BRICKS & MORTAR: Rosier future beckons for CEE retailers after year of change and disruption

BRICKS & MORTAR: Rosier future beckons for CEE retailers after year of change and disruption
Bucharest's Sun Plaza shopping mall.
By Clare Nuttall in Glasgow January 10, 2021

Retailers in the Central and Southeast Europe region had a difficult start to 2021 as the latest wave of the coronavirus (COVID-19) pandemic raging across the continent was met with new restrictions including, in some countries, non-essential shop closures. As a result, the usual pre-Christmas shopping frenzy and seasonal sales failed to live up to normal years after 12 months of “disruption on an unprecedented scale” for retailers, says a report from international property services company Colliers. 

For retailers, retail property owners and investors 2020 was “characterised by forced store closures, concerns over inventory and supply chains, difficult negotiations over rents and income, the rapid acceleration of e-commerce and omni-channel models, and general uncertainty that has touched all areas of the global population and economy, to name just a few,” says the report that looks at the retail markets in 17 countries in the region. 

Despite the worrying situation at present, however, Colliers believes there is room for optimism, as there seems “to be a rosier theme emerging than the gloomy spring [2020] months might suggest”. 

Specifically, the report points to the rapid recovery of retail turnover when the first wave of the pandemic ebbed and lockdowns were lifted in late spring, in stark contrast to the very slow recovery after the global financial crisis that started in 2008. Moreover, labour markets and purchasing power in the CEE region “seem to be in much better shape this time around than a decade ago,” says the report. 

“We analysed the IMF’s forecasts of unemployment to assess the state of the labour markets. We looked at 2021 compared to 2019 and 2010 compared to 2008. We skipped the recession year to get a clearer grasp on how things might look like in the first year of the recovery. With a couple of exceptions, the jump in unemployment is set to be much lower this time around; the exceptions are Romania and Belarus, though both had tighter labour markets to begin with than compared to 2008,” said Silviu Pop, Colliers’ head of research, Romania.

“[W]hile keeping a close eye in the rear-view mirror for any unforeseen events that might creep up on us, it looks like the CEE region is set to remain one of the better performing regions in the world, a ca. 173mn consumer market that should continue to deliver better growth rates and returns than more developed markets in a lot of different sectors, including retail,” it adds. 

That said, 2020 was a year unlike any other and led to radical changes in the retail sector in the region and globally. “The pandemic has definitely shaken up the ‘normal’ order of things in many areas of life and business. And the changes that began years ago, on many levels, have been significantly accelerated, changing both the lifestyle and working models for so many, as well as the forms of communication we use all over the world,” according to Colliers. 

“In particular, the temporary closure of shopping centres has forced many consumers to search for new shopping alternatives, as well as for retail chains to look for new ways of selling their products. It is also worth noting that we are currently witnessing a digital transformation on an unprecedented scale.”

The need for retail businesses to react to changed circumstances led to a “very busy” year for retailers, despite the unfavourable market conditions, as they reacted to the reality of the pandemic, developing new sales channels, investing into e-commerce, renegotiating leases, optimising brick-and-mortar shop chains and preparing new business strategies. 

Unsurprisingly, many investments were put on hold or delayed, especially some of the larger ones. In Poland, for example, most of the new retail investments have been halted or delayed, while the most active formats are small shopping centres and retail parks. Where there was expansion in brick-and-mortar stores, this was mainly by chains from the FMCG sector, although there were also new non-food tenants in the discount segment, notably fashion chain Primark’s entry to the Polish market and the arrival of Swedish furniture chain Ikea in Slovenia. 

More surprisingly, some high-end brands entered new markets, among them Hugo Boss in Albania, Yves Saint Lauren, Dsquared and Chanel in Czechia and Armani Beauty in Romania. 

Luxury goods, however, were low down on many people’s shopping lists after the lockdowns were imposed in the spring, leading to fundamental changes to spending priorities. Collers used the Google Trends tool to analyse what items people were Googling in the CEE-6 (Poland, Czech Republic, Slovakia, Hungary, Romania, Bulgaria). The surge in online searches for certain items among them yeast, thermometers, vitamin C, dumbbells and other indoor exercise items, desks and bicycles revealed a lot about life in 2020. 

The report’s authors admit it’s not clear whether the changed shopping patterns will persist in the long term. “After looking at such data, we cannot help but ask ourselves, how will the ‘new normal’ affect the retail sector long term? Will consumer habits change permanently? Who will survive and adapt to the new market conditions? What will shopping centres look like in the future? It is difficult to answer these questions at the moment. However, one thing we can be certain about: it will never be quite the same again,” they wrote. 

"The retail sector has seen big challenges and changes rising in recent years and this year has simply brought them fully to the surface for all to see. The pandemic is partly to blame, but this has far more to do with the ongoing changes in the desires of consumers … Everything indicates that, even after the restrictions are lifted completely, many of our new shopping habits, forced by the pandemic, will become a trend in the new reality and remain with us for quite some time to come."

Vendors move online

The most significant change, however, has been the shift to online retail, a trend that was at a relatively early stage in much of the region, but was rapidly accelerated as soon as lockdowns were imposed. Currently, the share of online sales varies widely across the region from over 18% in the Czech Republic which has the most e-shops per capita in Europe to the low single digits in some countries.

“We are observing a sharp increase in consumer activity in e-commerce, which may not be a novelty, but has become a fundamental element of the ongoing transformation of the retail sector, related to the development of technology and changes in consumer behaviour,” says the report, which posits that “2020 may well go down in history as the year of online shopping”. 

By the end of 2020, there were an estimated 45,000 e-shops in operation in Czechia, including major e-retailers like Alza.cz or Mall.cz that are working to expand the range of goods offered to consumers. E-commerce turnover is anticipated to have increased by almost 20% year on year in 2020. 

In Poland, the evolution of distribution channels towards the omni-channel model “has been on-going for several years [and] has turned into a revolution,” said Colliers. Around 2,000 new online stores started activity in the first half of 2020. This trend extended to Southeast Europe too, where in Romania online sales expanded by around 30% in the first nine months of 2020. 

“Many retailers do operate other channels, but quite often the brick-and-mortar stores make up the largest part of their revenue and operational network. This year, if not already before, has revealed how flawed some models are,” said Kevin Turpin, regional director of research, CEE. 

Launching online, however, is not a straightforward move for retailers, the report points out: to adapt to more robust models takes time, know-how and investment. “If brick-and-mortar retailers were not looking at other channels, particularly ‘online’, before 2020 then there are unfortunately not many quick fixes available to what could be a large flotilla of sinking ships.” Another issue is that in the region many retailers are present through a franchise partner, which often does not control the rights to the e-commerce platform of the parent brand, and this restricts their ability to sell online. 

On the other hand, shopping centres of which there are almost 1,680 in the region with over 34mn square metres of gross leasable area (GLA) saw a decline of between 20% and 45% in footfall figures in mid-2020 compared to a year earlier. In the second half of the year, shoppers started
to visit shopping centres again, but subsequent lockdown periods prevented a return to pre-pandemic footfall and turnover levels. 

The low levels of activity prompted retailers to negotiate rates from summer 2020, and looking forward, says Colliers, “Depending on the country, a wave of bankruptcies and acquisitions of varying degrees of intensity is expected, particularly in the gastronomy, entertainment and leisure sectors.” The year was particularly bad for mall entertainment such as cinemas, fitness clubs and children’s play areas, many of which remained closed as of the start of 2021.

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