This article appeared first in The State of Fashion 2021, an in-depth report on the global fashion industry, co-published by BoF and McKinsey & Company. To learn more and download a copy of the report, click here.

There is no doubt that the year ahead will be one that is enormously difficult to navigate and plan for. But for fashion brands that are highly exposed to physical retail, Covid-19 provides the impetus they have long needed to chart a new course for their store network — one that experts say must be a sprint, not a marathon.

With store inventories and real estate costs weighing heavily on their cost base, fashion retailers have been in a race to capture e-commerce spend as consumers’ uptake of the channel skyrocketed during the pandemic. But no matter how sophisticated and seamlessly integrated their digital strategies are, omnichannel won’t resolve a bigger issue that many players face in the run-up to 2021: Most global store footprints are no longer the right size, shape or scope for the times in which we live. More to the point, the tool that companies have traditionally used to fix that problem — store network optimisation — now needs a major rethink too. So much so that some commercial real estate experts have begun to encourage retail clients to examine their global store portfolio as though it doesn’t already exist.

“We almost do a brand-new market entry strategy,” said Charlotte Elstob, Vice President of International Retail at JLL, who asks brands to consider how they would position themselves and locate stores — and at which size and format — if they were to re-enter each market from scratch.

Nothing is taken for granted in this kind of approach; no locations are sacred, and no store is given a free pass. Indeed, every store is put under the microscope using key performance indicators that go far beyond conventional four-wall analysis. Store profiles and locations are then scrutinised in the context of the retailer’s global, regional, national and city footprints.

Global store footprints are no longer the right size, shape or scope for the times in which we live.

“Taking into account the sector of retail, [we’re asking fundamental questions again like] whether you need to be close to transport hubs, or a more organic footfall residential neighbourhood, or whether you [really] need to have a site on what has been historically one of the busiest and most prominent streets in that city,” she added.

The answers to these questions will, of course, differ by brand and — given the pace of change in the industry — many of the considerations that are relevant now may be different in 2021. With disruptions and uncertainty likely to be constant in the year ahead, how can global fashion brands practically map out their retail portfolio for the future?

Adapt Retail Spaces for Post-Pandemic Purpose

Traditionally, the return on investment of a retail store was measured in terms of how much product was sold within the four walls of that physical space. But when a growing percentage of sales occurs online or through omnichannel strategies, that calculation no longer adds up.

Instead, according to retail futurist Doug Stephens, retailers should think of physical store investments as they have traditionally considered media investments — as a vehicle for customer acquisition, rather than purely as a distribution venue for product.

“We need to determine what the value of an impression in a physical store is,” Stephens said, much like we have determined a market value for views and clicks in the digital space. “Then you wind up with: here are the four-wall sales, here’s what we can reasonably attribute to that store in terms of online sales and here’s the media value we can attribute to that store, and that gives you a full picture of what a store is worth.”

Far from diminishing the role of the physical store network, online shopping can actually elevate the importance of some physical stores. This trend has already become apparent in Asia, particularly in China, where “New Retail” (a term coined by Alibaba founder Jack Ma back in 2016 to describe the seamless merging of retail’s online, offline and logistics arms) has seen the integration of digital into all manner of offline store experiences.

Far from diminishing the role of the physical store network, online shopping can actually elevate the importance of some physical stores.

At Intime, a department store chain taken private by Alibaba in 2017 which is at the forefront of the Chinese tech giant’s “New Retail” experiments, the store’s Miaojie app not only promises two-hour delivery for local consumers, it also tracks stock on shelves and in storage in real time, allowing merchants to adjust supply and pricing swiftly.

Physical stores such as this are acting as hubs of discovery, places for entertainment and gathering and, increasingly, as fulfilment centres. Even before the pandemic, a significant number of under-performing retail outlets were converted to fulfilment centres. A CBRE study from 2019 found that, in the US, 7.9 million square feet of retail space had been turned into 10.9 million square feet of new industrial space (mainly warehouses and e-commerce distribution centres) since 2016. Covid-19 has only accelerated this shift.

Major US retail players like Walmart, Kohl’s and Target have been working to convert their retail spaces into mini distribution hubs to shorten the last mile for customers. In other markets, physical retailers are swiftly reimagining and repurposing their valuable real estate assets, including those in markets that had less-developed e-commerce infrastructure and lower rates of internet penetration prior to the pandemic.

According to Thiago Alonso de Oliveira, chief executive of JHSF Participações, the parent company of luxury retailer Cidade Jardim in São Paulo and several other upmarket shopping malls across Brazil, the firm’s revamped online platform CJ Fashion has helped temporarily transform their malls into de facto fulfilment centres for wealthy clients ordering by WhatsApp. “It’s more like a marketplace [as] our data is integrated to the inventory of the physical stores, so we know in real-time what products are available in which sizes, and so on.”

Physical stores act as hubs of discovery, places for entertainment and gathering and, increasingly, as fulfilment centres.

Physical stores in this context become hybrid shopping destinations, community-building centres (for consumers) and logistics and distribution centres (for brands) — a combination of duties that is unlikely to fade even after the Covid-19 emergency subsides. One reason for this is the trust that some legacy retailers have built with their clients over generations. “For brands, it feels safer to be with us,” said Juan Carlos Escribano, chief executive of El Palacio de Hierro, a department store chain in Mexico that has been in business for over 130 years and serves as a shop-in-shop location for major luxury brands.

While some department stores and shopping centres will continue to serve an important role in brands’ overall retail network as anchors for concessions and other formats, the locations for future large-scale developments could be very different if footfall in city centres does not return to close to pre-pandemic levels.

Consolidate in Most Markets Except in China

Nowhere will the store footprint change more than in the rebalancing of store numbers and locations across the world, as some markets prove to be more resilient than others. In 2021, Europe is likely to see an 8 to 13 percent decline in offline sales and the US will likely see a drop of 22 to 27 percent, compared to 2019 levels.

This suggests that store networks in these regions will need to be significantly reduced. Retail consolidation has been happening in the US and other mature markets for years, but the crisis amplified the sense of oversupply. As Doug Stephens bluntly puts it: “The US market could literally shed 50 percent of its physical assets… they are [so] over-saddled with physical retail.”

The one notable exception to the inevitable cull of physical retail is China, where the offline market is expected to grow by up to 5 percent in 2021, compared to 2019 levels. Here, some brands will actually need to expand their footprint to meet surging domestic demand spurred on by the pandemic.

The one notable exception to the inevitable cull of physical retail is China, where the offline market is expected to grow by up to 5 percent in 2021, compared to 2019 levels.

Indeed, as travel retail and outlet centres in Europe are starved of all-important Chinese consumers, and where travel restrictions (alongside geo-political strife) have decimated destinations once favoured by mainland shoppers like Hong Kong, new hubs such as Sanya and Haikou on the southern Chinese island of Hainan are attracting investment. In October 2020, Chinese department store operator Youa announced a 1 billion yuan ($148 million) investment to further improve the island’s luxury offering, creating even greater interest in the cluster of resorts located there for conglomerates like LVMH, Kering and Richemont.

Indeed, one of the biggest retail stories of 2020, particularly for luxury, has been the repatriation of Chinese spend as the sector’s most important consumer group stayed home and, as such, there is now an even greater imperative for brands to re-balance their mainland store networks against their global footprint. Store numbers for top luxury brands in China rose 4 percent in the first half of 2020, while those for cosmetics brands jumped 8 percent, according to a report by property consultancy Savills.

One notable addition to China’s luxury scene will be Harrods’ first outpost, which is scheduled to open in Shanghai in late 2020. Rather than follow the ambitious roll-out strategies of international competitors like Galeries Lafayette, Harrods will open a format called The Residence, which is more akin to a private members’ club than a traditional store. Though plans for this were in the works prior to the pandemic, it highlights the need for global brands and retailers to reconsider how they serve their consumers by fostering community in a physical space.

According to Josh Gardner, chief executive of Beijing-based Kung Fu Data, the good news for those looking to increase their physical retail presence in China is that there are fantastic deals to be had in the current climate.

It’s now cheaper to convert offline in China than it is to convert online.

“It’s now cheaper to convert offline in China than it is to convert online,” he said, referencing the skyrocketing costs of customer acquisition on the major e-commerce platforms that international retailers use to penetrate the Chinese market. “Chinese landlords will take rent share, so you can activate your brand almost instantly through their networks. Everyone is just looking for business.”

Brands should, however, approach expansion with caution. At the luxury end of the spectrum, retailers have been burned in the past by over-ambitious physical retail rollouts across China. After a slowdown in spending attributed to Chinese President Xi Jinping’s crackdown on corruption in the early 2010s, more than 80 percent of luxury brands, including Prada and Gucci, closed some of their stores in China in 2015. The years since have seen Chinese spend come roaring back, but luxury brands will likely be more prudent this time around. Nevertheless, the reshoring of spending could see new store openings, particularly in key locations, such as Changsha, Shenyang, Wuxi and in China’s virus epicentre of Wuhan.

The store network proposition is rather different for the mass-market fashion segment, with Japanese fast-fashion giant Uniqlo going all-in for physical retail in China, even as rivals Inditex and H&M Group slash global store counts. Unlike many Western fashion chains, which have largely struggled to gain significant market share in China, Uniqlo has been winning in the country in large part due to its flexible approach to physical retail formats.

A look at the current situation in the Middle East suggest a potentially similar pattern to China, albeit on a much smaller scale. According to JLL’s Elstob, stores in the region are benefiting from the repatriation of domestic spend as luxury consumers were unable to travel to Europe for much of 2020. “The very wealthy consumers… have stayed in those markets and there is significant spend trapped there,” she said.

The very wealthy consumers... have stayed in local markets and there is significant spend trapped there.

If the crisis leads to more permanent shifts in shopping patterns, then one implication could be that brands start to value their local stores in cities like Riyadh, Jeddah, Doha, Abu Dhabi and Kuwait City more than they did before the pandemic. Dubai, however, could follow a slightly different trajectory, according to Rania Masri, Chief Transformation Officer of Chalhoub Group, a luxury retail and distribution company headquartered there. “Tourism is very important for Dubai. Travel has had a big effect on us here [in contrast to the other Arabian Gulf consumer markets] that depend [more] on their local populations.”

Anticipate the Changing Nature of Cities

People all over the world have been forced this year to change the way they live and work. As a result, both the function of cities and the relationship that consumers have with them are in a state of flux.

“All of a sudden — whether we are talking about people in London, New York City or Shanghai — we feel untethered to that [urban] system [which has been prevalent since the industrial age]. So as I am able to work, or educate and entertain myself remotely, as opposed to feeling that I have to gravitate to any particular city centre or high street, then things change dramatically,” Stephens said.

Eight weeks after all shops were allowed to reopen in England after a three-month lockdown, footfall in London’s prime retail neighbourhood in the West End remained 63 percent down compared with 2019 levels, according to data from New West End Company, which represents 600 businesses across Oxford Street, Bond Street, Regent Street and Mayfair.

Conversely, edge-of-town retail parks such as South London’s Brocklebank, have seen much better bounce-back, with customers finding the convenience of easy parking more appealing than using public transport. Fast fashion retailer Primark said its retail-park sales were up in 2020 significantly compared with the previous year.

Suburban retail was already gaining ground over central locations, as affluent people preferred shopping centres and malls in well-off residential peripheries of emerging market megacities such as Moscow, Istanbul, Mumbai, Lagos and Jakarta.

Suburban retail was already gaining ground over central locations, as affluent people preferred shopping centres and malls in well-off residential peripheries of emerging market megacities such as Moscow, Istanbul, Mumbai, Lagos and Jakarta.

According to Alexander Pavlov, chief executive of Tsum department stores in Russia, which are managed by Mercury Group, the Barvikha Luxury Village has seen high rates of growth in 2020. The retail complex, which features stores including Valentino, Celine, Chopard and Ralph Lauren, is located on the fringes of Moscow close to many of the dachas (second country homes) where the group’s wealthy consumers have been spending more time since the pandemic. “Fashion brands should put more focus and attention on the local market to increase their market share. Once the borders are open, clients will keep buying the brands that they got used to buying locally,” he said.

In Shanghai, 98 percent of the 2.65 million square metres of the total new physical retail space supply expected to be developed over the next few years will be in secondary and decentralised areas of the city, according to figures from CBRE. This would leave only 2 percent for traditional “prime” retail areas. Highly anticipated new developments in the pipeline, such as Swire Properties’ 120,000-square-metre Taikoo Li Qiantan in the outer regions of Pudong district, are spread wide across Shanghai’s fringes.

“The people who live in a community [now] tend to live, work and play in that community,” said Albert Chan, Director of Development, Planning and Design for Chinese real estate giant Shui On Land.

The same pattern is playing out in other parts of the world, where some of the most exciting new retail developments are being constructed outside of city centres, to cater to middle-class consumers with cars looking for shopping, dining, entertainment and community services in one place. The much-anticipated Capital Mall development in South Africa’s Pretoria West region, located at the intersection of several major motorways, is just one example.

The new mantra is about flexibility and manoeuvrability, which is a concept that is often hard to square with the solid nature of bricks and mortar.

Though this race to the suburbs may appear to be a mere replication of the outbreak of suburban malls in more developed markets, especially North America, the next generation of spaces could be markedly different if they are specifically designed to cater to their local communities in the post-pandemic era, rather than just taking advantage of cheaper land on the city fringes.

“If you look at the complexion of shopping centres in the mature markets of the US and Europe… oftentimes they are monolithic centres [with] no real sense of authentic place.” Stephens said. “But [nobody needs] 200 of the same stores cookie cut across the land.”

However, according to JLL’s Elstob, the increasing importance of suburban and satellite city locations doesn’t necessarily mean that city centre locations become less attractive. “We are advising some clients that are looking to enter the New York market [to now] consider some more high-profile locations than they could have before because the terms available are better and they can get more incentivised deals,” Elstob explained.

Embrace the Impermanence of Built Environments

Not long ago, ideas about the use of built environments seemed permanent, but events in 2020 have taught us all to question any pre-conceived notions of permanence.

The notion that a brand should always select permanent locations for its retail portfolio — or even relatively permanent ones, locking itself into five- or ten-year leases before carefully re-examining its priorities — now feels antiquated. The new mantra is about flexibility and manoeuvrability, which is a concept that is often hard to square with the solid nature of bricks and mortar.

But with the only alternative being rows of empty storefronts marring the faces of cities around the world, landlords are likely to become more receptive to experiments and accept ephemeral concepts. In some markets, transient retail formats will probably move from being a peripheral part of the retail environment to the very core.

If I give a brand three years of space, I am taking a risk, but they are also taking a risk, so pop-ups are the best model for both parties.

In Shanghai, for example, a new, youth-focused mall which opened to the public at the end of 2019, TX Huaihai, has this ephemeral mentality at the centre of its lease agreements. According to company founder Dickson Szeto, who is in the process of opening half a dozen more TX properties around China, its malls will feature a rotation of brand pop-ups changing every three months in a bid to keep up with young consumers’ desire for newness.

“If I give a brand three years of space, I am taking a risk, but they are also taking a risk, so pop-ups are the best model for both parties,” Szeto explained.

As consumers’ shopping priorities changed in 2020, executives realised that there is a degree of insecurity in every physical retail store, experience and format. No one knows for certain how long consumers’ new order of priorities will last or how they may evolve in 2021 and beyond, but a return to the pre-pandemic status quo is highly unlikely.

Whatever happens next, the key to building a successful physical retail portfolio will hinge not only on sophisticated and seamless digital integration for ultra-connected consumers, but on the ability of brand leaders to seize the moment in terms of location, format and next-generation strategies that generate good return on investment.

“I think, going forward, brands will and should become far more opportunistic in terms of where the brand appears, where it pops up, where it delivers experiences,” Stephens said. “It may be a question of having fewer stores, but fundamentally better stores.”