In the next part of Property Week’ s Focus on series, we take a deep dive into Paris’ retail market, looking at the main trends and challenges facing the sector.
Q&A with Thierry Bonniol, head of retail leasing France, BNP Paribas Real Estate.
How has the French retail market performed in the last year?
The French retail market generated nearly €530 billion in sales in 2019 according to BNP Paribas Real Estate data. It was responsible for nearly 25% of the Eurozone’s turnover in 2019 making it one of the leading retail markets in the Eurozone in terms of turnover.
According to our forecasts, the French market is expected to continue to maintain a leading position over the next 10 years, as a result of positive demographic dynamics and resilient household consumption.
In 2019, the French retail market recorded a solid performance, with total sales up nearly +3% according to INSEE data, in contrast to UK retail sales that declined 0.1%, according to the British Retail Consortium in 2019.
In 2019, some sectors outperformed in terms of turnover such as F&B services (+6.7%) and specialised food (+5.9%), whereas fashion clothing in particular performed less well (-1%).
There are also great differences in terms of performance when looking at specific market segmentations and the positioning of a brand, whether it is luxury, mass-market, discount etc. and who the targeted customers are (students, families etc.).
These underlying trends of 2019 are expected to continue into 2020, along with a clear slowdown and a flattening of the F&B services sector. The sector outperformed in the pre Covid-19 period and is now experiencing great difficulties following the health crisis. Other sectors that are progressing include: sport, medical centres, organic shops and the second-hand market.
Is the French market ‘over shopped?
Major underlying societal and technological trends are influencing the retail market and the real estate sector as a whole. In the space of just a few years, we have seen a shift from globalisation and standardised retail towards localism and more of a personalised shopping offer.
New forms of consumer behaviour has also become prominent in the form of: e-commerce, and consumers desire to shop for products that are sustainable, ethically and responsibly produced. The physical store itself is also evolving and the point of sale is much more influenced by places and lifestyle.
To adapt stores are reinventing themselves and event, entertainment and recreational dimensions are becoming significant. Retail today is much more about the experience and being part of the community, supported by technology that enhances the customer journey. The traditional retail model of growth is changing. Each catchment area has its own store format to meet demands of that particular customer base. Driven by the phenomenon of urbanisation, which tends to concentrate growth in these territories, retail real estate continues to evolve to adapt to this new paradigm.
What are the main challenges facing the French retail market at the moment?
Covid-19, did not only lead to an economic crisis but has also acted as an accelerator of trends already at work in the retail market.
Businesses have been impacted very differently depending on their size and activity. While some players are seeking to rationalise their store footprint and are fighting for their survival, others are still developing and looking for “prime” locations and opportunities to optimise their physical network.
There are a number of trends worth noting: the acceleration and generalisation of the multi-channel model (physical commerce + e-commerce), the opening of physical stores by initially pure-players (Amazon, etc.), the appearance and development of consumption models and differentiating value creation models (responsible and ethical consumption, data, the second-hand market, rental, etc.). These trends are not unique to France, but are also increasingly prevalent in the UK and other major retail markets globally.
How do rents work in France , which rent models are used?
The traditional commercial lease known as Lease 3-6-9 continues to apply. It provides a legal framework for the relationship between landlord and tenants and protects both parties. The short term commercial lease (less than 3 years), known as a derogatory lease, also allows for greater flexibility between the two parties who are not required to commit to a long term. Generally, the tenant pays a fixed rent, however a variable part may be added based on the turnover generated by the tenant in the commercial premises. The landlord may also agree to support measures (graduated rents, participation in development work, etc.).
The key thing here is that the landlord and the tenant are partners. The success of one must lead to the success of the other. The role of intermediation between the two parties exercised by the board is essential in the feasibility and success of these operations with high stakes.
The UK, where traditional lease structures place greater focus on fixed terms, longer leases and upward-only rent reviews, could learn from the partnership model between landlords and retailers taken in France. Turnover leases in particular are more common in Europe, and this collaborative approach to data sharing would be a welcome addition to the UK retail market where there is a growing desire to embrace strategic change and move to flexible arrangements as a result of the current crisis.
Thierry Bonniol is Head of Retail Leasing at BNP Paribas Real Estate