26th February 2018
Figures from the Office for National Statistics show that retail sales growth was broadly flat at the beginning of 2018. The Retail Sales Index, which measures the value and volume of retail sales in Britain on a monthly basis, is an important indicator of economic activity. Despite existing market challenges, the UK retail market remains a significant sector worth in excess of £350billion per annum.
The current figures for online retail sales in the non-food sector show an upward pattern of growth. The trend seems clear: continued growth in online sales and market shrinkage in physical shops.
So what does this mean for retail clients, property investors and developers, both legally and in terms of their future growth trajectories and investment plans? Different retail sub-sector markets have developed.
Out-of-town retail parks and shopping centres designed around anchor tenants are reconsidering their market: what will replace ‘anchor’ tenants when they exit the space? It was recently reported that at least 20% of existing UK retail space could close over the coming years in the face of rising costs such as business rates and wages set against declining sales from large physical stores. With the prospect of insolvency and reduced trading by anchor tenants, more progressive solutions to retain and grow underlying commercial property assets in this sector are necessary.
It is notable that shopping centre owner, Hammerson, took back a House of Fraser site at its Highcross shopping centre in Leicester last year. The top floor has now been turned into an extra car park, prime retail space is being taken over by Zara, and the former service yard is now a street of restaurants. Leisure and retail service provision is competing with traditional A1 retail use.
A decline in high street trading in the 1980s and 1990s coincided with an increase in out-of-town retail shopping centre development. Successful high streets are now having to reinvent themselves in ways that appeal to millennial consumers (local food and retail products). This includes providing service- and leisure-driven brand experiences in restaurants and bars, supplemented with mid-tier takeaway food and artisan type products.
The aim is to service both physical and online demand. Use classes may need to merge to enable crossover in planning to facilitate certain high street changes and drive economic growth. The emphasis for standard millennial consumers centres on ‘likeable’ experiences rather than hard products. So well-sourced, millennial style, mid-tier restaurant chains like Wagamama are in a zone of growth. But those offerings which have overextended with badly managed franchises face brand damage or destruction in an increasingly competitive, online and discerning sector.
Many mid-tier retail clothing brands are developing their online presence alongside physical shop closures and a rationalisation or conversion of physical stores to showroom use. Showrooms may be used to enable physical access to products with limited store inventory enabling actual purchase through showroom visits and subsequent online ordering. Full inventory is held off-site in less expensive out-of-town industrial distribution centres (B8 use) thus improving cost base, productivity and margins.
The luxury retail clothing sector operates within its own sphere, both as an online product and as a physical bespoke retail experience. It limits its physical presence to blue chip locations within major national and international cities where space is at a premium and competition for exposure and brand presence remains high. This includes out-of-town discount luxury retail shopping centres (e.g. Value Retail’s Bicester Village/Kildare Village concept). Visiting A list space remains attractive to many luxury consumers and tourists in major cities and sits within a specialist market.
Alongside this, many online luxury brands are increasingly aware of the need to use, acquire and control online sales technology to encourage customers to visit their physical stores. The reason for this is retention of brand value and its outsourcing. The danger of losing control of brand distribution to online distribution networks controlled by third parties is a relevant factor for luxury and, indeed, all products that are invested in the online retail experience.
As physical shops close, a brand grows increasingly dependent on online presence. By failing to invest in ownership and retain control of online distribution networks, a brand risks losing control of its access to market and even its overall value.
French couture house, Chanel, recently announced its intention to ‘go digital’ by taking a minority stake in online retailer Farfetch, a move which could include an app that allows customers to mark their preferences and sizes online before entering a store. In the last year, China’s second biggest e-commerce company, JD.com, has invested nearly $400million in Farfetch. The Arcadia Group is also under review as it has notably lost millennial market share since 2012. However, reports of talks of a sell-out to Chinese textiles giant Shandong Ruyi (which already owns controlling shares in luxury brands Sandro, Maje, Gieves & Hawkes, Kent & Curwen and Bally) are being strongly denied.
Across the water in the US, boarded up stores have become increasingly common. The consumer habit is changing its tick box. The central point seems to be that the market is saturated with physical retail units and shrinkage is necessary. In the US it is notable that although retailers do not plan to abandon physical stores altogether, many see them as being on equal and diminishing terms with online operations. Therefore it seems increasingly likely closures will continue both here and in the US.
The property and legal market must prepare and consider its response to the needs of a rapidly changing and sharply differentiating retail sector, which will present opportunities for growth and re-alignment. It will become increasingly necessary to review future development proposals and to negotiate and re-gear existing physical retail space – both in terms of planning usage and spatial needs of occupiers – in order to identify and maximise returns from commercial property in a way that captures and complements the growth trajectory and changing demands in this sector.
Thrings provides advice on all aspects of retail property, industrial warehousing, head and regional office requirements, rent reviews/re-gearing, investment/refinancing, corporate merchandising and IP requirements and employment issues. For more information, or to discuss any aspects of this article, please contact Fionnuala Nolan or another member of Thrings’ Retail team.