A new study by professional services firm Alvarez & Marsal (A&M), in partnership with Retail Economics, has found that store-based profit margins for the top 150 retailers in the UK have more than halved in less than a decade – dropping from 8.8% in 2009/10 to only 4.1% in 2017/18.
Driven by ballooning operating costs, (increasing by 10.8% since 2014), a legacy of inflexible lease structures and changing shopping habits, A&M estimates that large multiple retailers now occupy up to 20% more store space than they need and can financially justify.
Business rates remain a significant burden for retailers that are overly exposed to property, whilst continuing wage increases have further accelerated labour costs and placed intense pressure on most retailer’s profitability.
Meanwhile, demand for retail space in the UK is at its lowest since 2007, with secondary locations (local shopping centres and high streets) experiencing the steepest declines in footfall. A&M said that this has translated into a 60% decline in the total volume of retail transactions at these locations over the last two years.
The large multiple retailer space has been most acutely affected with a consistent store decline in each year since 2013, culminating in a net loss of 2,481 stores in 2018 alone.
Following a flurry of CVAs, A&M highlighted that landlords have been met with growing resistance when proposing increased rents on new lettings. Their ability to achieve higher rents has declined steadily and proved successful on just 30% of retail units in 2017.
The study found that retailers focused on the value, convenience and luxury segments remain generally resilient, while mass market operators, particularly mid-market fashion retailers, are most exposed to upheaval in the sector. Those mid-market fashion brands have experienced around six times the number of net store closures compared to its value and luxury counterparts.
Richard Fleming, Managing Director and Head of Restructuring Europe at A&M, commented: “Most of the UK’s biggest retail brands are in the midst of a fight for survival. We have already seen some high-profile casualties, and many more are on life support. But reports of the ‘death of the High Street’ have been greatly exaggerated.
“We’re entering a new era of retail, presenting opportunities for forward-thinking incumbents, entrepreneurs and investors. Those that collaborate with landlords and local authorities will be the big winners going into the next business cycle. This needs to involve striking the right balance between retail and leisure through strategic partnerships, nimble pop-up schemes, agreeing temporary rent cuts that allow companies to reshape their debt and operational structure, or adopting turnover-based rents where retailers and landlords stand or fall together.”
The A&M research did find some grounds for optimism. Physical store browsing remains a significant component of the shopping experience – currently accounting for over 80% of total retail sales and expected to remain at 65% over the next five years.
It also highlighted that retail destinations will benefit from the growth of small independent firms, such as beauty salons, new social activity bars (such as darts, crazy golf and ping pong), health clubs and restaurants. The increase in new leisure units since 2012 stands at 5.2% versus a 1.8% increase in new traditional retail units over the same time period.
A&M stated that as the economic value attached to material possessions diminishes, customers increasingly expect to be entertained and educated through experiential store formats. Gen Z and Millennials are twice as likely to note that they spent less on retail products and more on experiences (e.g. holidays and eating out) over the last 12 months than those in their 50s.
Fleming added: “Retailers now need to assess the value and purpose of physical stores as a media channel, not just a profit centre. This involves taking a more data-driven approach, closely associating store performance with ‘engagement’ and ‘impressions’ that enhance brand favourability and drive sales across the entire customer journey.”
NAM Implications:
- Still think 2008 (global financial crisis) was a temporary blip?
- Also witness the rise of showrooming…
- …customers ‘twirling the knobs’ instore
- …and buying online.
- Highlighting the need for integrating all channels to optimise consumer interest.
