Analysis: How Germany’s retail scene is growing up

The number-one retail investment market in Europe last year, Germany, continues to attract significant retailer and investor attention – evidenced by Jack Wills opening its first store in the country this week.

Ecommerce is growing up

Germany may be one of the biggest retail markets in Europe, but its consumers have been slower to catch on to the benefits of ecommerce, lagging behind other markets in Northern Europe and East Asia in their adoption of online retail.

However, that’s beginning to change as online sales growth rapidly increases.

It’s a significant shift for the German retail market which, despite the presence of international brands across its 10 major cities, sits as much as a decade behind the UK when it comes to ecommerce.

The UK is Europe’s most advanced ecommerce market with around 15% of all sales taking place online.

In Germany, however, just €50bn of its €500bn retail sales took place online in 2016 – and some sectors, such as grocery, barely exist on the web. But the opportunity to jump on this evolving bandwagon is clear.

Placemaking and shrinking shops

Once lauded as a death knell for physical retail, ecommerce has evolved to supplement high street and mall spend the world over. In Europe, there is little evidence to suggest that it is replacing physical stores.

Instead, ecommerce is changing the function, shape and size of stores, forcing retailers and landlords to put emphasis on “placemaking” – creating places that people want to come to, spend time in, spend money in, and return to.

Stores now play an important role in customer service and brand experience, as well as driving direct sales.

So although stores aren’t disappearing from German high streets, they are getting smaller. JLL figures show that 75% of all lettings in 2016 were for small and medium-sized units across Germany’s biggest 10 cities.

What’s more, an increasing amount of space is being let to food and beverage (F&B) brands. This sector remains buoyant, occupying 20% of all retail space let in Germany.

National and international brands continue to enter the market, with vegan fast-food chain Alge and the US-based baked goods chain Cinnabon opening stores in 2016.

F&B will continue to have a strong impact on retail over the coming years as it becomes a vital ingredient in placemaking.

Research shows that space allocated to F&B in Europe has more than doubled in 10 years, and that shoppers who eat spend 18% more overall. This trend is set to continue across the Continent.

Rents

Retailer demand in Germany remains robust across the country’s biggest 10 cities, despite the market’s structural change. Munich commands the highest rents in the country, followed by Berlin and Frankfurt.

Decathlon, American Vintage and Superdry have been among the most acquisitive retailers of prime German space over the past couple of years and are examples of how physical space in the right location is still hugely important, even in the online era.

In fact, JLL research has tracked reports of 200 etailers going offline and taking physical space across the world, including Zalando, Cyberport Style Bop, Fab.com and One Nordic in Germany.

For those who are unable to access Germany’s prime spots, adjacent areas are becoming increasingly popular, causing a ripple effect across the country’s leading cities.

Areas previously not regarded as prime, such as Theatinerstrasse, Weinstrasse, Residenzstrasse and Dienerstrasse in Munich, the Gurzenich Quarter in Cologne and Rossmarket and Schillerstrasse in Frankfurt, are experiencing stronger demand than ever.

Demand for new prime, well-located space – such as Ko-Bogen II in Dusseldorf and the Hafen port development in Hamburg – is expected to remain robust in the coming years.

Opportunities

With the UK and US as a guide for what is to come, German retail has plenty of room to develop, both online and offline.

As consumers become increasingly confident buying goods on the web, online shopping and mobile commerce will become more commonplace, with the introduction of innovations such as click-and-collect.

Customer experience and placemaking will also stay high on retailers’ agendas across global retail hotspots.

Opportunities also remain in Germany’s investment market, which will continue to remain buoyant.

Investors will continue to seek opportunities both through buying landmark assets and through platform investments, thanks to the market’s favourable fundamentals.

• James Brown is head of research and strategy, EMEA, at JLL