The NamNews High Street Revival Recipe
By Brian Moore, Global Retail Consultant and CEO of EMR-NAMNEWS

More art than science, more craft than art, a pragmatic ‘solution’ that reflects market realities, appreciates that a High Street is more like a kitchen than a laboratory, but above all is commercially sustainable …such is the ‘recipe’ required to help revive UK High Streets.

The big issue in the High Street is not how many shops are closed or are closing, but is more about the fact that most failed shops will not re-open…  In truth, we need to face up to chronic over-capacity in the High Street.  With a current ‘empty-shop’ share of 15%, a rate kept artificially low by non-commercial lettings, it is perhaps more realistic to anticipate an over-capacity figure of 30%, and work at making that proportion of High Street space commercially viable, aiming at creating a model that would encourage the populous to return by choice to a revised High Street shopping environment on a ‘repeat-purchase’ basis….

We believe that this re-engineering of the High Street should include the following ingredients, as a minimum.

Residential accommodation:

Here the issue is achieving commercial viability from the point of view of a developer.  Essentially, if a developer can buy the freehold for five to seven adjoining shops, it can be feasible to convert the first floors to medium-grade residential accommodation at commercial rents. The ground-floor can be upgraded to medium-prime retail space, with minimal in-store storage to optimise selling area, and a rental model that is part-subsidised by the residential rentals, and combines low rental with a percentage of sales to encourage start-up retail businesses in the High Street.

A further advantage would be possible reductions in street crime and infrastructure deterioration or damage caused by previously unnoticed water-leaks and infestation, due to higher levels of domestic occupation in a more lively High Street.

Pop-up shops to encourage low-risk trial:

In the short term, pop-up shops could be used on some sites to encourage low-risk trial of goods and formats.

For suppliers that can operate in limited time-frames, a typical pop-up store can operate for as little as two days up to a period of four to six weeks and during this period the supplier can test-market a new product or brand and thus get first-hand feedback from customers, with an added plus of lower marketing costs compared with TV.

Specialist shops viability:

Essentially, the purpose of specialist shops in categories such as toys, bookselling, consumer-electronics and home entertainment is to meet a fundamental consumer-shopper need to physically experience the product. When specialists’ retail prices are so out of line with alternative formats, it is inevitable that having ‘turned the knobs’ on a piece of electronic equipment in a specialist outlet, the shopper will invariably make a purchase in a mass retailer or online at a significant discount.  There is no legal way of ensuring fulfilment of the sale by the specialist retailer unless via a price differential that is so low that purchasing elsewhere is not worth the trouble.

It has to be expected that as these shops cannot compete with either online providers or the major multiples they need help in optimising their business model.  The major multiples have reached market dominance by taking state-of-the-art retailing to new highs, in effect becoming expert shopkeepers.  In fact, these major multiple retailers have set global standards in state-of-the-art retailing that have redefined shop-keeping, and these standards need to be met by High Street operators in order to survive.

In practice, suppliers need to be retail business consultants to specialist and independent shops, helping them to adapt state-of-art retailing techniques and practices to their operations.  However, as the cost of this level of service would rarely be covered by the size of the resulting order, suppliers need to change their approach to calculating the profitability of some customer types.  Because specialist and sometimes independent customers are ‘educating’ the consumer, they are in fact performing an advertising function for the brand.  Should we not therefore charge say 50% of the cost of servicing them to the advertising budget, and continue to call if the remaining cost is covered by size of order? 

Payday loan facilities:

Payday loan shops represent both a social and commercial threat to the High Street.  Both pawn shops and online payday loan providers are there to serve a local need in terms of low-income consumer survival.  However, attempts at justifying the 2,000-3,000% interest rates by reference to high servicing costs of small amounts borrowed, coupled with ‘high’ risk of default are inevitably attracting government attention.

In practice, much of this risk is eliminated by effectively taking ownership of borrowers’ salary/wages cheques until loans have been repaid, with any default-losses well covered by the usurious interest rates charged to those who pay…  In the end, the eventual changes to legislation will be too late and inadequate-for-purpose in restraining providers that in the old days would simply have been run out of town…

Instead, the government should acknowledge that those members of the community in need of income-supplements between paydays should be offered government-backed temporary loans using the payday loan model. This could include taking ownership of pay-cheques/income supplements, but offering low-level interest rates, a move that could help to stabilise household finances and freeze out current payday-lenders overnight….

This would thus liberate existing premises to allow for retail businesses that could make a more positive contribution to High Street regeneration from both a social and a commercial point of view. 

Charity shops business model:

Essentially, charity shops perform a vital role in recycling goods, providing employment and work-experience to those that might be otherwise unemployable, and make valuable contributions to worthy causes.  However, the charity retail business model enjoys several advantages that can make them a threat to traditional retailers in the High Street.

By acquiring goods free of charge, employing mainly volunteers and paying business rates that are discounted by 90%, they make it impossible for other retailers to compete.  The answer here is to avoid the temptation to use charity shops as a quick-fix way of repopulating the High Street.  Instead, the government should limit charity shops to say 5% of high street retail space, and offer discounted business rates to start-up retailers in categories that are vital for High Street development, but are rendered non-viable by 100% rates demands.   

Lease legislation:

It is vital that government end the 25-year, upward-only rent reviews, no break-clause legislation, and replace it with 5-year ‘price-to-market’ reviews, break-clauses that reflect commercial realities and channel dynamics, and encourage risk-sharing rental models that are a combination of minimal fixed rental and say a 5% share of annual sales.  

This approach will ensure that both landlords and tenants take a realistic ‘joint-view’ of commercial retail opportunities, yet give landlords a way of terminating tenants that cannot optimise sales per sq. ft. in the leased space.  

Business Rates:

Currently based upon inflation indices, and always out of phase with market realities, it is unnecessarily restricting of governments to allow inflation to ‘automatically’ trigger rate increases.  Moreover, retail businesses essential to the neighbourhood should be allowed the 90% Business Rate discount already enjoyed by charity shops, to ensure their commercial viability. 

Banks as High Street landlords:

It is easy to suggest that when banks are High Street landlords they should simply reduce rents by 50+%, but this ignores the fact that retail leases are recorded in a bank’s balance sheet as assets valued at a multiple of annual rental.  Any reduction in rental would therefore reduce the bank’s capital base and thus further compromise its ability to lend without additional capital injections…

In practice, if a bank’s retail asset values are significantly out of line with commercial high street realities, then they might be better off liquidating such assets, taking a financial hit and allow new landlords to operate with more realistic rental models as outlined above. 

Commercial viability of the High Street:

In summary, commercial viability of the High Street requires a balanced mix of residential, leisure, retail and offices to generate daytime traffic.  Whilst the natural competitiveness of HORECA provision will ensure acceptable standards of pricing and quality, consumer parking and commercial deliveries have to be accommodated in a positive way that encourages rather than detracts from regeneration of the High Street.  However, commercial viability has to be a pre-requisite.

Without the above ingredients, mixed in a viable way along the commercial lines suggested above, in effect a compromise for all stakeholders, then any solution becomes instead, a recipe for disaster…

This recipe was built on themes raised in a recent broadcast on Voice of Russia Radio (Radio Moscow) - See KamBlog

Date published: April 2012