_Ten Key Structural Failings of the UK Retail Industry
The well-documented issues - inflation, business rates and minimum wage increases – remain factors but deeper structural flaws are undermining the UK retail sector.
Stephen Springham, Head of Retail Research at Knight Frank said: “We have identified Ten Key Structural Failings of the UK retail industry. Denial of these is not an option; the UK retail sector is neither dying nor is it in terminal decline, but it is in need of fundamental change.
“Intervention is desperately needed to right the structural wrongs of the past and solutions need to transcend slashing rents, closing stores and cutting costs, this is merely sticking plasters on much deeper wounds. Only by proactively addressing the Ten Key Structural Failings will the retail market be able to move forward - and finger pointing between retailers, landlords, central and local government is an impediment to this process, the responsibility must be a collective one.
The Ten Key Structural Failings of the UK Retail Industry reveal mistakes that have been 30 years in the making but which are now preventing the recovery of the retail market.”
The Ten Key Structural Failings are:
1. Oversupply - there is too much retail floorspace in the UK: With national vacancy rates currently around 12.5% and allowing for 5% for ‘churn rates’ and market tension, this would imply oversupply of around 7%-8%.
2. Historic over-expansion – retailers opened too many stores: With widespread new development came more opportunities for expansion, with many retailers embarking on highly ambitious programmes of opening 30 to 50 new stores a year. The chase for market share in the short-term overrode any considerations for longer-term profitability and business sustainability.
3. Miss-management – retailers have not been proactive in weeding out under-performing stores: Every retailer has an ‘ugly tail’ in its portfolio, stores that are under-performing and/or loss making, typically 10%-30%, but often as much as 50% of the estate. Retailers have been turning a blind eye to these under-performing stores.
4. Rental / property cost inflation – property costs continue to rise faster than retail sales: Retail rents have grown at an annual average rate of 4% since 1981. If full occupancy costs are factored in (e.g. rents, rates, service charge, insurance), total property costs have accelerated at a faster rate than most retailers’ sales.
5. Wider cost inflation – all retail costs are rising faster than retail sales: Operating costs, including wages, salaries and utilities, are growing at a faster rate than retail sales. Overall retail sales values grew by 4.2% in 2018 but many retailers would have seen far lower growth than this, while all are likely to have seen both wages and utilities increase by 5%+.
6. Rise of online – e-commerce is about so much more than store-based sales gravitating online: Physical retail losing share to online glosses over the huge structural challenges that retailers are facing. The rise of online and the need to embrace multi-channel has resulted in collateral damage to many store-based retailers by losing focus, the complexity of adding online to existing business models, the cost of developing sustainable online platforms and capital expenditure being channelled away from core store-based operations.
7. Over-geared balance sheets – private equity has a lot to answer for: The link between retail failure and private equity ownership is proven. The traditional private equity model should have no place in retail. It is no coincidence that the vast majority of operators that have launched a CVA or gone into administration are private equity backed, while others such as Debenhams bear onerous debt from historic private equity ownership. Retailers need to be run as retailers, by retailers, not as cash cows by financiers.
8. Brand Devaluation – retailers have sacrificed ‘brand equity’ for sales and market share: Many retailers have under-minded their own ‘brand equity’ with their compulsion to offer constant promotions and discounts, the worst manifestation being Black Friday.
9. Under-Investment – neither retailers nor landlords have made appropriate and consistent levels of investment in retail stock: Retail is capital intensive and most retailers have not allocated sufficient capital to maintain the upkeep of their stores, while landlords, especially the institutions, have not proactively asset managed their schemes over the years, resulting in many high streets, shopping centres and retail parks looking dated, tired and in need of refurbishment.
10. Complacency – retail has been taken for granted for too long: Retail is a sector that has historically delivered on every count, it is still a boost to GDP and accounts for 5% of national GVA. UK retail remains the country’s second largest employer and contributes £7billion in business rates to The Treasury and is a major benefactor to the UK economy, yet receives precious little support from the government in return.
Despite all expectations to the contrary, the UK consumer is continuing to spend. There is no evidence to support the notion of a consumer slowdown, in wake of the EU referendum. Official data from ONS show that retail sales values in 2017 were up 4.5%, significantly above the 10-year historic average of 3.0% and the highest level of growth since 2004.
In 2018 retail sales values grew by 4.2%, with volumes growing by 2.8% year-on-year. Expressed another way, real retail sales growth last year was double that achieved by the wider UK economy (1.4%).
Stephen Springham concluded: “Online is blamed as the driving force behind distress on the high street. However, this is a simplistic view which doesn’t do justice to the complexities of modern-day retailing, where the dividing line between online and physical stores continues to blur, almost to the point of no longer existing. Most physical retailers are now multi-channel, even those that have been in a state of distress. They cannot be victims of a channel they are embracing.
“E-commerce is undoubtedly a catalyst to huge structural change across retail markets but is not single-handedly responsible for all the problems we are currently witnessing.”
To obtain a copy of the report, please contact Stephen Springham at Stephen.Springham@knightfrank.com.
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