Has the Pandemic Impacted Retail Rotation?
Before Covid-19, retail rotation was considered an indicator of a city’s healthy business and retail fabric. Has the pandemic impacted the opening of new shops, or has the process continued, helping businesses stay afloat?
There is much confusion and different theories about how Covid-19 has impacted the fabric of retail shops, restaurants, gyms, and other services in a given city.
We all have seen many shops, especially restaurants, closing in our neighborhoods because of lockdowns and capacity restrictions. The question is: when a business closes or moves somewhere else, does another business come to occupy its place, or are we facing a significant reduction of the retail fabric?
To answer this and other questions about the reality of brick-and-mortar businesses in European cities, especially in Barcelona, we reached again to David Nogué, CEO of the Eixos Observatory.
Eixos is a Catalan firm specializing in retail mapping and data. Before the current pandemic, we had the opportunity to learn from them the characteristics of retail models in different cities, especially Barcelona and Manhattan. And, last year, Nogué told us about the impact of Covid in London.
In the following Video, David Nogué walks us through their recent analysis of Retail Rotation in Barcelona, how the pandemic has affected it, and the current situation of the commercial fabric in the city. After the video, Nogué gives a synopsis of the current situation.
We understand that retail rotation is a common phenomenon in cities. The current pandemic has probably affected the natural rhythm of businesses changing hands, moving, or new openings. What are your impressions and analysis of retail rotation in major European cities, especially in Barcelona, right now?
David Nogué: Is retail rotation good or bad for cities? At Eixos, over the last 12 years, we’ve been collecting data periodically in Barcelona and other cities to understand how retail rotation behaves. Then we’ve created the Retail Rotation Index, which measures the openings & closures rate within a year. It works as a percentage of changing stores versus the total number of retail spaces per year, all over the city. This index clearly shows different geographic areas in terms of retail rotation. It varies from 10% in some areas to 25% in other areas.
Once we’ve set the index for the entire city we’ve compared it with other indexes that we know very well: the Retail Occupancy Index (percentage of occupied retail stores vs the total number of retail spaces available), the Destination Retail Index (percentage of destination stores over the total number of active stores within an area) and the Retail Density Index (the number of stores per every 100 inhabitants in an area). We use these indexes in our daily economic observatory analysis to define the retail health scenario for an urban area.
Then we created a map for each indicator. Including the Retail Rotation Index, there were four maps in total. We detected a neat pattern by overlapping all four maps: the economically healthier and more dynamic areas also had the highest rotation values. I don’t think it was a simple coincidence. The more vital an economic area, the more it changes over the years.
While some differences exist, most rotation and retail density are still happening in the same areas. Does that mean that, in general, the retail fabric in Barcelona has stayed healthy in the past two years? And, what businesses are most affected?
David Nogué: Back in March 2020, as soon as the pandemic broke out, at Eixos we understood the heavy impact that social restrictions such as lockdown would have on economic activity. Then we worked on a risk assessment model to forecast the number of business closures for each economic category. For instance, we saw clearly that restaurants, bars, and hotels would pay a high toll. It’s kind of obvious now in 2022 but, back then, not that clear.
As we published our first Retail Rotation Index results by the end of 2019, we feared that in 2020, the retail rotation could stop. Who would be crazy enough to open a new store during the lockdown? We thought that probably many new businesses wouldn’t open their doors until the coast was clear. But when would the coast be clear? Depending on that, the damage to retail fabric could be light or catastrophic. Many businesses shutting down and only a few openings would bring a severe desertification scenario to the most successful commercial areas. Because of their retail composition, and according to our model, they were also more vulnerable to the pandemic.
Because vaccines arrived quickly and lockdowns were shorter than expected, retail rotation never really stopped. It compensated the closures with new openings. Two years later, we’re thrilled to discard our model’s worst-case scenarios, which initially considered a zero retail rotation.
In your opinion, what are the factors helping many businesses survive the current crisis? Rent reduction? Government help?
David Nogué: Rent reduction and government help have been key factors for businesses to survive.
In Spain, the Government help felt indeed short, though. And most of it is in the form of loans that businesses will have to repay soon. It doesn’t compare at all with our European neighbors. The German Government, for instance, gave to the pandemic-affected businesses up to 70% of their previous year’s income.
On the other hand, private initiative is in good shape. For instance, real estate agencies & landlords launched aggressive offers for retail rentals as soon as they saw it coming. According to some prominent realtors, landlords waived up to 7 months of rent to keep the retail spaces occupied. That’s a lot!
Furthermore, we observed many businesses moving their location to premium areas. “We’ve moved,” they wrote on a note at their old location door. When comparing the new site to the previous one, we noticed that the latest is in a much better retail location.
Is substantial retail rotation a sign of good recovery in the future?
Going further with the biological model we introduced before, retail rotation is substantial to good retail health recovery. Imagine that retail stores are cells of a living organ like our skin. New ones that replace the younger ones are the fastest. This substitution process slows down when we grow old, so our skin loses quality and deteriorates faster. That is almost the same thing for retail fabric.