How an Exodus from Cities Will Reshape Retail
The work-from-anywhere revolution will accelerate the coming of a post-digital age for shopping, argues Doug Stephens of Retail Prophet.
Throughout history, cities have played a central role in the evolution of retail. From the grand bazaars of ancient times to the opulent department stores of the 1800s to the venture-backed start-ups of the 2000s, cities have offered the stage, the audience, and ultimately, the financial prosperity to power retail through the ages.
But in major developed economies like the United States, we are set to see an outbound migration from cities the likes of which we have not experienced since the 1950s. Just as the IBMs and Microsofts of the world did 40 years ago, migrating to the boundlessness of the suburbs, today’s corporate giants are rethinking location once again, except this time encouraging their employees to live and work wherever they like.
On May 21st, Facebook announced that it would give its employees not only the freedom to work from home permanently, but also to spin a globe and point to wherever they’d like “home” to be. Mark Zuckerberg told The Verge, “We’re going to be the most forward-leaning company on remote work at our scale… I think we could get to about half of the company working remotely permanently.” That same day, Shopify and Twitter both made similar announcements. Shopify founder and CEO Tobias Lütke said he expects most of the company’s employees to choose the work from home option, adding: “The choice is really, are we passengers on this tidal wave of change? Or do we jump in the driver’s seat and try to figure out how to build a global world-class company by not getting together that often?”
Tech companies are hardly alone in their position. Banks such as Barclays and Bank of Montreal are also contemplating an office-less future for some of their employees. Snack food manufacturer Mondelez, Nationwide Insurance and Morgan Stanley have also joined the growing chorus of businesses rethinking the value and utility of the twentieth-century white-collar workplace. In Nationwide’s case the action was decisive, closing five offices completely and allowing the 4,000 affected employees to work from home permanently. Barclays Chief Executive Jes Staley recently remarked that “there will be a long-term adjustment in how we think about our location strategy… the notion of putting 7,000 people in a building may be a thing of the past.”
And if this all sounds like a passing fad at a handful of companies, consider that a recent survey by PWC found that 26 percent of US companies are now actively seeking to reduce their real estate investments. Statisticians would call this “significant,” which is Latin for commercial real estate crisis.
But what does this have to do with retail? As it turns out, lots.
As New York Times reporter Matthew Haag points out, “Entire economies were molded around the vast flow of people to and from offices, from the rush-hour schedules of subways, buses and commuter rails to the construction of new buildings to the survival of corner bodegas. Restaurants, bars, grocery stores and shops depend on workers for their survival.” And he’s dead right. Consider that each day, more than a million-and-a-half people pour into Manhattan. Thousands of New York businesses are dependent on that daily human migration for their survival. If that disappears, so too do thousands of retailers and other businesses.
Cities will be completely reshaped by a work-from-home revolution, and the retail-scapes in these cities completely changed in the process. Given that over 70 percent of all US job creation since the 2008 financial crisis took place in a handful of American cities, the economic impact of a reversal in urbanisation would be nothing short of staggering.
Consider that, in San Francisco’s Bay Area alone, it’s estimated that there are more than 830,000 technology workers. Also consider that the average Bay Area technology worker makes 56 percent more on average than the same worker in the finance sector in New York City. It’s no surprise therefore that technology workers are the engine of the area’s consumer economy.
The question is, what percentage of these workers would truly consider leaving the Bay Area if their employers allowed them to? One recent survey of 4,400 tech workers pegged the number at 66 percent. But for the sake of argument, even if only a quarter (208,000) of those workers actually left the Bay Area for more affordable cities and counties across the United States, the impact would be staggering.
And the impact is not limited to those who leave. According to a 2010 study, every one technology worker in the Bay Area of San Francisco supports five jobs in the services sector. Meaning the impact would not be simply the loss of almost a quarter of a million technology workers, it would also mean losing well over a million service sector jobs along with them. With much of retail still stinging from the effects of the pandemic, those who do lose their jobs aren’t likely to find an abundance of opportunities elsewhere, with yet another knock-on impact for Bay Area retailers.
And San Francisco is hardly the only city contemplating the long-term effects of an office-less society, with cities like Paris, London, and New York bracing for similar outbound migrations.
The Future of Cities
As journalist Simon Kuper put it, “In a Zoom economy, many could abandon Paris, exchanging their two-bedroom in the 10th arrondissement for a similarly-priced rural château. Popping into town once a week by TGV may be enough. Expect a Depression era fire sale of Parisian flats, shop spaces and offices.”
This is not to suggest that cities like Paris are going away anytime soon but it’s reasonable to assume that beyond the financial toll of a white-collar exodus, these cities may, in the process, lose much of the unique energy and dynamism that drew inhabitants to them in the first place.
Long after the pandemic is over, small unique shops, restaurants and cafés will struggle in the face of what will almost certainly be a dramatic economic migration of consumers out of their trading areas. Indeed, the very things that made cities uniquely appealing, will likely be the first things to disappear. Atlantic columnist Derek Thompson, sums it up this way: “Cities will still be convenient, but their conveniences will be homogenous: a dependable array of CVS locations, bank branches, fast-casual franchises, and coffee shops… Everything that urban residents typically despise about chains — their cold efficiency, sterility, and predictability — may come to feel like mixed blessings during a period when people feel stalked by murderous pathogens.”
That said, it has also been those same homogeneous national and international retail players that have been able to sustain their customers during the pandemic by virtue of deep corporate pockets, in addition to well-executed delivery, click and collect and socially-distanced shopping experiences. These winners will indeed take the spoils and use the victory to further solidify their dominance in the world’s mega cities, but in doing so, take a larger slice of a shrinking urban pie.
If there’s a silver lining in any of this, it may be an almost certain decline in lease rates for both residential and commercial space in major urban areas. A longer-term softening of real estate values may bring a new generation of digitally-savvy entrepreneurs with ingenious grassroots retail businesses to these cities and, over time, serve to rebuild their authenticity, uniqueness and appeal. By the same token, a dispersion of high-income earners could bring welcomed levels of prosperity and growth to places that, until now, have not benefited from the spoils of the tech and financial sectors’ growth.
A decade ago, young people in particular flocked from their suburban family homes to cities on the promise of high-paying jobs and the excitement of big city life. They eagerly took tiny apartments at exorbitant rental rates on the belief that they didn’t need space. The city was their backyard. The rich tapestries of busy streets, shops, cafés, restaurants and clubs were ever-present reminders that they’d made it.
Covid-19 and widespread social unrest, however, have changed that. Throngs of people that once filled vibrant city streets to visit shops, restaurants and cafés are now facing the threat of contagion to protest police brutality and fight for equal rights, a stark reminder of the dark side of life in America’s cities. Apartments, once suitable for a life spent mostly out, now feel every bit as small as they are, given that they are now home and office, and all at a cost that is now daunting in the face of rising employment insecurity. As a consequence, Millennials and the companies they work for may once again look to the wide-open environs and lower living expenses of the suburbs, shaping a completely new suburban retail landscape in the process.
When we look back on this historic exodus, we’ll see that the retailers that survived it were those that realised early on that physical stores have become an archaic and tenuous means of distributing products. If nothing else, Covid-19 made that abundantly obvious. As we catapult from the industrial era of retail into the digital age, brands that survive the trip will see physical stores not as permanent, monolithic structures, but rather as ephemeral, flexible and experientially-based concepts, aimed less at moving product and more at acquiring new customers by moving hearts and minds with compelling real life experiences.
The winners will be brands that see every piece of branded media as “the store” and give every customer, regardless of physical or temporal distance, the ability to access their products easily and conveniently. And finally, the winners will be those that use physical stores as an integrated component of last-mile delivery to serve a radically more digitally inclined and pandemic-scarred consumer. It’s been my long-held belief that by as early as 2033 the majority of our daily, routine consumption will transact outside physical stores. The pandemic has only brought this inevitability closer.
For commercial developers this will mean reimagining cities in the suburbs; mixed use communities that offer the vibrancy, variety and energy of their urban counterparts but with a focus on liveability, affordability and sustainability.
Some brands like Ikea, already a suburban mainstay, may instead double-down on urban real estate, cashing in on what is likely to be a fire sale in the commercial real estate industry and expand their share in urban markets — something their large format stores have failed to do.
In either case, the lesson here for all brands is that we don’t build our lives around retail. Retail builds itself around our lives. So, as fundamental aspects of those lives — like work, education and communication — go digital, it only stands to reason that retail brands must make the journey with us. Those brands that do, will be in a good position to lead once the pandemic subsides. Those who stubbornly cling to the industrial era of retail, will become footnotes in its history.