Bigger stores, flexible rates and rents - there’s plenty to do to keep physical stores viable in a multichannel world.
With a seventh of high street shops now empty, swathes of secondary and tertiary locations are at risk of turning into ghost towns as they become ever more polarised from primary destinations.
Despite vacancy rates marginally dropping in February to 14.2%, according to market research firm Local Data Company, the number of empty shops on the UK high streets remains worryingly high. The fashion industry has this year already seen the collapse of 121-store young fashion chain Republic, which plunged into administration
in February before being bought out by sportswear giant Sports Direct.
And the economic gloom looks set to continue, with financial monitoring firm Company Watch predicting in March that another seven retailers could go bust in the next month.
Matthew Hopkinson, director of Local Data Company, says the recession has sped up what would have happened naturally and that we are now beginning to see a stabilisation of vacancy rates, but adds that some areas are doing better than others. “Anyone who sits in the shadows of one of the big beast shopping centres definitely suffers,” says Hopkinson, flagging up mid-size towns such as Dudley and Stockport.
Miles Dunnett, head of asset management for property developer Grosvenor Liverpool Fund, agrees and says town centres need to offer more than shops: “In their day-to-day shopping, people want something convenient and if they want something more extravagant then they’ll go to one of the dominant city centres, but you’re not going to do that all the time. [It is] the mid-tier places that are losing out.”
This polarisation is having an adverse effect on the retail offer in towns bordering larger shopping areas, with vacant units becoming prevalent. “Many of our secondary-tier towns continue to contract due to lack of demand from the retail sector,” says Paul Faulkner, director at commercial property adviser GVA.
“As a direct result [of the internet], retailers’ property requirements have changed, with the majority of national retailers saying they can trade from fewer larger stores without having a negative impact on sales,” he adds.
This trend is visible across both shopping centres and the high street. David Atkins, chief executive of shopping centre owner Hammerson, says the performance of each store has become more important and retailers are now “rightsizing” their portfolios. “We will see a reduction of floor space and store numbers and the watchwords for retailers are ‘fewer, bigger, best’,” he says, adding that this trend will continue until consumer confidence has improved.
Some landlords are being more flexible in order to attract retailers to mid-sized towns, with some offering turnover-linked rents. “Retailers have used this and availability to their advantage on new stores or relocations in mid-tier towns when trying to secure shorter lease lengths or tenant-only break clauses,” says Faulkner.
Landlords are having to be more lenient, with some retailers calling for rent reviews to help underperforming stores. In March, Sports Direct became the latest to ask for turnover rents on its newly acquired Republic stores when it offered landlords 15% of stores’ turnover to cover rent, service charges and rates.
Yvonne Court, partner of cross border retail services at commercial property broker Cushman & Wakefield, says: “Landlords in shopping centres control the space and are able to respond by offering shorter leases and perhaps more turnover leases including the attribution of non-store sales to stores or more flexible leases. In the case of high street landlords, ownerships are sometimes more fragmented - it could be individuals or institutions owning the properties, who are less able to respond so easily.”
Paul Turner-Mitchell, owner of Rochdale young fashion indie 25 Ten Boutique, says: “Landlords are more willing to work with retailers, whether it be monthly rents instead of quarterly or a period of grace. But they need to act earlier and not when it gets to a critical stage.”
Rents are just one cost retailers have to contend with, however, with service charges and business rates also a major issue.
Diane Wehrle, retail insights director at footfall monitoring service Springboard, says: “For many retailers, it’s business rates rather than rent that is the issue and can represent 40% of the occupancy cost. And for some retailers - those who are not trading strongly - this will mean they might choose to vacate.”
Turner-Mitchell adds that bricks-and-mortar stores have to pay around 10 times the amount of business rates than that paid by online retailers for their distribution centres. “The business rates structure is flawed in the age of omnichannel retail,” he says.
“Unless we are proactive rather than reactive then things won’t change. As time goes by, more damage is being done to the high street.”
Working collectively to ensure the retail offering is strong is something Andy Brian, retail expert at Yorkshire-based law firm Gordons, advocates. “It’s a well-worn point but a huge responsibility rests on the shoulders of local government and communities to ensure the high street remains a destination for consumers,” he says.
Despite some worries that as internet sales increase there will be less demand for physical stores, Wehrle believes the rise of click-and-collect will benefit the high street.
“As pure-plays recognise that consumers are becoming less willing to pay postage, that it’s not always convenient to have goods delivered and also that while online spend is important, a large proportion of spend is still derived from stores and so the presence of their brand in the high street is important to achieving success online,” says Wehrle.
Therefore the retailers that survive will be those that successfully embrace multichannel and are located in high streets with a shopper profile that most closely matches their own.
Wehrle adds: “The well-managed high streets with a strategic vision and a successful approach to enhancing the centre will prosper.”