Looking at the "death" of retail from the box office perspective

PLEASE NOTE that this article is based on my personal views and doesn't represent the perspectives of any firms.

As COVID-19 wreaks havoc globally, retailers were forced to bring their offerings online. That marks the meteoric ascent of e-commerce.

Buying clothes for yourself? Do it online. Got sick and need immediate care? Consult with the doctor and get your prescription drugs using the healthcare app on your phone. Feel lazy to do your groceries? Get someone to do it for you and have it delivered to your door.

With lockdown and social distancing measures restricting people's movements, retailers had no choice but to make it work to maintain their relevance in the customers' eyes.

How will e-commerce impact physical retail when COVID-19 is said and done? Is this the start of physical retail's inevitable death?

The answer is NO and YES, depending on how you look at it.

• NO, because it's human nature to want to fulfil their desire and have an experience, and "revenge spending" is the trend in the short- to medium-term.
• YES, as physical retail's direct sales contribution to overall retail sales will diminish; as only retailers who can adapt quickly enough will eventually survive.

Curious? Scroll ahead, but be warned: it's a long article.

TL;DR: scroll all the way down for a summary.

NO, PHYSICAL RETAIL IS NOT DEAD, NOT ANYTIME SOON

In Hong Kong, the pandemic has been - with multiple waves of outbreak throughout 2020 and 2021 - largely controlled. Life has been pretty much normal other than the law of mask-wearing in public places and capacity restrictions in public facilities.

Shopping malls in Hong Kong have thus far relied mostly on voucher schemes. K11 MUSEA, despite being a COVID-19 cluster a couple of weeks ago, was immediately thronged by eager shoppers on its first day of reopening thanks to its 50% discount program of up to HKD 1,500 (~USD 192) on beauty products. Shops upon shops had to turn away people and apologised to passers-by, "We no longer have stocks for today!"

My gut feels that physical retail is not going anywhere soon. People here are always eager to go out. That's not something that e-commerce can change with a switch of a button. But to conclude that physical retail is not dead based on one day of pure foot traffic observation wouldn't be admissible.

ENTERTAINMENT: STREAMING VS CINEMAS

One tenant type that has been afflicted by the pandemic is cinema. Everything related to cinema screams COVID-19: hundreds of people sitting for hours in an indoor space with limited air circulation. That's a big no-no for many governments, hence the shutdown of the majority of cinemas, resulting in delays of blockbuster releases (Marvel fans, I can't wait for Black Widow, Shang-chi, and Eternals too).

Entertainment, too, has shifted online during the pandemic. In 2020, Netflix gained a whopping 36.6 million new customers, powering past the 200-million subscribers mark. Disney+, the new entrant to the streaming industry, grew its subscription by 248% to 94.9 million customers, an extraordinary feat considering this is their four-year goal.

The conversation around entertainment has been driven by original programs from streaming companies. Netflix's The Queen's Gambit became a blockbuster streaming hit, watched by 62.2 million households in its first 4 weeks of release. Disney+ has its own sleeper hit: WandaVision, the first Marvel streaming miniseries that set to redefine Phase 4 of Marvel Cinematic Universe (MCU).

With the surging popularity of streaming, it's not surprising to hear all the conversations surrounding the death of cinemas. Is that true? Have people abandoned movie theatres?

BOX OFFICE DURING COVID-19

Box office receipts tumbled big time. Cinema closures have forced major studios to either postpone their major releases to later dates or move ahead with online streaming premieres. With fewer new programs available to the audience, people had fewer reasons to go to the cinemas, even in countries where cinemas have managed to reopen.

Globally, box office receipts dropped around 70% y-o-y to USD 12.4 billion.

APAC's box office fared better, dropping 62% y-o-y, mainly due to total closures that mostly took place in 2Q20 and 3Q20. However, 4Q20 saw APAC box office rebounding massively. In fact, almost 78% of the global box office came from the region between August and December.

Despite the freefalling global box office, there are many box office stories across APAC that have been nothing short of extraordinary if we look closer.

In CHINA, box office receipts during Chinese New Year 2021 hit a jaw-dropping CNY 7.8 billion, a 25% jump (adjusted-for-inflation) from that of the same period in 2019. While the growth is expected due to "revenge spending" - Chinese New Year blockbuster season was cancelled in 2020 due to the pandemic - it's still nonetheless astounding given capacity restrictions that the authority enforced especially in Beijing and surrounding areas.

In HONG KONG, right after the 3rd wave in September, Christopher Nolan's Tenet hit the theatres with a big bang despite capacity cinemas being halved across the city. It has since earned HKD 54.4 million, a respectable figure that is comparable to HKD 68.4 million total gross of the R-rated blockbuster Joker from 2019.

In JAPAN, taking advantage of no competition from Hollywood, local anime title Demon Slayer: Kimetsu no Yaiba became the highest-grossing film ever in the country, having earned JPY 38.61 billion (USD 355 million) as more than 28 million people flocked the theatres to watch the title. These figures surpass the lifetime gross and total admissions of the previous record-holder Spirited Away (2001) by 22% and close to 17% respectively.

In AUSTRALIA, Wonder Woman 1984 showed resilient box office performance. Its lifetime gross in the market dropped by only 26% from that of its predecessor, Wonder Woman, from 3 years prior. This was achieved amid cinema capacity restrictions that are capped at 75% (and even 50% in some cities).

The fact that people can go to the cinemas at all in these countries means they tackle COVID-19 relatively well. While overall numbers are undeniably down, these stories have suggested that people are still going to the cinema despite COVID-19. Why are people still going to the movie theatres? Can't they entertain themselves at home?

HUMAN NATURE: DESIRE AND EXPERIENCE

It's dinner time and you're hungry. You want to hang with your friend who happens to be in town (post-COVID-19). You want to eat something brothy and warm. You also want to see someone dancing.

Good. Let's go to Haidilao. Their hotpot is amazing and it's always cool to see those staffs doing their noodle dance in front of you.

"I'm going to Haidilao."

"Just eat instant noodle."

"But I want hotpot! And I want to see my friend."

"Just chat your friend on Zoom and look up the noodle dance on YouTube."

Desire and experience are often misunderstood in a commercial sense because they're hard to quantify. Regardless, we all know that it's very unlikely for people to be indifferent to the options they have and how they experience things (real-life vs online). Humans are by nature pulled to interact with each other.

Kevin Feige, the Chief Creative Officer of Marvel, said:

"Also, what's happening overseas in countries where [the pandemic] is more under control. Guess what? It's human nature to want to get together and have an experience. That's continuing in very big days in countries where they are able."

Going back to the movie theatres example, why do people still go to the movie theatres?

From a DESIRE point-of-view, it's because that's the only available choice they have. If someone in APAC wants to feel entertained by watching Wonder Woman 1984, they can only do so at the movie theatres at the moment (the movie is released on the streaming platform only in countries where HBO Max is available). Also, you can't just tell her/him to watch The Boys on Prime Video. That's the same with the hotpot/instant noodle example.

Then comes the EXPERIENCE. Have you ever watched a Marvel movie on an IMAX screen? The larger-than-life visual spectacle thrown on your face. The blaring sound effects leaving you shaking to the core. The screams of glees and jeers from the audience as they react to each scene in the movie. Unless you're the "1%" and you have your own movie theatre at home, this is not something that you can simply experience anywhere.

In a sense, retail is the same, albeit at a regular, normal-life-like scale. Retail in itself is an experience, and the best way to fulfil our desire is to fully experience it with our senses.

People seem to forget that retail in itself is an experience; a social activity, whether people are doing it alone or with their loved ones. In using our senses to interact with the products, services, and people around us, there is intimacy and energy in those interactions that human beings need a lot. In countries with lockdowns that last for months, people suddenly realise all these. When they can't get those energy and intimate moments of "human nature", they go topsy-turvy.

As an example, I still go to a store if I want to purchase pants. I want to try it on; I want to know how it feels on my skin, how tight it goes when I squat, kneel, sit; I want to be able to decide on-the-spot whether the pants are right for me or not.

REVENGE-SPENDING IN THE NEXT 5 YEARS

I think, in the next few years, physical retail is here to stay and might be busier than ever. People now realise that desire and experience are no longer something they can take for granted. Once the world goes back to pre-COVID-19 normal, we are going to move on with a scar still intact in our minds, knowing that these moments won't last forever.

I won't be surprised if people go all-out on everything when things go back to normal. And the first real estate sector to reap the benefits of that will be the retail sector, especially the small-to-medium-businesses (SMB) ones.

YES, IT WILL DIE IN A WAY WE CAN'T COMPREHEND... YET

But just because people are going all-out in their "revenge spending", it doesn't necessarily mean that physical retail will thrive and prosper forever. We have seen many stories of physical stores shutting down around the world. UA Cinemas, Robinsons, and Esprit are just some tenants that have shut down for good in Hong Kong, Singapore, and APAC respectively given the tough environment during the pandemic.

Additionally, there will come a time when "revenge spending" eventually plateaus. What happens when both our desire and the experience that we crave can be accessed at a roughly equal level at home?

COVID-19 has made people realise that there are things in life that they no longer can take for granted. But it also reminds people of the many risks that they often brush aside normally. In hindsight, COVID-19 eventually drives people to be more selective in choosing the desire and experience that they're willing to have in real life.

Going back to the movie theatres example, if a title is released on both movie theatres and streaming platform at the same time, how would people react?

PRELIMINARY INSIGHT: RAYA AND THE LAST DRAGON

Raya and the Last Dragon is the first major title to be released on both movie theatres and streaming platform at the same time in the APAC region. The film was released at the first weekend of March on both mediums in Australia and Singapore.

Raya and the Last Dragon was made available on Disney+ using the Premier Access option, where subscribers have to pay AUD 34.99 or SGD 38.98 to watch the movie. In contrast, average movie ticket prices in both countries are roughly AUD 14.50 and SGD 13.00 respectively.

Based on currently available box office numbers, it looks like Raya and the Last Dragon will continue to play at your nearest cinemas. For comparison, let's have Raya's box office performance compared to that of Moana, a similar title from the same studio in 2016 (courtesy of Box Office Mojo).

Let's recap the fact that cinema capacities are capped at more-or-less 50% (up to 75% in Australia) in both countries. Based on the numbers above, what can we see?

• Weekend 1 box office receipts for Raya are below 50% those of Moana; understandable given the capped cinema capacities in both countries, but...
• W-o-w box office drops for Raya are much smaller than those of Moana, and...
• In weekend 3, box office receipts for Raya are actually increasing on a w-o-w basis, an extremely rare occurrence in the entertainment industry. In fact, Raya's weekend 3 box office in Singapore is actually higher to Moana's, even when adjusted for inflation.

Raya has a better w-o-w hold compared to Moana in both markets. Even more astonishing, in weekend 3, Raya seems to be attracting even more moviegoers in both markets! What does this mean?

1. Raya has a better hold because cinema capacities are currently capped; not everyone can watch the movie at the same time, hence the flow over to the 2nd and 3rd weekend,
2. Raya is a movie that is best watched in a movie theatre, and the word-of-mouth surrounding its cinematic experience drove people to go to the cinemas,
3. Raya is simply a great movie, and people are excited to watch "something good" together with their loved ones as a social event, AND/OR
4. People are sick of staying at home, and they see Raya as a good reason to "go out".

We don't have any conclusions yet on why people still flock to the cinemas to watch Raya despite being able to do so on Disney+ at home. If I may hypothesise, it will be a combination of all 4 reasons. However, I believe the majority will say mostly reason 2 before the other reasons.

THE 3 QUESTIONS: CHOOSING THE WORTHY EXPERIENCE

It's too early to conclude how retail consumer behaviour will change in the future, but the release of Raya gives us good preliminary insight on how people will shift.

Customers are becoming more selective in choosing the physical, face-to-face experience they want to have; they will do so only once they know it's worth doing so by asking the following questions:

1. Is this an experience that I can get at home? Real-life experience is intimate face-to-face social interactions, happenings that evoke our senses, actions that absorb and radiate energy to the humans around us. Can I get the same feeling by being at home?
2. Is this worth the risk? Until the full containment of the pandemic is fully declared, people will have to face the "fear" of being infected. How will "fear" determine people's preferences towards experience?
3. Is this worth paying more? With COVID-19 risk being real, customers' willingness to pay towards associated fees with online offerings (subscription fee, delivery fee, etc.) becomes more-or-less obsolete. Will people be willing to bear the additional costs associated with going out?

PHYSICAL STORES AS A MARKETING CHANNEL

I believe that physical retail is "dying", but not in a sense that it will cease to exist for good. Rather, it's "dying" in the sense that physical retail's share of direct sales will diminish in the future as overall retail sales will be driven largely by the immense growth of e-commerce.

I can only imagine retail consumption to never stop growing in the foreseeable future. However, I believe that eventually, e-commerce sales are going to overtake physical store sales given the scale of consumers outreach and access that e-commerce can reach versus physical retail. As the world becomes more digitalised, e-commerce sales are going to skyrocket whereas physical retail sales are going to relatively remain dormant.

However, this doesn't mean that retailers should abandon physical retail right away. Just because the future paves a much brighter prospect in e-commerce, they can't suddenly abandon the majority of current consumers that lean towards real-life experience. This is where the idea of omnichannel marketing becomes more critical than ever.

For example, Tesla is well-known for making its electric vehicles (EV) sales mostly online. But Tesla also knows that they can't abandon its physical stores because purchasing an EV is a high-involvement decision that costs a lot of money. That's why they keep their physical stores and experience centres for buyers to "experience" the EV before purchasing it. The physical stores are marketing costs that Tesla had to bear to grow their overall sales. Without these stores/centres, Tesla will have not only lower marketing costs but also, as a result, lower overall sales.

Using omnichannel marketing, I believe that physical retail is no longer the primary resource of sales/income for retailers, but rather a marketing channel that retailers have to continue developing to grow their overall retail sales. Essentially, physical retail is now a marketing cost that retailers have to be willing to bear in order to maintain their relevance in the customers' eyes.

IMPLICATIONS FOR RETAILERS

The tricky part now is to figure out how to keep people streaming into physical retail to have the full "experience". Retailers need to focus on offering experiences that can't be copied anywhere else to attract people and keep them coming again and again. These experiences have to be unique, able to immerse people both physically and emotionally.

For tenants, this is more straightforward. Just like the previous Tesla example, tenants have to incorporate design, technology, and human elements to create life interaction that can't be accessed from home. A great example of this is Burberry, which debuted its first social physical retail in Shenzhen in July 2020. The store uses technology in collaboration with Tencent to allow interactions between customers and Burberry's products. The more customers interact in the store, the more personalised their experiences at the store become. The personalisation varies from personalised product offering to exclusive access to the invitation-only Thomas's Cafe located within the store.

On the developers/landlords side, things get a bit trickier. Firstly, they have to be more selective in curating their tenant mix/profile. Developers/landlords have to carefully choose tenants that are relevant to today's consumers and are willing to meet their curated standards. Secondly, developers/landlords have to think of their retail operations as a curated program rather than physical asset operations. To keep attracting customers, developers/landlords must put their innovative thinking cap on to offer continuously new experiences to maintain their assets' relevance. This can range from holding seasonal/unique events like Van Gogh Alive (see picture) to constantly rotating tenants, which in itself may lead to entirely different ways of retail operations (like flexible leasing, for example).

"Developers/landlords have to think of their retail operations as a curated program rather than physical asset operations."

Moving ahead, retailers can no longer rely on the fact that people will just come to their stores or assets. They have to continue developing their vision to offer something innovative to engage with the customers by bringing them closer to their "human nature" through experiences that keep evoking their senses and emotions.

THE FUTURE GENERATIONS: REDEFINING DESIRE AND EXPERIENCE

It's tough to pinpoint exactly what desire and experience are. The definitions of these terms vary from country to country, from individual to individual, etc. But one aspect that can be used to sum everything up will be "generation", as it encapsulates the global population in line with how this world develops over time.

Whatever we've known about retail has been largely on the knowledge passed down to us from Generation X (1965-1980) and Millennials (1981-1996/1997). We're now in a period where spending power is transitioning from Generation X to Millennials.

Yet, technology has completely changed our lives in the past 20 years, especially within the past decade. And that's why Generation Z (1997/1998-2012) and their eventual offsprings, Generation Alpha (early 2010s-mid-2020s) and Generation Beta (mid-2020s-late 2040s), will be the ones that will redefine physical retail based on how they define desire and experience in the future.

Generation Z is the first generation to have grown up with portable technology and Internet access from a young age. With that, they've already redefined what desire and experience are. Let's take "socialising" as an example. For the majority of us, "socialising" might mean meeting your friends to have dinner at a restaurant. For Generation Z, I've heard "socialising" as having takeaways at home while Zoom-ing their friends.

Our ways of living - and our very definitions of desire and experience - have completely changed with technology. As the pace of technological development accelerates, so will our ways of living, and the future generations - Generation Z, Generation Alpha, Generation Beta - will become the ones that will bring about these changes to everything that we know as of today. What we might consider as not enough today might be sufficient for our future generations.

Where will this bring physical retail to? We don't know. It depends on how technology will change the way these future generations act and think. But we know for sure that with behaviours changing at a pace faster than ever before, retailers will have to be willing to change quicker than ever before to not fall behind.

SUMMARY

Will physical retail die as a result of e-commerce growth?

• NO, because it's human nature to want to fulfil their desire and have an experience. The pandemic has made people realise that these experiences are not something they can take for granted, thus "revenge spending" will be a trend in the short- to medium-term.
• NO, because from a customer's perspective, retail itself is an emotional journey that is best experienced using our senses.
• YES, in a sense that physical retail's share of direct sales to the overall sales will diminish as a large portion will be overtaken by its e-commerce (online) counterpart.
• YES, in a sense that only those who are willing to change, and can change quickly enough, to maintain their relevance in customers' eyes will survive.

Implications for retailers:

1. Retailers must face the fact that despite its diminishing importance in terms of direct sales, physical retail is a critical component of omnichannel marketing. It's a marketing cost that retailers must be willing to bear to allow prospective customers to fully immerse themselves physically and emotionally in the products they wish to purchase.
2. As people become more selective in choosing the experience they wish to have, retailers have to innovate to continuously offer experiences that bring customers closer to their "human nature".
3. The acceleration of technological development means retailers must be able to adapt to changing consumer behaviour much more quickly, depending on how the next 2-3 generations redefine the meaning of "desire" and "experience".