The retail industry continues to face new challenges. Physical retail is still the main channel for the Norwegian consumer, but e-commerce, from both domestic and international platforms, grows with a faster pace and continues to gain market share. The physical retail industry is not collapsing, but changing, and going forward, the retail market will create some new winners and losers.
Main macro trends
The Norwegian economy is performing well, and over the past three years growth has been solid and employment has risen. Despite international conditions, GDP growth remains strong in mainland Norway. The long-term trend in retail sales volume is positive and shows an increase since the beginning of 2018. The consumer confidence index (CCI), a survey that defines the degree of optimism among the consumers, has been volatile so far in 2019 and is currently at the lowest level since May 2016. The CCI has been negative since August last year, indicating a slight overweight of pessimistic consumers in the Norwegian market. However, the underlying trend in consumption is good and consumption growth is on par with historic growth.
2019 conditions and drivers better than 2018
2018 was a challenging year for the retail sector with a reduced Norwegian purchasing power due to high electricity prices and increasing interest rates. However, expected lower electricity prices, employment growth and increased real wages going forward, indicate that the consumer has more money left to spend. The consumer is changing and is today to a larger extent than earlier spending money on services. Both consumption of goods and services have increased since 1990, but from early 2000, consumption of services has experienced a stronger growth than goods consumption. The retail sector, both in Norway and globally, continues to experience strong competition and restructuring which in turn has resulted in declining margins and turnover despite growth in consumption and retail sales.
Retail sales increased in 2018, and Norwegians spent NOK 560 billion, an increase of NOK 15 billion compared to 2017. According to the latest retail report from Virke, physical retail is still the main channel for the Norwegian consumer. However, consumer preferences have changed and other channels like e-commerce from both Norwegian and foreign platforms continue to gain market shares. Norwegian e-commerce experienced the strongest growth in 2018, closely followed by e-commerce from foreign stores. Physical retail in Norwegian stores experienced a growth of only 2.1% in 2018, which is the same level as in 2017.
Global trends go local
Due to the challenging retail markets with strong influence from e-commerce, retailers are reducing costs and closing stores rather than opening new ones and the global expansion activity is at record low levels which has an impact on the Norwegian market. JLL estimates activity to reach normal levels in two years for main cities across the world. Growth in prime high-street rents have peaked in most markets in Europe, while prime shopping centre assets see a moderate growth outlook going forward.
This trend is also seen in Norway with downward pressure on prime rents. E-commerce continues to gain market share in addition to new consumer preferences like the increased focus on sustainability are threatening the physical retail market, especially the fashion industry which is more frequently bought through online platforms as well as being one of the major contributors to pollution today. Fashion is the sector with the largest footprint in both shopping centres and high-street locations, and increased bankruptcies and store closings leave attractive retail premises vacant and puts pressure on rent levels. Read more about the downward pressure on high-street retail rents here.
E-commerce has experienced strong growth in recent years, but it is important to note that web sales is not a given success formula in the market today. Several players within e-commerce also struggle with falling margins, partly due to costs associated with delivery and product returns. Going forward, flexible omni-channel retailing, along with focus on service and experience for the end-user, will be crucial for success and survival, and it needs to be developed and tested further.
A solid property transaction volume
The Norwegian retail transaction volume is still high with close to 30 retail property transactions with a volume of approximately NOK 9 billion so far in 2019, which is about 20% of the total transaction market. Big-box transactions account for approximately 53% of the total retail transaction market, a significant increase compared to recent years. Shopping centres, on the other hand, have experienced reduced activity and account for less than 30% so far this year, compared to 45% of the 2018 retail transaction volume. The share of high-street retail transactions is also reduced so far this year, which can be explained by the lack of assets available in the market.
Our partner JLL reports a retail investment volume of EUR 14.6 billion in the first half of 2019, which represents a 37% decline compared to the same period last year. The European retail sector continues to see some adjustments in pricing, particularly within the shopping centre sector, where yields have been rising for the last three quarters.