Store-based profit margins for UK retailers have more than halved over the past eight years, new data has shown.
Over the past eight years, pre-tax margins at the top 150 UK retailers nosedived from 8.8% in 2009/10 to 4.1% in 2017/18, a new report by global professional services firm Alvarez & Marsal (A&M) in partnership with Retail Economics shows.
The drop has been driven by rocketing operating costs, inflexible legacy lease structures and changing shopping habits. Operating costs rose by 2.4% in 2018, and by 10.8% over the last five years, the Retail Economics Retail Cost Base Index shows.
Large multiple retailers in the UK now occupy up to 20% more store space than is necessary and financially justifiable. This is despite the consistent closure of stores over the past six years for multiple retailers, amounting to a net loss of more than 7,000 units. The largest loss of 2,481 stores was recorded in 2018 alone.
Mid-market fashion retailers have experienced around six times the number of net store closures than their value and luxury counterparts.
Business rates remain a significant burden for those retailers overexposed to property. Retail Economics estimates that business rates cost the retail industry £7.5bn in 2018. This is on top of consecutive wage increases with each hike in the National Living Wage estimated to cost the retail industry around £1.5bn per year.
The report also detailed that the demand for UK retail space has hit its lowest level since 2007. Vacancy rates across high streets (11.5%), shopping centres (13.6%) and retail parks (7.1%) all rose in the latter half of 2018 on the previous year. Retail park vacancy rates are now at their highest level since 2014.
Retail Economics estimates that approximately 37,000 units lie empty across high streets, shopping centres and retail parks in Great Britain, and almost one-third (11,600 units) have been unoccupied for more than three years.
However, the report found that physical store browsing remains an important part of the consumers shopping experience – still accounting for 80% of total retail sales, and expected to remain at 65% over the next five years.
Millennials and Gen Z groups value bricks-and-mortar shopping: a quarter of 16 to 24-year olds visit a flagship shopping destination at least once a week. This is compared with 45-to-54-year olds, who visit on average just once every six months.
Managing director and head of restructuring Europe at A&M, Richard Fleming, said: “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.”