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This Is What Online Retailers Really Think About Leasing Physical Stores

With traditional retailers closing stores at unprecedented rates in the UK and U.S. over the past few years, the great hope of the real estate world has been that new retailers, many of which started life online, will take their place. 

There have been a few examples, seized upon with a slight air of frenzy by those that own or lease retail real estate, including eyewear brand Warby Parker and, of course, e-commerce giant Amazon. But several questions remain open in the post-pandemic world: How much store real estate do digital retail brands really need? And what do they want from landlords to persuade them to take space?

A good guy to ask is Matt Truman, CEO and co-founder of True Global, an investment firm that buys and backs both retailers and retail technology companies. The company has £1B of assets under management, including a new £300M fund raised last month to buy and build more brands. It also has partnerships with giant retailers and property companies like Walgreens, 7-Eleven, Oxford Properties and Grosvenor. These companies want access to True’s insight about how the world of retail is changing. 

The Nottingham store of Ribble, one of True's brands.

In terms of the retailers the company buys, True specialises in digital-first, direct-to-consumer brands, meaning companies that started online to reach customers directly rather than through third-party websites — exactly the kind of brand real estate owners hope will open physical stores. True's retailers include bike company Ribble and womenswear brand Hush.

“We have a very clear and distinct view on real estate,” Truman told Bisnow. “We’re really excited about real estate because a shift that was needed has started to happen.”

Truman said that the six brands True owns through its private equity business were interested in opening more stores, potentially hundreds more, because of the economic rebasing happening in the retail real estate world. But there’s a catch. The real estate sector needs to fundamentally overhaul the way it thinks about retail and how it charges rent, raise its data game massively, and be willing to undertake partnerships that will change the way retail real estate has historically been valued to stanch blood flow from the sector.

The pain in the retail real estate world really began to ramp up in 2018 and 2019, accelerated by the coronavirus pandemic. But Truman, who was an investment banker in the retail sector and launched two e-commerce brands before co-founding True in 2013, said that as far back as pre-2008, the sector was making itself unappealing to brands. Retail real estate was too slow to understand the new world that e-commerce heralded after centuries as the only game in town. 

“If you go back to 2008, there were a lot of stores in the UK and U.S., but the economics meant it just didn’t make sense to open [another] store,” he said. “It was an absolute no-brainer, it was a lot cheaper and more effective to pay Google to advertise than it was to open a store.”

Truman broke down what the economics looked like before the dramatic drop in rents of the past four to five years. Typically, when rent and taxes or business rates were combined, the occupancy cost of a store equated to about 20% of a store's sales.

On the other hand, the customer acquisition cost of marketing on Google, or, more recently, on social media platforms like Instagram, is more like 5% to 10% of what that customer is likely to spend with a brand. 

“Real estate, needs to reposition itself. It is just another marketing channel,” Truman said. “There is a big shift going on in retail from the channel-centric to the customer-centric. The customer doesn’t care what channel they are using, they just want you to be available.”

That means real estate professionals should expect to talk to a tenant's chief marketing officer as much as the chief financial officer, he said. 

True Global Chief Executive Matt Truman

Truman said he is excited about real estate for the brands True owns because the financial side of that repositioning is well underway. Based on negotiations with landlords, he said, rents have effectively dropped between 50% and 70% in the past few years. That is bad news for property owners, but the fall means it is no longer an easy decision when it comes to where brands spend their marketing money, especially as the cost of acquiring customers online has also risen. 

One cliché trotted out by real estate owners when talking about digital brands taking store space is it is hard, often impossible, for retailers to make money using an online-only strategy, given the costs of distribution and marketing. Truman is quick to dispel that myth. He said all of True’s six brands are profitable, with margins in the range of 10%-20%, higher than the 5%-10% typical of traditional retailers.

But he is in agreement with one fact posited by the real estate world: For some brands, having a store footprint is a big positive. Customers spending a lot of money on a bike want to touch and feel it as well as be educated by knowledgeable staff, he said, speaking of Ribble. Furniture brand Cotswold benefits from the tactile nature of physical stores, he added. 

True’s brand portfolio currently operates 11 physical stores. Truman said if a brand does decide to open stores, it could operate between 20 and 30 locations with sales split roughly 70/30 between digital and physical. That could equate to hundreds of stores across its portfolio. 

But while retail real estate has gone some way through its financial repositioning, there is just as important a repositioning that has barely even started on mindset, technology and data. 

“Real estate hasn’t caught up in terms of data yet,” Truman said. “When I walk into a negotiation on a store, I have the data that tells me exactly how much I’m willing to pay for each customer that store is willing to bring in. I know who is in the catchment, what they are likely to spend, and that they might come and buy something four or five times over the life of the store. 

“Real estate needs to start thinking in terms of the lifetime spend of the customer, not in footfall or rent per square foot. But they don’t have the technology or the data to do that."

Google, by contrast, "can tell me everything about the customer, from the moment they enter the funnel to the moment they complete a purchase, what time of day they are most likely to spend," Truman added. "The Trafford Centre (in Manchester) needs to be able to do that, too.”

True's portfolio ranges from apparel, to furniture, bikes and grocery products like non-dairy milk.

The types of data points True is interested in include the absolute quantity of shoppers visiting sites, the demographic makeup of that footfall, in-store dwell times and the walk-past capture rate. On the revenue side, key information includes the type of revenue being generated, be it in-store sales, click and collect or even online sales wherein product discovery takes place in a store but the final purchase is made online from home.

With perfect data exchange across these two buckets, a brand theoretically could show absolute conversion of physical space, giving it similar information to that provided by online channels like Google and lending the ability to calculate a fair value for the underlying space.

Truman said having this data available would come, in part, via investment in proptech systems that allow property owners to better understand who is visiting their malls or stores and how they're interacting with a piece of real estate. But it's also about a structural change the industry has tentatively embraced, albeit with some pushback. 

“My real estate costs are fixed, and if you look at all of my other marketing costs, they are variable,” Truman said. “I think real estate needs to change its model so what I pay in rent is based on the behaviour of the customer and what they will pay over their lifetime, not what Marks & Spencer pays next door.”

Truman is talking about turnover rents, the system of paying rents based on store sales rather than paying a fixed amount. Landlords aren’t huge fans of this, for the very reason that Truman said it was a positive — it turns a fixed payment into a variable one. That reduces the valuation multiple that can be applied to a piece of real estate because there is less certainty about the cashflow that it will produce.

Truman said that to truly provide the data retailers want, they will need sales data from brands. Yet those brands will not be willing to provide this unless landlords provide those turnover leases

“The only way of getting sales data is to partner with retailers and get the live links to the electronic payment systems in stores,” he said. “Brands will be willing to do that, but only if that fixed cost becomes variable. It is inevitable and it will actually help to rebalance the real estate sector.”

That rebalancing will be painful for some, Truman said. Retail owners can expect to have their assets valued on a five or six times multiple to earnings, rather than the traditional 20, because it will essentially be valued much more closely to the performance of the underlying retailer in the store. And owners will have to work harder and pay much closer attention to the mix of occupiers in a mall or on a high street.

But to do that, even those retailers and brands that began life online by talking to their customers directly must be attracted back to physical stores.