales growth and store-based retail sales are forecasted carbon tax regimes. Bricks-and mortar retail provides a
at 31% and 23% over the same period. This suggests that way of offsetting these risks.
DIGITAL ADVERTISING COSTS: CAC AS A NEW RENT
E-commerce has become a very crowded space, making it a period. As the average CAC metric is difficult to approximate,
more expensive for retailers to differentiate through advertising we can instead measure the increase in online marketing costs
and build lasting customer loyalty. Simultaneously, the reach of per customer by looking at the digital advertising costs per
digital marketing is decreasing due to the rise of ad blocking internet user in a country. In the US, digital advertising spend
software and customers becoming overwhelmed by intrusive per internet user has seen tremendous growth of 46% over the
digital ads. This is reflected in rising customer acquisition costs period 2017-2020. The UK and Germany witnessed slightly
(CAC), which can be approximated by dividing marketing more subdued growth of 26% and 16% respectively during the
costs spent by the total number of customers acquired in same period.
DIGITAL ADVERTISING SPENDING PER INTERNET USER, IN $
Source: eMarketer, Statista, Office for National Statistics (UK).
While some industries had to cut digital advertising in 2020 Having physical locations can support e-commerce in
because of Covid-19 slowdowns e.g. Travel and Automotive, managing profitability in the environment of rising
other industries such as Healthcare & Pharma and Consumer advertising expenses.
Electronics have thrived. Retail remained the largest digital ads
spender in 2020 at $28.2bn, increasing its annual spending by Gaining scale in the digital realm has become precarious and is
+3,1% due to an acceleration of e-commerce activity. Despite highly sensitive to changing advertising costs. We view CAC has
the continued growth in digital advertising spend, the reality is becoming the equivalent of a “rent” for e-commerce retailers.
the barriers to entry are very low. However, barriers for building As competition for customers’ attention increasing online, CAC
a sufficient degree of scale through advertising are high in the could become a catalyst to alter sentiment in favour of physical
digital world due to supply saturation. This suggests that digital retail. With digital “rents” becoming unsustainable for
advertising costs will continue to increase as e-commerce grows. many online-only retailers, physical space becomes a
viable and cost-effective alternative.
CONFIDENTIAL AND PROPRIETARY | CLICKS TO BRICKS: PHYSICAL RETAIL AS A SOLUTION TO DIGITAL DETERRENTS | 2
DIGITAL ADVERTISING SPENDING GROWTH IN THE US % Y-O-Y CHANGE, BY INDUSTRY
35%
25%
15%
5%
-5%
2017 2018 2019 2020
-15% Computing products & consumer electronics Healthcare & pharma
-25% Telecom Financial services
CPG & consumer products Retail
-35% Automotive Travel
Total
-45%
Source: eMarketer.
DIGITAL ADVERTISING SPENDING AS A % OF E-COMMERCE SALES
WORLDWIDE
11%
10.1%
10% 10.0% 9.9%
9.7%
10% 9.3%
8.8%
9%
9%
8%
2019 2020 2021 2022 2023 2024
Source: Statista, eMarketer.
SUPPLY CHAIN CONSTRAINTS: THE TRUE COSTS OF FULFILLMENT AND RETURNS
DELIVERY TIMES
Before the advent of e-commerce, shoppers bore the burden of the last mile journey from their homes to their nearest distribution
hub, often a physical store, to purchase products. This activity was both unpaid labour and a reduced distribution cost for the
retailer. Customers have now shifted this activity on to the retailer and in the process have become accustomed to frictionless
distribution, and this requires a re-evaluation of fulfilment options as part of customer service.
REASONS FOR CART ABANDONMENT DURING CHECKOUT
Extra costs too high (shipping, tax, fees) 49%
The site wanted me to create an account 24%
Delivery was too slow 19%
Long/complicated checkout process 18% Reasons for abandonment
during checkout
I could not see / calculate total cost up-front 17%
I did not trust the sitte with my credit card information 17%
Website had errors / crashed 12%
Returns policy was not satisfactory 11%
Not enough payment methods 7%
0% 10% 20% 30% 40% 50% 60%
Source: Baymard Institure, 2021. N=4,329
CONFIDENTIAL AND PROPRIETARY | CLICKS TO BRICKS: PHYSICAL RETAIL AS A SOLUTION TO DIGITAL DETERRENTS | 3
A survey conducted by the Baymard Institute highlights that FULFILMENT COSTS
50% of digital shoppers abandon their carts due to costs of As a result of the accelerated growth of e-commerce, deliveries
online purchases being too high, while 19% of respondents have also become more expensive. Amazon has seen its sales
do not purchase products through online channels because of soar but has also experienced fulfilment costs pressuring
the long delivery times. E-commerce marketplaces have made profitability. Although the effect has been mixed and therefore
same- and next day delivery a market standard, regardless arguably caused by low margin products being bought
of customers’ unwillingness to pay surcharges. The pandemic through marketplaces, it has exposed weaknesses in the speed
experience brought fulfilment constraints into the spotlight of product fulfilment from warehouses as part of the customer
as the influx of online transactions brought spikes in the service. According to a McKinsey study of delivery costs in a
number of deliveries and returns, consequently slowing both. catchment area of Berlin, for a retailer operating under cost
Accenture reported that, on average, retailers took 2.8 days to minimization constraints, same-day delivery is likely to be
fulfil orders in 2020, compared to 1.8 days the previous year. unprofitable whether at scale or not. In terms of servicing the
A physical location functioning as service point or customer, buy-online pick-up in store (BOPIS) or curb side pick-
logistics facility can enable faster delivery times for up from a network of stores is a more cost-efficient model, with
the customer, which is important when providing a last-mile delivery option only logical from a cost perspective
a competitive service. where next day delivery is already established.
ESTIMATED SAME-DAY VS NEXT-DAY DELIVERY COSTS - ¤ / SHIPMENT, NON-FOOD RETAIL EXAMPLE, BERLIN AREA, IN €
Same day Next day
16
14 2.75
12
10 4.4
8
6 2.76
8.02 0.97 1.4
4 0.69
2 3.73 3.26
0
Retailer's current standalone At scale Current market volume = at scale
market potential
Fullfillment Intranode Last mile
Source: McKinsey, 2020. Includes costs of own warehousing and fulfillment and third-party transport.
BOPIS is a powerful evolution in retail, especially since it Looking at the example of Germany, where Amazon has a
emerged from shopper demand during the period of Covid-19 dense network of 11 warehouses, large retailers may reach the
rather than operational savings. According to GlobalData, pick- same catchment by refitting their stores into fulfilment centres
up of online orders from stores grew by 103% last year in the where extra services are offered when purchases are picked
U.S., while shipping orders from stores grew by 80%. A network up. According to McKinsey, connecting 30 stores in Germany
of stores can better cater to areas where no extensive to the grid would be enough to reach almost half of the
warehouse network exists while bringing retailers closer German population and come close to matching Amazon’s
to customers than traditional distribution facilities. current footprint.
CONFIDENTIAL AND PROPRIETARY | CLICKS TO BRICKS: PHYSICAL RETAIL AS A SOLUTION TO DIGITAL DETERRENTS | 4
RETURNS
In addition to fulfilment costs, there are those associated with reverse logistics, or the process of dealing with returned purchases.
While offering a flexible return policy is often part of an online retailer’s proposition, online players aim to further reduce number
of returns and its associated cost.
THE COMPLICATED FLOW OF REVERSE LOGISTICS
Source: CBRE, 2019.
It is estimated that about 50% of Zalando products are returned space for fitting and evaluating merchandise may prove to be
across markets. Spikes in return rates can hamper profitability a cost-effective proposition for retailers, especially if stores are
and have led Asos in issuing unexpected profit warnings. located strategically to captive customers.
Returns are often free or come at a low cost for customers, but
can be catastrophic for retailers when spikes occur, and hit the A consumer survey conducted by UPS in 2019, highlights
bottom line when sales grow. According to a 2020 Financial that consumers ship returns but also personally bring them
Times article, the cost of processing returns is 20% of the to stores when a convenient store option is available. Some
original e-commerce sales price. Retailers who operate online, retailers may find it advantageous to adopt bricks-and-
therefore, invest heavily in technology to reduce the volume mortar into return hubs allowing them to streamline the
of items returned due to wrong fit, as well as further sharpen returns process, while cutting down on costs incurred from
lenient return policies. With 50% of all returns attributed to last-mile and pick-up locations.
fitting errors, simply allowing customers to inspect purchases
at pick-up can solve many issues. The costs of renting physical
REASONS FOR RETURNING ITEM
RETURNED TO A STORE SHIPPED RETURN
38%
29% 31%
28%
24%
22%
Faster Convenient location Free Free Easier Online only retailer
Source: UPS, 2019.
CONFIDENTIAL AND PROPRIETARY | CLICKS TO BRICKS: PHYSICAL RETAIL AS A SOLUTION TO DIGITAL DETERRENTS | 5
Returns to a physical store are also the cheapest option for COST OF RETURNS AND PROCESSING TIME BY CHANNEL
retailers, and most importantly it is in stores that retailers can LH-DAYS UNTIL PRODUCT IS AVAILABLE FOR RESALE I RH- VARIABLE COST
prepare a product for re-sale. It is also important to note that
2.5 10
store design is important for processing returned goods. The
cost of using distribution centres or 3PLs for returns is more
2 8
expensive and results in a longer processing period. This of
course prolongs when a refund is issued, which can potentially
1.5 6
jeopardize the customer-retailer relationship. Facilitating
in-store returns can be highly economical as well as
1 4
contribute to higher customer retention rates.
0.5 2
0 0
Return to store Return to DC
Variable cost of returned item, $ Days
Source: UPS, 2019.
ENVIRONMENTAL AND SOCIAL IMPACT
GHG EMISSIONS FROM SHOPPING AND PACKAGING raw packaging materials for European e-commerce alone.
A recent study of last-mile delivery published in Environmental Used packaging products are also difficult to recycle, which
Science & Technology journal indicates that GHG emissions puts in perspective the current wastefulness of the industry. As
from shopping at pure physical retailers were estimated to e-commerce penetration inevitably grows, the increased
be higher than those of omni-channel. Pure e-commerce efforts of countries striving to achieve carbon neutrality
players with no physical presence were shown to produce the will likely lead legislative efforts to reduce and offset
highest GHG emissions when compared to omni-channel carbon released in packaging production and promote
and physical channel. The scope of the study includes the recyclability of packaging.
GHG footprint from last mile delivery and last mile consumer
transport from store to home in the case of bricks-and-mortar.
For regions where consumers often walk or cycle to the shops,
as in China or the Netherlands, the study has shown that there
is no evident reduction to be achieved in GHG emission from
last-mile delivery. The analysis accessed GHG emissions from
the number of products bought, warehouse storage, delivery,
and packaging activities. It was argued that online purchases
have the highest environmental impact as the products
bought online are typically not bought at bulk, require more
packaging, and come from different distribution centres.
As shopping in physical stores can produce fewer GHG
emissions and requires less packaging, bricks and mortar
retail may provide a more environmentally responsible
way of operating and help mitigate legislative risks for
omnichannel and e-commerce players.
The assessment of effects from packaging conducted by the
European Commission in a 2020 report for the opportunities
and threats for the Circular Economy arising from e-commerce
discovered that additional demand of almost 1.5 million tons
of cardboard and around 26 thousand tons of light density
polyethylene foil are generated by e-commerce in Europe.
This equates to 490 thousand tons of extra CO2 released
during the production of these materials. When multiplied by
the growth rate of e-commerce in Europe since 2017 when
data was collected, this extrapolates to about 750 thousand
tons of extra CO2 released in 2020 due to the production of
CONFIDENTIAL AND PROPRIETARY | CLICKS TO BRICKS: PHYSICAL RETAIL AS A SOLUTION TO DIGITAL DETERRENTS | 6
RETURNS EMISSIONS AND LANDFILL CONCERNS
There is a trail of emissions when consumers return goods 5 million people in a year. Central pick-up locations such
to sellers, but shockingly, many of the returned products as lockers and physical retail points could help curtail the
head to landfill because reverse logistics often makes it negative environmental impact from packaging waste, lower
uneconomical to prepare products for successive re-selling. the amount of returns and add value through traffic reduction.
It is estimated by Optoro, a company that helps companies Physical service points, such as shops, may also better
such as Ikea to streamline their returns, that only about half of cater to a new trend: consumers who care about how their
the products that American consumers return go back on sale purchases affect the planet and communities. Addressing the
again. Returns infrastructure was found to create 15 million wastefulness of returns through physical retail may help
tons of CO2 emissions annually in the US. Furthermore, e-commerce players foster customer loyalty and mitigate
5 billion pounds of returned goods were found to end up in potential legislative risks.
US landfills, equivalent to the amount of waste produced by
IMPLICATIONS FOR RETAIL REAL ESTATE
The retail sector has been under pressure for quite some point, omnichannel players and larger pure online-only
time with e-commerce being one of its biggest disruptors. players will be compelled to assets that are experiential and
In this paper, we discussed several potential deterrents to can serve as advertising platforms and fulfilment centres.
e-commerce growth. We conclude that physical retail will
remain relevant by helping address these risks. The retail sector continues to evolve, and its future trajectory
should not be limited by yesterday’s thinking. Its purpose is
We expect a reduction of total retail floor space to continue. expanding from being purely transactional to accommodating
This is in response to physical retail’s legacy footprint being human needs and aspirations. Stores that will thrive, need
optimized in favour of capital light logistics, which in turn is to tap into emotion and human connection. But they also
fuelling the growth of e-commerce. As a consequence, retail need to be convenient for the customer and environmentally
leases will become more profitable for physical retailers sustainable. This of course has space implications. The
and less profitable for investors over the short-term due to re-purposing of retail, from both physical and functional
oversupply lagging this reduction in demand. However, perspectives, will be necessary in a post-pandemic world to
over the medium to longer-term, physical stores will still be rekindle the customer-retailer relationship.
necessary for retailers. As e-commerce reaches a saturation
SOURCES
• Impact of the Coronavirus on e-commerce, E-commerce Europe. Survey Results • Narvar, Digital Commerce 360, Common reasons for returns in the world survey,
Report, 21 January 2021 2019. Samply of 19-65 years; 3,519 respondents; global consumers who have
made an online purchase at least once in the last [Link] viewpoint: Many
• Cart Abandonment Rate Statistics, Baymard Institue. Reasons for Abandonments
Happy Returns for Retailers, AlixPartners Insights, December 2017. Link to article:
During Checkout, 2021. Link to article: [Link]
[Link]
abandonment-rate Sample of 4,329 respondents, US adults.
happy-returns-for-retailers/
• Future of retail operations: Winning in a digital era, McKinsey & Company, 2020. • Comparative Greenhouse Gas Footprinting of Online versus Traditional
• Despite lockdowns and disruptions, new report by GlobalData finds multichannel Shopping for Fast-Moving Consumer Goods: A Stochastic Approach, Sadegh
retail adoption accelerated during 2020 holidays, GlobalData. Link to article: Shahmohammadi,* Zoran J. N. Steinmann, Lau Tambjerg, Patricia van Loon, J.
[Link] M. Henry King, and Mark A. J. Huijbregts, Journal of Environmental Science &
globaldata-finds-multichannel-retail-adoption-accelerated-2020-holidays/ Technology, 2020.
• Retail Supply Chain Management, James B. Ayers & Mary Ann Odegaard, CBRE • Identification and assessment of opportunities and threats for the Circular
Supply Chain Advisory, 2019. Economy arising from E-commerce, Romagnoli V., Aigner J. F., Berlinghof T., Bey
N., Rödger J.-M. and Pätz C, European Commission, 2020
• Asos upgrades outlook as customers return fewer clothes, Harry Dempsey
and Jonathan Eley, Financial Times, 2020. Link to article: [Link] • Optoro Impact Report, Optoro, 2018. Link to website: [Link]
content/fcb6f720-d8f5-43b6-88f3-2a12567187bb com/2018-impact-report/
• Pulse of the Online Shopper, UPS, A Customer Experienfce Study, 2019.
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