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Online retail: a challenge for brick-and-mortar retail and urban development

Simon Keller September 20, 2017

How are brick-and-mortar and online retail developing?

Brick-and-mortar retail (2016: 93.9 billion) generates around twelve times as much turnover in Switzerland as online retail (2016: 7.8 billion), but the former (2016: -1.7%) has been shrinking for several years, while the latter (2016: +8.3%) has been growing continuously. The proportion of goods purchased online (2016) ranges from just under 2% for food to 23% for home electronics. In an international comparison, Switzerland has a similarly low market penetration of online trading as Sweden, France or the Netherlands. This may come as a surprise, as the percentage of people shopping online is higher in Switzerland (2010: 57%) than in the EU (2011: 47%). Nevertheless, the five largest online retailers (2016: CHF 2.3 billion) in Switzerland already generate more sales than the five largest shopping centres (2015: CHF 2.1 billion). Experts agree that online trading will continue to grow, but opinions differ as to how quickly and strongly this will be the case. A further decline in stationary retail is also expected. Fredy Hasenmeile, an analyst at Credit Suisse, sees around a third of Switzerland's 50,000 brick-and-mortar stores at risk by 2028. And for the shopping centers, Marcel Stoffel, publisher of the Shopping Center Market Report, predicts a vacancy rate of a quarter of the sales space.

What are the drivers of online trading on the demand side?

Among the most important social developments favouring online trade are the increase in female employment (Switzerland 2010: 76.5%; 2014: 78.7%) and that of single-person households (Switzerland around one third, in cities around half). Also significant are  the growing proportion of "digital natives" as well as the growing Internet affinity of the "Silver Ager", who often have good financial resources. In addition, online trading, which is independent of time and location, benefits from society's increasing transport mobility.

Retail in Transition – Effects of Digitalization

Online retail is growing steadily, while brick-and-mortar retail is losing sales. For the city of Zurich, this creates challenges in logistics on the one hand, and stationary retail is an important factor for the revitalization of the districts on the other. We discussed with experts what exactly this means for Zurich.

What are the challenges and possible obstacles to online trading?

A "Zalando effect" is noticeable in the textile trade (source: STEZ).

What online retail cannot (yet) offer is a sensual perception of the products and thus the emotionality when buying. Trying on clothes and shoes online is just as impossible today as touching and smelling fresh food. Whether this will set limits to the further growth of online trading remains to be seen. It is worth remembering the "Zalando effect", which has shown that products such as textiles, which a few years ago nobody thought would be ordered online, are now already made online by around one in five purchases.

With the growing online trade, the movement of goods will increase both internationally and locally. Consumers are demanding faster and individually adapted deliveries of goods. This represents a major challenge for logistics, especially for the so-called "last mile", the fine distribution to consumers. Whether new means of transport (e.B self-driving vehicles, drones, sous-terrain means of transport) or other forms of goods pick-up stations (e.B. pick-up, neighbourhood agency) will relieve this increasing bottleneck remains to be seen.

What are the consequences of online trading?

Since online retail has no costs for store rent and equipment, sales prices in the retail trade come under pressure. Less sales staff is needed, but more (specialist) people in the ICT sector and in logistics. Online trading also lowers the hurdles for market entry, which is shown by the growing number of newly founded companies in relation to the existing ones. Between manufacturers, IT companies, logistics companies, wholesale and retail trade, the strict separation of work will disappear noticeably. A producer will supply the customer directly ("producer2consumer") and a detaillist will produce the goods "on demand" themselves thanks to 3D printers and sell them to the customer. The diversity of customer requirements meets a juxtaposition of different forms of distribution and procurement channels.

How will the development continue?

Both brick-and-mortar and online retail will continue to change and grow together in "cross-channel retail". Along the "customer journey", there will be various customer contact points that will be both virtual and stationary. That's why pure onlne retailers are establishing brick-and-mortar stores selectively, as Amazon has done, for example.B by purchasing the "Whole Foods" grocery chain.

In "cross-channel retail", two-way communication with increasingly well-informed customers is central. Due to the personal data collected, more and more personalized and time-spatially adapted offers are made to you. This requires investments in digitization in the retail sector of CHF 4 billion over the next 5 years, as Deloitte forecasts.

What does this mean for urban space?

Without logistics, there is neither brick-and-mortar nor online retail. It shapes urban space through its emissions and space requirements. Longer opening hours for brick-and-mortar retailers and shorter delivery times for online retail lead to more logistics. This represents the spatial bottleneck for the growth of the entire trade. In some cases, great hopes are placed on new logistics concepts (self-driving vehicles, drones, pick-up stations, etc.) to alleviate this problem. It will be interesting to see whether these will prevail.

In addition to the question of the movement of goods, the number, distribution and size of retail stores is of great importance for urban areas. Opinions differ as to whether the described developments in the retail trade will lead to larger or to smaller and specialized shops. The future will show whether there will be a spatial concentration or a decentralization in or outside the city. Closely linked to these developments are the quality of local supply for the population and employees as well as the attractiveness of the city as a shopping destination for tourists.

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