‘In the balance’ – LDC’s report on what has happened in UK retail and leisure in H1 2016

Last week LDC held its 14th bi-annual retail and leisure summit in London at the offices of Berwin Leighton Paisner. How time flies since the first summit back in 2009 which for those of you who remember was when the retail world got its first recession shock with the closure of 809 Woolworths on one day in January.

Now that the headlines have subsided I thought it would be interesting to collate the commentary from our expert panel so ably chaired by Emma Simpson of the BBC. The panel consisted of Vicky Fowler (BLP), Mike Jervis (PwC), Ben Dimson (British Land), Raefe Watkin-Rees (Pizza Hut) and Terry Duddy (non exec at Hammerson and Debenhams)

our-panelist-14th-retail-leisure-summit

The main story from the data which appeared in the press release was;

The delicate balance between shop openings and closings, new builds and demolitions, slowed the year-long improvement in vacancy in the first half of 2016, new research from the Local Data Company (LDC) reveals in its half year report titled ‘In the balance’.

Closures exceeded openings by 1,997 in the period January to the end of June. In the second half of 2015 openings had been more numerous than closures by 335 in Great Britain. The dramatic turnaround was the result of openings falling by 15%, while closures dropped just 5%, as 22,801 shops closed in the first half, weighed against the 20,804 that opened.

Demolitions and re-uses of retail premises exceeded the supply of new buildings, so the percentage of empty units, the vacancy rate, actually fell until right at the end of the half – at which point it just began to tick upwards.

fig-4-retail-summit-report-h1-2016Figure 1. GB shop vacancy rate 2008-2016

 

The LDC report, which also compares recent results to those over the last five years, also shows that:

  • England has the lowest national vacancy rate at 11.3%, followed by Scotland at 12.1% and Wales at 15.1%
  • Retail parks have gained more units than any other type of location
  • Shopping centres have made the best improvement in vacancy rates – in coming down from the highest peak of any type of location
  • Town centres have proven remarkably resilient to change in overall shop numbers since 2011
  • High street health index scores show retail parks and small towns in the pink in comparison to larger towns and shopping centres
  • Large towns/cities (>400 units) have the highest vacancy rate at 12.3% with medium sized towns (200 – 400 units) standing at 11% and small towns (<200 units) at just 8.8%
  • Burslem (Stoke on Trent) has the highest vacancy rate at 33.3%
  • Beaconsfield is the top performing town by occupation with no vacant units
  • The North East has the highest percentage of long term vacant units (persistent vacancy)
  • London is the only region to have lost in numbers of independent shops and the only one to gain in numbers of chain stores over the past half-decade
  • Comparison goods stores selling finished non-food products have fallen in number across the whole five-year period – split evenly between multiples and independents
  • Food & beverage chains have driven significant growth in the multiples’ sector
  • Independent service providers such as barbers have driven growth in town centres while multiples such as banks have plunged in number
fig-31-retail-summit-report-h1-2016Figure 2. Openings and Closures of retail and leisure units H1 2016

 

My commentary was that “Growth slackened significantly in the half year leading up to the referendum at the end of June, taking the steam out of the gentle improvement in vacancy that has improved by 2.3% since 2011.”

“Since the end of June we have seen the vacancy rate in leisure outlets inch upwards. Whether this will be just a twitch in the statistics or the beginning of a long term reversal will become clear over the coming months. For example, the 23% net growth in restaurants since 2010 is unlikely to continue. Business, government and the media are all sniffing the air and scanning the horizon for any piece of news that might tell us what happens next.

Of note is the structural change in the number of retail units by location type in the last five years with a net loss of over 5,000 units but with out of town retail parks growing by nearly 1,300 new units. Not only how we ‘shop’ but where we shop has changed dramatically.”

“This new report sets the benchmarks for developments on the high street for the coming years which will see the UK exit the EU and strike out on its own. Increased costs for retailers coupled with fierce competition and over supply of shops is likely to see increased levels of distress and failure among retailers with survival of the fittest being the order of the day.”

Retro.jpgMetro Retail Park in Gateshead (Source: LDC)

The experts’ view

More importantly it is what the panellists said that is of most interest as their combined knowledge and diverse experience is something you rarely see in one room even at the most expensive conferences!

In no particular order I have highlighted some of the key statements made;

  • Consumers are spending rather than saving
  • Insolvencies (My Local, BHS and Austin Reed) have happened and the number of shops going out of business in 2016 (1,200 affected units) is higher than in 2015
  • The winners are the discounters (Wilko, JD Sports, B&M etc)and many of these winners do not even have well developed internet sites so online is not always key.
  • There are losers of which clothing head the list and in part this is now because of ‘fast fashion’ where there are four seasons instead of two and retailers such as Zara source from Iberia whereas others such as M&S source much further afield which makes it harder and more expensive.
  • We are still adding retail space and 2.5m sq. ft. is due to come online in London alone in 2017 with growth also happening across other major cities in the UK.
  • There are lots of headwinds out in the market of which BREXIT is but one which is likely to result in more restructuring.
  • Polarisation of places will continue both geographically and between the various landlords. British Land’s current portfolio vacancy rate is just 1%.
  • Landlord’s need to provide the very best space and services where accessibility, landscaping, service provision, events and helping occupiers with data is what is required.
westfieldWestfield Shepherd’s Bush, London (Source: Flickr by Leo)

Eating out

  • The growth in leisure is significant and more of a focus these days than fashion retailers. There is an increased focus on this by landlords and British Land has grown its F&B provision from 2% to 8% and expects this to double.
  • Cinemas have also been a key part along with independents who can provide services such as nail bars and health & beauty.
  • 89% of internet transactions involve interaction at some point with a store. Click and collect continues to grow and increasingly consumers browse in store and complete the transaction online. The store is very much at the heart of young people’s purchase decisions. The modern store has a much broader role than in that past that encompasses brand, local awareness and complimenting the online offer.
  • Eating out has seen a significant growth (in excess of 30%) and consumer habits and choices have changed as a result. Street food and delivery aggregators (Deliveroo, Uber Eats, Just Eat etc) will create more growth.
  • Catering in shopping centres works very well for all – shoppers, landlords and operators.
  • The race for F&B space is being driven by Private Equity. Like for like sales growth was 2.5% for most but is now less than 1%. The growth in more earing outlets is just taking market share rather than creating real growth.
  • The current levels of consumer confidence and preferences are putting a squeeze on established operators as more and more new entrants arrive.
  • Profitability is under severe pressure as a result of rental inflation, business rates inflation, living wage and BREXIT. Many F&B staff are EU citizens!
  • Change is faster than ever before and this is likely to reduce the average rebrand life down from 7 years.
  • Restaurant numbers will stagnate going into 2017
Pizza Hut.jpgPizza Hut in Wallsend (Source: LDC)

The ‘high street’

  • Contrary to many views the high street has been very resilient and is responding to the changes required.
  • The amount of retail space has grown every year for the last 15 years whilst online has also grown and it is this that has created oversupply and vacancy
  • There is no such thing as the death of the high street, it is just changing.
  • For change to happen there needs to be increased flexibility in what can be done and this is where planning must change
  • Change is happening within planning especially within permitted development between A1 to A2. In addition, we have seen betting shops and pay day loan shops move into the sui generis category
  • Offices to residential has been curtailed by the introduction of a further test and this is where an understanding between churn and impact in change of use is key.
  • Lease lengths continue to reduce with most leases now being 5-10 years with a break. The closure of BHS for some locations, such as Portsmouth, was seen as positive as it enabled something new and more relevant to be created.
  • Standalone tertiary locations have seen a significant drop in occupancy
  • There is a drive for town and city centre living but for some reason not in Wales and this is perhaps why their town centre vacancy rates are much higher than England and Wales
  • We will see a big impact when the millennials enter the work force in 2025 as they will be 75% of the workforce and like gadgets and urban areas.
city-sunny-people-street.jpgRegent Street, London (Source: pexels.com)

Retailers

  • Chains are opening bigger space in bigger centres at the expense of smaller locations.
  • The regional variations is a concern for both landlords and occupiers with regards where to invest and for how long.
  • The fact that independents are improving is a surprise to many but increasingly an important consumer area of interest.
  • The consumer is doing better than ever before but why is retail not reflecting this? The reason is that retailers are no longer getting the same share of spend as consumers choose to spend their money on experiences – beauty, holidays and food. Money is coming out of retail and going elsewhere.
  • Online is not growing incremental sales but retailers still have to invest in it
  • BREXIT uncertainty and the impact on Sterling will have a big impact on supply chains where profits could be wiped out by these changes.

Stores

  • Further rationalisation of store portfolios will happen. For example, 50% of John Lewis sales are now online.
  • There will be more digitisation of stores
  • The drivers of vacancy will be seen through upcoming lease expiries, business rate increases, monthly rents and CVAs.
  • Fewer stores but ones that are in the right place and have been reimagined
  • These days 400 restaurants is too many – 300 is about right to cover the UK
  • Shopping centre opening hours are increasing to accommodate the rise in the F&B offer and this will impact the high street.
Argos.jpgArgos in The Arcades Shopping Centre in Manchester (Source: LDC)

 

So 2016 is likely to be OK but a bigger question lies around the head winds alluded to above for 2017. Will we see the F&B bubble burst? Will we see the revival of the CVA or worst still company failures? Or will it be business as normal but with the ongoing structural changes that have been playing out at a faster rate each year since 2009 when things fundamentally changed. Welcome to the new norm! Stay tuned for LDC’s monthly updates and the 15th summit will be in February 2017 with LDC’s Scottish Summit and Welsh Summit taking place in December and January respectively.

Links to the interviews with the panel and my summary can be seen here:

Matthew Hopkinson Video Summary: LDC’s 14th Retail and Leisure Summit

[Video] Retail opinion from our expert H1 2016 Retail and Leisure panel

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