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10 structural failings the UK retail industry must address

Slashing rents and closing stores are “merely sticking plasters on much deeper wounds”, a new retail report from Knight Frank has found. Instead, the industry must take a collective approach in addressing 10 structural changes to be able to make progress. 

“Closing stores and slashing rents is a bit of a knee-jerk reaction, and if a retailer has deeper issues, then closing a few stores isn’t going to solve those issues,” head of retail research at Knight Frank, Stephen Springham told Drapers. “These practices are just sticking plasters on much deeper wounds. There is no silver bullet for the retail market, but these alternative scenarios take a broader view than just slashing rents.”

Denial of the 10 structural failings of the retail industry, identified in the Price of Change report, is “not an option” said Springham. 

Knight Frank’s 10 structural failings of the UK retail industry

  • Too much floor space: National vacancy rates are currently around 12.5% – implying an oversupply of 7%-8%.
  • Legacy stores: As the market boomed, many retailers undertook highly ambitious programmes, opening 30 to 50 stores. Now those with a large legacy portfolio are suffering the consequences of chasing market share as the market becomes increasingly volatile.
  • Failure to consolidate: Retailers have been turning a blind eye to their underperforming stores. Knight Frank found that stores making 10%-30% losses often make up as much as 50% of store estates.

“Retailers should have been weeding out their underperforming stores on a rolling basis,” Springham told Drapers. “Before the [2008] financial crash, retailers, by and large, would just blindly renew their contracts. Company voluntary arrangements [CVAs] are now them effectively trying to extricate themselves from mistakes of the past. If they’d done it gradually, it would have been less drastic.”

  • Rent inflation vs sales growth: Rents have grown at an annual average rate of 4% since 1981, and, factoring in occupancy overheads, total property costs have accelerated at a faster rate than most retailers’ sales. 
  • Cost crunches: It is not just property costs – retail expenses such as wages and utilities continue to grow at a faster rate than retail sales. Overall retail sales values grew by 4.2% in 2018 but many retailers would have recorded far lower growth than this, and the report found that all are likely to have seen both wages and utilities increase by more than 5%.
  • Private equity influence: The report found that most operators that have launched a CVA or gone into administration are backed by private equity or, like Debenhams, bear onerous debt from historic private equity ownership. Retailers should be run by retailers, the report maintains. 

“Private equity is the root of a lot of pain among retailers, and the epitome in terms of how not to do it in retailing – expanding aggressively, racking up a load of debt and then passing it on to someone else,” said Springham. “It’s too much of a coincidence that those who have entered and who are entering CVAs and administration have had a history with, or are owned by, private equity.”

  • The threat of online: Many store-based retailers have lost focus as a result of the complexity of adding online to existing business models. The rise of online and the need to embrace multichannel have resulted in capital expenditure being channelled away from core store-based operations.
  • Brand devaluation: The Black Friday effect. Many retailers have undermined their brand value for customers by constant promotions and engagement with industry-wide discounting events such as Black Friday. 

Retailers simply copying others’ promotional activity is a dangerous strategy, Springham explained: “It is terrible to see retailers on constant promotion because it does damage to their brand. If they aren’t confident in their own pricing, what message does it send to the people they’re most dependent on – customers?

“Black Friday is by far the worst manifestation of this. They have created a drug now, so consumers expect it.” 

  • Reluctance to invest: Neither retailers nor landlords are investing enough in retail stock, the report found. Most retailers have not allocated sufficient capital to maintain the upkeep of their stores, and landlords have not asset-managed their schemes proactively. This has resulted in many high streets, shopping centres and retail parks looking dated and tired, Springham said. 

“Store-based retailers have made the change to be multi-channel, but this has deflected attention and investment away from their stores,” said Springham. “They’ve spent a lot of money beefing up their online capability, but not their stores.” 

  • Lack of support: While the retail sector accounts for 5% of national gross value added and contributes £7bn in business rates to The Treasury, the Price of Change report says it receives little support from the government. 

“One area where there is universal agreement from landlords and retailers is that the business rates regime isn’t fit for purpose,” said Springham. “The relief for those with a value of less than £51,000 is the wrong end of the problem. 

“It’s the top end that needs help. Debenhams is going to face a £2m rates increase just for its Oxford Street store, which isn’t great in its current context.” 

Retailers, landlords and the government must now work together to implement the report’s changes, argued Springham: “It’s collaboration, not conflict. It’s not the first time that’s been said, and I look forward to the day when no one needs to say it. Those that don’t get involved are missing out and potentially putting themselves at more risk.”

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