Retail, Facebook and Fitting Rooms
*This opinion article was written inspired by an article published in Äripäev on 04.12.2018 titled "Entrepreneur fights Facebook business".
Despite the fact that online store sales still constitute only a few percent of Estonia's retail trade volume, the volume of goods sold in e-shops has continued to grow at a relatively strong pace. The relocation of smaller physical stores from shopping centers to the Internet has also continued to grow consistently. Traditional business models have fallen behind the times for many retail chains, and to increase sales and profits, costs must be optimized and business-related activities must be reorganized. Alongside the growth in the number of online stores, larger physical retail chains have also begun to place increasing emphasis on e-shops, competing for survival by offering free delivery of goods and other increasingly popular convenience services.
The lower prices of online stores and the often more convenient shopping options for many consumers are slowly but steadily reducing the turnover and profits of physical stores. Unlike the United States, Estonia should not expect vacancy rates in retail trade in general and in major shopping centers to reach similar levels in the coming years, but strong pressure from online stores for substantial changes in the retail sector will persist. I am not claiming that traditional retail is dying out in Estonia, but online commerce affects certain product categories much more than others.
While the retail trade index as a whole has shown mainly up to 5% annual growth, sales via mail or the internet have periodically shown relatively often double-digit growth. Reading the Äripäev article about Facebook sellers and their negative impact on retail entrepreneurs, it immediately recalled a trend that began about a decade or slightly more ago. Namely, physical stores became "trial booths" – initially especially among perfume stores. In perfume stores, customers could try testers for free, after which clients went to web portals that operate successfully to this day, having expanded their reach to other product categories as well. Year after year, a similar trend has moved into clothing retail, where, compared to food retail, for example, there are rather high margins, and alongside growing internet users, such products have increasingly begun to be purchased from the web instead.
Many of these businesses operating mainly on the web have not even started from Tallinn or even Harjumaa, but from some small Estonian town, which again confirms that it is possible to succeed almost anywhere purely with the Internet and parcel lockers. Tallinn has grown large enough that e-shops deliver goods to the nearest parcel locker to one's home, even if the physical store is on the other side of the city. It is simply easier in terms of time saving not to go to the product yourself, as successful people increasingly value their time, so the Internet allows very effectively optimizing one's time expenditure. If we look at even the process of idea generation in the case of goods produced by Cleveron, many of them have emerged, as expressed by Arno Küti, precisely because he himself felt the lack of such opportunities on the market. Ordering one's groceries from a grocery store to a parcel locker at one's home by a fixed time might have sounded strange a few years ago, but in perspective, such trends are consistently advancing. This is especially because primarily time is being sold to clients, not products. Take Airbnb or Taxify, for example – these are not merely accommodation or transportation service provision platforms, but primarily convenience and clients' own time that can be saved through the consumption of the respective service are being sold there.
The Internet's advance on retail as a whole will continue in the coming years at least at a similar pace as now, with the victims being primarily physical stores selling someone else's brand. If an entrepreneur is purely a reseller, then very likely consumers will find the same products on the Internet and at a lower price. Possible regulation of Facebook traders' activities would not remove the true nature of the problem, because an internet connection and running a store on Facebook are considerably cheaper than operating a warehouse and retail space, so the trumps will remain in the hands of online retailers in perspective. If from the beginning of December the Tax and Customs Board supposedly manages to clarify who on Airbnb earns taxable income and pays taxes and who does not, then even if everyone begins to pay income tax and this balances competition between honest and dishonest landlords, the short-term rental market will still continue to grow and traditional accommodation complexes falling behind the times will continue to close their doors.
Retail is becoming increasingly efficient under the influence of the Internet. Individuals selling aftermarket goods on Amazon use various apps daily that can scan a product barcode with a mobile phone and instantly pull up all competing offers. In parallel, it is already becoming relatively common to read about Estonian entrepreneurs operating successfully on Amazon, who generate hundreds of thousands of euros in turnover annually, but do not own a single physical retail space, warehouse, and cannot even touch the products they sell to consumers somewhere else in the world. Ownership of commercial real estate as such and any operation of it has been left purely to the service provider's care. Growth in businesses operating online can also be seen in real estate agency inquiries – interested parties relatively often look for small storage spaces similar to modern smart warehouses, where they can store their goods. Due to the latter, the smart warehouse concept on the market is entirely welcome, which has been successfully brought to market. At the same time, Cleveron in Viljandi continues to develop new technological solutions that facilitate e-commerce even further.
Amazon is currently not yet in the Baltic countries. The nearest region from which goods are sent to Estonia is Sweden. Time will tell whether the small population here will bring Amazon to Estonia in the future or not, but e-commerce will continue to grow regardless. At the time of writing this article, I am 25 years old and I must admit that I visit physical retail spaces mainly for only three reasons – the grocery store, the building materials store, or assessing corresponding real estate for work purposes. If at all possible, I have been trying not to do so for any other reason for a long time now. Based on my circle of acquaintances, I can factually state that a very large number of young people are behaving relatively similarly. Visiting physical stores is being avoided increasingly mainly for two reasons: first, it simply saves time, and second, everything on the Internet is often considerably cheaper. When purchasing goods from the Internet, one does have to wait for them to arrive, which is why for the latter reason, I have not yet left grocery shopping to the Internet. However, someone on Facebook is unlikely to start selling food products on a large scale, because the margins of the respective product categories and the general profitability of the segment are rather poor for small entrepreneurs.
If we are to touch on demographic trends, then retail entrepreneurs should also think about how their consumer base will change in the future. The older their existing customers in, for example, clothing stores become, the more their profit margin and potential turnover comes under pressure, because as is well known, consumption at an older age tends to decrease. Standing in line at a grocery store or driving from the office home in the evening, everywhere you can see young people aged 10-25 with their faces in smartphones. Soon, however, they will constitute the most active shopper segment in retail, but increasingly less in physical stores. If the real estate market's biggest negative factor in the coming years is a roughly 35% decline in the number of 25-35-year-olds, then it cannot be overlooked that this directly affects many retail segments and the future performance of the respective companies. Shopping centers have to increasingly work to get consumers to come there at all – cinemas are built and other attractions are erected… Estonians did not even want to accept Netflix for free, but perhaps trends in this area will change over time.
E-commerce is putting pressure not only on retail entrepreneurs but also on property owners, because with tenants operating with the traditional business model so far, it is increasingly difficult to raise rent, as their profit margin is already under pressure, not to mention constantly rising labor costs in today's market situation. In terms of shopping centers, competition is growing – already existing centers have expanded or are expanding, T1 and some smaller centers have entered the market, Porto Franco is being added, and due to the aforementioned, Tallink City has been placed on the back burner for an indefinite period. Generally speaking, Estonia's retail trade volume is not growing at the same pace as retail space is being added to the market, but this leads to growing vacancies and also poses a risk of possible rent price decline. The question in between could be whether the newly added shopping centers will start to become empty or the B- and C-class business premises scattered throughout the city? In most shopping centers, there are many exactly the same retail chains and anchor tenants, and as one owner of a grocery store chain operating in Estonia has already said, it sometimes gives the impression that you are competing with yourself. It seems, however, that T1 shopping center will also add several brands not yet seen in Estonia, which is very welcome on the retail market.
Source: Arco Vara
