A renewed focus on e-commerce and a redefinition of physical stores to emphasise customer experience could be the by-products of COVID-19 on Japan's retail sector, new research has found.

CBRE's Rethinking Retail Strategy in the COVID-19 Era report examines relevant macroeconomic indicators and the results of a flash survey conducted by the firm to understand the impact of the coronavirus pandemic on retailers and the future of the retail market.

Earnings and sales

According to Flash Survey on COVID-19, which surveyed retailers operating boutiques in key retail areas, 95.1 per cent of respondents said that the COVID-19 pandemic has had a negative impact on earnings, with an even greater negative impact in April than in March.

Change in number of visitors to retail and recreation (7-day moving average). 

Requests for rent reductions for existing stores

Asked whether they had requested a rent reduction at existing stores, 90.9 per cent of respondents from a wide range of sectors - luxury brands, sports goods, fashion, drugstores and convenience stores -said that they had.

CBRE believes this suggests that retailers are looking for ways to improve cash flow and stabilize their business by reducing rents, a large share of the fixed costs for brick and mortar stores.

Other than rent reduction, 42 per cent said that they also requested a grace period or a refund of security deposits, while Most said that they were negotiating a two to three-month payment holiday and the return of three months' worth of the deposit.

Retail sales vs department store sales (y-o-y change).

Changes to store opening plans and strategy as a result of the pandemic

Respondents were asked whether the COVID-19 pandemic had changed their plans for opening new stores, to which 21.8 per cent of retailers replied that they 'have surrendered, or intend to surrender, the lease on' at least one existing store.

Regarding store opening strategies once COVID-19 infections have been brought under control, the most frequent response was 'refrain from opening new stores for the next year' (34.2 per cent).

Family Income and Expenditure Survey by Item (y-o-y). Source: CBRE Japan

Reasons, as specified the results, included the closure of unprofitable stores, concentrating on reorganizing and integrating the store network, and being more cautious than before about estimated sales and lease terms.

At the same time, 29.1 per cent answered they would ‘continue aggressively opening new stores’.

Consumer confidence index.

These respondents saw the current situation as an opportunity, expecting corporate restructuring and mergers to increase the number of vacant stores in good locations, and the declining demand for stores to result in more reasonable rents.

CBRE K.K Retail Services, Advisory & Transaction Services Senior Director, Masashi Okumura, said since the end of last year, soaring high street rents were starting to limit the pool of potential retailers.

"Then COVID-19 hit and it has led to an overall decline in appetite to open new stores," he said.

"A growing number of retailers and food establishments have been reluctant to open new stores, and news about store closures are starting to emerge.

"At the same time, since it will be difficult to secure an equally prime location later on, retailers are very careful about store closures."

The store opening strategy of retailers after the pandemic. Source: CBRE 

Mr Okumura said while a number of retailers had contacted CBRE in relation to cost savings following the lifting of the state of emergency in May, there had also been tenants "looking ahead post-COVID-19" and willing to open stores at pre-pandemic rent levels.

"Based on inquiries, we are seeing many retailers focusing on e-commerce sales and redefining the purpose of the physical store from ‘sales’ to ‘branding and customer experience’," he said. 

"With changing consumer behaviour, retailers will need to quickly reconsider the role of their brick-and-mortar stores and develop omni-channel strategies.

"As a result, we believe that the link between e-commerce and physical stores will continue to strengthen in the future.”

Click here to view the full report.

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