Structural change in retail trade – Why prime city locations will change (2017)

Although the economy is booming, the over-the-counter retail trade in Germany’s pedestrian zones is under considerable pressure. The causes for the looming loss of importance of formerly vibrant inner cities can be quickly summed up: the Internet is to blame! The remedy to ensure quick recovery has, it seems, already been found; retailers just need to stage shopping as an experience and dovetail their traditional business model with the possibilities offered by new e-business – and then everything will be perfectly fine, at least in the larger cities.

However, it is not quite that simple, as the current situation of inner-city retail trade often demonstrates. Increasingly, a shop’s attractiveness is shaped by factors that can no longer be directly influenced by owners or tenants. Despite a generally decreasing footfall in the pedestrian zones, many municipalities are still planning additional retail space which will lead to disruptions in the retail landscape, both within the city and regionally.
A noteworthy example of this is the urban development in Neumünster, a tranquil town with 78,000 inhabitants in Schleswig-Holstein. Firstly, in 2012, a designer outlet was built just a few minutes’ bike ride from the central pedestrian zone. This outlet was then expanded from 20,000 to 27,000 m² just three years later. In addition, the Holstein Center in the city centre was opened in autumn 2015 with a further sales area of almost 23,000 m². One doubts that both new centres, with a combined extra 50,000 m² sales area, can coexist in the future with the existing retail trade in this traditional prime location.

The rapid growth in sales in many places is counteracted by a worrying increase in bankruptcies. Well-known companies such as Wehmeyer, Sinn-Leffers, Tom Tailor, Pohland, Wöhrl, Promod, Voegele, Roeckl, Leiser, Weltbild, Strauss, Butlers, and most recently also Biba, are in economic difficulties despite constantly good consumer data, or are striving to reinvent themselves using new ownership structures. Numerous other companies such as Gerry Weber, Görtz, and Bonita, as well as financial institutions such as Deutsche Bank, have announced or already implemented drastic slimming down of their branch networks.
This negative trend is likely to affect most medium and small towns. In these municipalities, DOMINO focuses mainly on relocation or optimisation of already existing branch operations (better micro location, optimisation of the area layout, adjustment of the rent burden, etc.). An exception is found in small and medium-sized towns which benefit from tourism. New retail companies have been able to settle in Garmisch-Partenkirchen, Landsberg am Lech, Freudenstadt in the Black Forest, Eckernförde on the Baltic coast, in the pilgrimage town of Kevelaer and even in Bad Tölz with its population of only around 18,000.
The attraction of larger communities of 100,000-300,000 inhabitants also varies enormously. For example, university cities such as Göttingen, Trier, Heidelberg, or Würzburg, which lie more at the lower end of this population range, have a much higher demand for chain stores than do Ruhr-area cities with more than twice as many inhabitants, such as Bochum or Duisburg. Strong demand continues in large cities with populations of more than 500,000. The comparatively high rent level of the past few years, however, can only be achieved in exceptional cases when a new lease is drawn up, a fact which DOMINO was able to establish in actual placement successes in cities such as Cologne, Hanover, Nuremberg, or Stuttgart.

In the municipal administrations, on the other hand, it still does not seem to have filtered through that the local retail industry is undergoing radical change. Owners of commercial real estate notice this when they have to comply with current regulatory requirements in connection with a new lease (with regard to fire protection, evacuation, parking space, listed building protection, etc.). There is no question that the necessary legal requirements must be observed. All too often, however, overly-restrictive interpretations and sometimes very long processing times by urban administrators lead to high pressure being placed on both landlords and tenants. Not infrequently, the capital expenditure incurred by regulatory requirements and expansion requirements is no longer proportionate to the owner’s income or the annual turnover achievable by the tenant. As a result, further investment simply does not happen and extremely low-brow retail offerings, such as nail salons and tattoo studios, take over. Or the property in this prime location remains completely empty. Both scenarios do not contribute to increasing the attractiveness of the pedestrian zone, and result in well-rented properties in the neighbourhood very soon being drawn into this downward pull (the trading-down effect).
If there are several vacant shops side by side, in many places a reduced or only partial opening of the pedestrian precinct has to be considered, as is currently the case in Witten, Moers, and Bad Homburg. There is a logical justification, in fact, to shortening a pedestrian street, for example from 1000 m to just 750 m, so that the remaining shops can keep their sales or so that vacancy gaps may be avoided – purely because of the long-term shift of perhaps about 25% of sales moving from over-the-counter retail towards e-commerce. In general, the issue of mobile accessibility of inner cities has become extremely complex – at the moment it is about prohibitions for diesel vehicles, strengthening public transport systems and expanding e-mobility. The advocates for maintaining access for private-use vehicles refer to the results of the Hannover Chamber of Industry and Commerce study on the connection between traffic access and buying behaviour. According to this, almost one in two consumers drives to the city by car, whereas only six per cent travel by bus or train. Motorists spend an average of €46 per city visit, almost twice as much as cyclists and also significantly more than consumers who travel into the city by bus. What do such statements mean for inner-city parking space management? Might a sufficient number of cheap – or even free – car parking spaces perhaps be the best way to promote local retail trade?
The local over-the-counter retail trade is also on a very uneven playing field against the growing online trade when it comes to business tax. Business rates determined in Germany in the EY communal study 2017 show large differences even within individual federal states. In Baden-Württemberg, business rates range from 265 (Walldorf) to 430 (Karlsruhe / Mannheim); in North Rhine-Westphalia they range from 265 (Monheim) to as high as 550 (Oberhausen / Waldbröl). According to the current forecast of the HDE (Association of German Retailers), retail sales will exceed the €500 billion threshold for the first time by the end of 2017. Of this amount, almost 10% of the total amount, €49 billion, is attributable to online commerce. This share of revenue almost completely escapes local business taxation and thus does not help to finance urgently needed infrastructure projects in the city, even though delivery fleets, which have grown rapidly due to Amazon and the like, need an intact and functioning transport infrastructure to deliver to customers. An equitable state tax policy should look a lot different!
Conclusion: There are many reasons for the future trend towards neglect in some inner cities. Even in prime locations, the minimum turnover chain stores need to remain viable can no longer be achieved, and the resulting vacancies will become part of the normal landscape of the city. In some regions, the loss in purchasing power, initially mainly caused by population decline, will be exacerbated by a further decline in sales due to e-commerce competition, especially in smaller cities. The Federal Association of the German Textile Retail Industry expects that, for the first time, online trade will account for a double-digit share of total retail sales by the end of the year, and goes on to anticipate a ratio of up to 36% for its sector by 2025. As a result, city outlets are likely to be endangered in larger municipalities as well. Even the large shopping centre operators complain about footfall and revenue declines, and are looking for solutions to counteract this development. It therefore requires enormous efforts on the ground to not only address the two key issues of “accessibility” and “attractiveness”, but also to immediately implement all feasible practical measures to strengthen over-the-counter retail trade. There is also an urgent need for action at the state and federal level, for example with regard to taxation and the expansion of shop opening hours (see article “Open to everything and everyone?”).