July Key Indicator: this month we investigate the future of Retail

the future of retail on the High StreetFew people can be unaware that the future of retail on the High Street has been in peril for some time.

There has been a seemingly endless litany of “big name” closures or attempts to restructure, from BHS and Toys R Us to Carpetright, M & S and House of Fraser to Maplin and most recently Poundworld.

But the retail sector encompasses not only physical stores on the High Street and on edge of centre retail parks, it also includes online-only operations, such as Amazon, eBay and Etsy and those retailers that have both online and physical shops like John Lewis and Lewins the Shirtmakers.

Nor should the small, independent niche shops be forgotten in considering the future of retail.

Clearly the preferences and behaviour of consumers is a key factor, but it is not the whole story, as I shall outline in this analysis.

The pressures impacting on the future of retail

Most of the difficulties facing the physical retail sector are well rehearsed.

They include escalating labour costs including wages, staff administration and compliance and the Apprenticeship Levy imposed on larger businesses since last year. These, along with the 2017 business rate revaluation that came into force in April and ever-escalating rents have had a significant impact on overheads for High Street stores, whether they are large chains or small independent SMEs.

Indeed, it has been argued that the rate increases have weighed disproportionately on the smaller retailers and, as I reported in a blog in May, the FSB has argued that the Government’s new online appeals system seems to have been designed to be hostile to business, bureaucratic and beset by glitches, while offering no in-person support, no phoneline or live chat options and involving a time consuming and opaque process for uploading supporting material when making an appeal.

Then, there are the landlords, although in fairness this term should also cover the many institutional investors representing such organisations as pension funds, which, arguably, need to maximise their revenues to protect the people they represent.

An equally well-rehearsed explanation of the difficulties has been the competition from online retailers, who do not face the overheads that come with a physical store and can therefore offer substantial discounts to shoppers.

This brings us to another key factor that affects the future of retail – and that is consumer preferences and behaviour.

Here, the convenience of online shopping at any time of the day or night as well as price competitiveness has been identified as the key factor in the so-called “death of the High Street”. But there is more to it than that.

As the TUC General Secretary Frances O’Grady, said: “Retail depends on customers having money in their pockets. One reason why some shops are struggling is because wage growth has been very weak.”

Not only this but, as was reported yesterday, an estimated 50,000 retail staff have been made redundant or seen their role put under threat since the start of this year. It should be remembered that these people are also consumers who are now likely to have less money to spend. In this context the recent collapse of Poundworld could be seen as a worrying development.

Not much discussed, but also worth considering is the strategy of local authorities and the planning process in town centres over the last 20 or more years. While cash-strapped councils understandably wish to maximise their revenue from business rates and are therefore likely to have been attracted by flagship “name” stores to anchor their High Streets, the results arguably have been an unappealing sameness to town centres such that it is difficult to know whether you are in Sunderland, Colchester or any other town you care to name. Another bugbear for shoppers is the cost of parking, also a revenue stream for local authorities where the cost is discouraging shoppers who instead go to out of town retail parks.

Can the future of retail in the High Street be revitalised?

Let’s look at consumer behaviour first. Shopping has always been to some extent a social activity and there are already signs that those authorities that have paid some attention to the appearance and appeal of their town centres may be reaping the benefits as markets, small, specialist independents and pop-up shops, together with more places to eat, have a coffee and socialise, appear. Municipal flower beds and baskets even, make shoppers feel welcome.

Equally, many shoppers will say that while they appreciate the convenience and cost saving of online shopping, there is no substitute for being able to examine and try on purchases.  This is where some innovative retailers, such as Next, have provided opportunities with click and collect options that allow customers to try on orders and if not happy, the shop will organise the return of goods for them. It also means that the shop can operate from a smaller space to cut its overheads.

Another change in behaviour among shoppers is to buying fresh produce locally and doing bulk shopping online or by car at large out of town stores. This is helping promote specialist and artisan shops that are close to where people live or work. The large stores have also latched on to this by introducing local concessions into their stores.

Many of the larger retailers that have found themselves in difficulties have also offered online and click and collect services.  However, there has also been an increase in the numbers that have tried to restructure, using the option of a CVA (Company Voluntary Arrangement) to renegotiate deals with landlords and thereby reduce overheads. While there are signs of some landlords opposing the use of CVAs, or imposing strict conditions, if agreed they do at least guarantee some continued revenue, albeit reduced, rather than landlords being left with empty property on their books.

A number of developments that may also help the future of retail

Recently, a think tank, The Centre for Cities, has argued that city centres should be diversified to include more offices and housing arguing that they are currently too reliant on retail, but also that if retail is to survive it needs customers to sell to, such as those working and living nearby.

The UK Treasury is also working on a fairer tax system to help High Street retailers, based on scrapping business rates and replacing them with a “turnover” tax.

In the US, a Supreme Court ruling has allowed states to collect sales taxes from retailers that aren’t physically based in the state, meaning customers will likely have to start adding taxes to their online shopping bills, while on June 19 in Belgium the European Commission held a conference to examine the future of retail and what can be done to help with the current challenges.

It is too soon to say what impact any of these developments will have on physical and online retail but equally, it is too soon to write the obituary for physical retail.

 

2 Responses to “July Key Indicator: this month we investigate the future of Retail”

  1. Chris Grunsell

    Hi Tony,
    The weakness of the pound meaning that goods sold by retailers have reduced their gross margins, contributions to overheads, and net profit, I believe to be the No 1 factor, particularly given intense competition for customers who have plenty of choice.

    We encourage all our clients to focus upon understanding their gross profit margins and working to make as many other costs variable rather than fixed, so riding out difficult times, which ultimately will improve once Brexit is settled one way or another.

    Always happy to talk over a finance deal and help get profts into a company’s bank. By the way, we practice what we preach and have no fixed cost to our agreements that can be mutually terminated at anytime.

    Cheers
    Chris Grunsell
    07709906677

    Reply
  2. Tony Heywood

    The retail has always been, like any other industry, the survival of the fittest. Only as everything in the 21st century it is moving much faster and you need to innovate quicker to survive.
    British High Street institutions such as Woolworths, C & A and BHS have gone but John Lewis and Next are still expanding. JJB Sports, MK One and Tammy Girl are no more but JD Sports, Sports Direct, Zara and Primark are opening new branches and on the acquisition trail.
    The struggling retailers find it very easy to cast blame and make excuses but business rates have always been linked to rents and many retailers (and casual dining groups) recklessly expanded and took on new leases in a dash for growth. The Landlords may have taken advantage of those desperate to add locations but the retailers signed of their own free will with presumably insufficient due diligence.

    Reply

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