As always at an LDC Summit there was a panel of experts to discuss what the data means in real terms for people running, owning or advising businesses within the Retail and Leisure sectors. This year we were joined by:
Emma Simpson, BBC Business Correspondent (Chair)
John Upton, Managing Director, Leon
Darren Williams, Country Director, T2 Tea
Jat Sahota, Head of Commercial – Retail, Land Securities
Sophie Michael, Head of Retail, BDO LLP
Oliver Chamberlain, Partner, Hogan Lovells LLP
Below is a summary of the commentary from the panel discussion post the presentation of the data.
What came out of the data for you?
It shows how one size does not fit all and the depth and breadth of what the report covered was very impressive. The level of activity in the market is something that most people probably do not appreciate until they see the LDC numbers. There is still a strong appetite for expansion by a number of retailers and operators.
For occupiers, 2016 saw rents rising in the desirable areas with tough competition in places. The impact of business rates increases is significant and for Leon it will add £350k of more cost which means finding £1.5m more sales! There is real concern in an industry that is very people focused and has relied upon a large number of foreign workers as to what will happen post-Brexit and the uncertainty that the current foreign workforce has. The national sentiment seen through the media is not helping. Expansion is very much on the cards for a number of smaller brands especially in London, but London is a bubble as the issues for retail are clearly seen in certain regions of England and the data illustrates this.
The slowdown pre-Brexit that the LDC data shows was very clear, but post-Brexit things have picked up within the investment market, helped by the devaluation of Sterling. Retail parks have very much become the convenience destination for many shoppers and increasingly shopping centres are becoming experiential destinations. Single ownership schemes have the ability to curate the experience versus the organic development of the high street. Shopping centres are also increasingly anchored by cinemas, restaurants and hotels where shopping is not the core purpose as it once was.
The slide below (See Figure 1) is particularly interesting as it counters the general view that the internet kills shops. It also shows that with more partnership and sharing of data, real trends can be better understood especially the online and instore dynamic.
Figure 1 – Percentage of internet sales vs vacancy rates in GB, 2008 – 2016 (Source: LDO)
What are consumers up to?
There is a lot of ‘noise’ around inflation and what will happen to discretionary spend with a common view that consumers will tighten their belts and the BDO sales tracker data is showing this with negative sales seen in 2016 (see Figure 2 below). Consumers have relied on food and fuel deflation in the past and this has now gone. Wages are not increasing as fast as inflation. Consumers are increasingly cautious and this is seen by the slowdown in sales of large ticket items such as high-end electrical goods. Retailers need to have a laser focus on product, quality and range.
More is now spent on eating out and this is all part of the move from product purchases to experiential purchases especially when the latter is often cheaper. The ability to wobble consumer sentiment has massively increased in the digital age as connectivity between people is so high. Bad news and bad experiences travel far faster than good news and good experiences. You therefore must work hard to engage and serve the consumer, after all, we are humans with social and emotional needs.
With such prolonged and significant growth in food & beverage outlets is there not a bubble which is about to burst?
Competition is fierce especially when you add into the mix the likes of Ikea and M&S Food To Go alongside the traditional players. There will be consolidation which has already started and operators are very cautious and very focused on delivering value and choice to their customers by offering different price ranges. But to what impact on profitability in the long run?
Operators are severely challenged as the consumer is more unforgiving than ever before. They are in the driving seat. F&B propositions need to move on quickly like fashion or else you get left behind. You need new formats whether you are a new brand or an existing brand.
Food delivery is a big challenge operationally but also with regards to customer service. Who is more important, the 30-minute home delivery order or the family of four sitting at the table in the restaurant? It is also very disruptive when you see so many food couriers coming and going.
Lease lengths are reducing as everyone is realising that it is impossible to see the future. Everyone needs to be looking for opportunities and adapting to them accordingly. Flexibility within leases is also rising with monthly rather than quarterly rent payments, and deal lengths are halving from 12 weeks to 6 weeks as operators want to sign and move quickly. A reflection of how fast the market is changing.
The view of what success looks like has also changed from being one all about store numbers to one about profitability and EBIT. Retailers and operators must exploit the experience to compensate for the increased costs. A store can never be boring it must be a place to dwell, feel at home and be a connection to the brand. Financials are a challenge as operating profits have been falling for the last 12 years as a result of more channels equalling more cost. Many stores, be it for food or traditional shopping are no longer fit for purpose.
Are there just too many shops?
The LDC figures of vacant shops (currently 46,736 of them) and the number that have been empty for more than three years, would suggest a simple yes, yet we continue to build more and more shops be it as shopping centres or as retail parks. Sometimes these are new developments in new locations or extensions of existing schemes. The answer really is that we have too many shops in the wrong locations and of the wrong format. Napoleon’s cry that the British were ‘a nation of shop keepers’ was true but those shops he referred to are no longer fit for the environment of brands, experiences and multi sales channels in-store and online. Most recently, the decline of comparison goods shops mentioned in part 1 of this blog along with newsagents and others perfectly illustrate this.
Traditionally, long leases have also had an impact, often they would be 15-25 years in length whereas now they are more like 5-10 years. Collaboration between retailers is also creating additional over supply as increasingly there are shops within shops. Timpson’s within supermarkets is a good example or coffee shops within bookshops.
The challenge for investors is the crystal ball challenge of trying to understand the relevance and resilience of centres in the future.
So, what is the future for the High Street?
The increased occupancy rates show how the British high street is changing and adapting but clearly not everywhere. Often one forgets that the health of a high street is a mirror of the local economy. Without people, jobs and money you have no need for many shops as they are discretionary spend unlike supermarkets and convenience stores.
It is also interesting to note that some of the big box retailers are now opening stores on the high street as increasingly stores are important marketing channels and create that brand connection alluded to earlier. Other good news is that retail spending is forecasted to increase, but to capture it you will need to be innovative in the locations that consumers consider as destinations or ones that serve their convenience needs.
Change is accelerating and food delivery for restaurants is one recent case where sales via these channels in the case of Leon have increased fourfold and now account for 7% of sales where it was just 1% a year ago. The right mental approach is key and that means going from ‘we can’t’ to ‘why can’t we’!
Investment in high streets will continue to be a challenge due to fragmented ownership, the lack of curation of the overall area, parking provision and costs as well as making sure that investors will get a return on any investment they make. Proactive engagement, understanding and partnerships from local and national government is critical to this.
Figure 3. Considerations for occupiers (Source: LDC)
Figure 4. Considerations for landlords and investors (Source: LDC)
Figure 5. Considerations for local and national Government (Source: LDC)
What must we all be doing?
Looking ahead, people will not only need a spoken language but also a technical language. Changes that we thought unimaginable will come sooner than we think, whether it is driverless cars or robots and we must, therefore embrace these and not fear them. The younger generations live through their phones and so retailers and leisure operators must work out how to be part of that communication.
Ultimately margin and price management will be the acid test of success and these will be driven by establishing true partnerships with suppliers, customers and staff on values that resonate with these stakeholders.