The emergence of omnichannel retailing in Asia is forcing retailers and landlords to rethink their approach to real estate. While blurring the lines between in-store and online sales can enhance customer satisfaction, it poses several important questions for leasing negotiations.

OMNICHANNEL RETAILING IN ASIA

Omnichannel retailing integrates traditional and digital sales channels and focuses on providing exceptional customer service by creating a seamless shopping experience where customers can buy online, in-store and a mix of options in between. In recent years, retailers have used bricks-and-mortar stores to fulfill online orders, placed technology within stores and used mobile and social media as sales channels.

Using bricks-and-mortar stores as fulfillment centres can increase online sales, decrease fulfillment costs, reduce in-store markdowns, and lead to quicker delivery times. Large online retailers, such as eBay, have been providing “click and collect” services allowing customers from all over the globe to take advantage of local convenience. For instance, UK customers can collect their purchases from one of Argos’ 150 outlets, while Taiwanese customers can collect their purchases from a locker at their local 7Eleven store.

China overtook the US as the world’s largest e-commerce market in 2013 and by 2018 it will be the world’s largest retail market overall. PricewaterhouseCoopers and the Economist Intelligence Unit predict Asian retail sales will grow 4.6 percent in 2015 and reach US$10.3 trillion in 2018. In 2015, Asian online spending alone is forecast to overtake North America’s for the first time, making the region the world’s e-commerce capital.

Asian consumers, however, want more from their retailers. Studies reveal that Asia has the lowest e-commerce satisfaction rate globally, mostly due to the limited delivery options available. Today’s customers demand a seamless experience across all points of contact with their retailers. As a result, retailers are working hard to improve customer satisfaction with various omnichannel strategies.

RECENT RETAIL EXAMPLES

French sporting goods retailer Decathlon opened its first Singapore store in November 2014. The 7,000 square foot concept store on Kim Yam Road has no cashiers. This “experiential zone” allows customers to try any of 13,000 products and is fully equipped with computers at every corner so customers can purchase items on Decathlon’s website, with the option of taking the items immediately or having them delivered to their home. Decathlon plans to open five more retail stores in Singapore to complement its robust online marketing channel.

Founded in early 2012, Zalora has quickly become one of Southeast Asia’s largest online shopping portals, selling apparel, accessories, shoes and beauty products. Last year, Zalora launched pop-up stores across Asia to increase local brand awareness. From October 2014 to January 2015, Zalora operated Southeast Asia’s first interactive pop-up store, leasing 4,000 square feet at ION Orchard mall in Singapore. From within the pop-up store, customers were able to try on over 30,000 products and browse through Zalora’s entire online catalogue. The bright and trendy displays and racks were each equipped with a brand new tablet to enable ordering once the shopper has chosen exactly what he or she wants. Since July 2014, the retailer has also run pop-up stores in South Jakarta, Indonesia and several in Malaysia.

Some bricks-and-mortar retailers have adopted omnichannel strategies that involve rolling out tech-infused stores and equipping store associates with mobile devices so that they can assist customers and process payments anywhere in the store, thereby shortening lines and opening up space. Whether predominately online or in-store, omnichannel strategies are gaining ground as retailers go in search of higher sales, higher margins and better branding.

KEY CONSIDERATIONS

An omnichannel strategy can be very costly and vastly more complex than traditional e-commerce or bricks-and-mortar business models. Retailers must integrate back-office technologies to allow inventory to be visible regardless of location, and implement a single profit and loss statement for all sales regardless of channel. Treating bricks-and-mortar stores as fulfillment centres also requires logistics services, retraining sales associates and considerable investment in technology across the entire retail enterprise.

Omnichannel retailing also has important implications for retailers’ real estate strategies, with the location of retail spaces becoming more important than ever. Stores must be conveniently accessible for customers, but must also make sense from a logistics standpoint if they act also as fulfillment centres for online orders. The size and layout of stores must be appropriate to allow for increased onsite inventory.

Leases are another key consideration. Unless plenty of vacant space is available in the market, retailers may find it difficult to lease temporary space for a pop-up store in a prime location, since landlords generally prefer longer leases. An important consideration for short-term leases is whether the arrangement would allow for transition to a permanent lease if the pop-up shop proves to be successful.

Omnichannel retailing also complicates turnover rent calculations. Typically, turnover rent provisions require the tenant to pay a percentage of gross sales as rent. As bricks-and-mortar and online sales channels intertwine, retailers will have to consider and negotiate more carefully as to what should be included in gross sales. Some landlords have already added provisions in lease agreements specifying that gross sales will include orders made from a computer situated within the store and online orders fulfilled in the store. The precise definition in each lease will come down to skillful negotiations.