Traditional retail can survive but needs to press the reset button on rents, rates, floor space and the retailer-landlord relationship

The recent acquisitions of Jaeger and Debenhams and by M&S and Boohoo respectively provide further evidence of the direction of travel for the UK’s beleaguered retail sector. If the penny hasn’t already dropped, the fact that both deals involved only the brand rights/websites to the exclusion of the store portfolios gives us further confirmation of the trend which has been underway – and will likely continue - for some time. 

There has been a fundamental change in how we distribute goods and services. Moreover, the growth of remote shopping and working are two of the key factors which have led to a significant re-casting of our land use system and its associated values.  Indeed, it would be very interesting to hear the views on recent trends of the early land use modellers such as Burgess, Hoyt, Weber et al.

The steady growth of ‘remote’ has led to a corresponding decline in footfall and expenditure in most physical retail locations, notably over the last decade.  More recently, the pandemic has also laid bare the heavy dependence of many urban centres on the workforce. As a result, retail rents need to be radically re-based to levels which are commensurate with the ability to generate sales, allowing the occupiers to make money.  

Fashion Incubator - a physical retail concept designed for digital and pureplay brands, that addresses the needs of online-led businesses.  Source: www.Fusion26.co.uk

As for business rates, its shortcomings are obvious and reform is long overdue. There is much debate around its possible replacement but we do need to somehow level the playing field between physical and online in respect of property (and indeed other) taxes. 

Just a quick walk round many town centres tells you that we have too much front end retail space; you don’t need to read the persistently high vacancy rates quoted in the press to know that most empty shops won’t be coming back as retail. And while restaurants and coffee shops have boosted the appeal of city centres in recent years, they too now seem pretty ubiquitous. And, arguably, with remote working and shopping set to grow further, we have too much commercial space full stop….

The number one priority for town and city centres seeking to retain their relevance should be to get people living in them again. Residential therefore has to be a key part of the answer, along with the amenities to promote diverse, vibrant and safe communities. So, we should pack our town centres full of people, living in a mix of housing types and tenures, supported by a strong cultural and events offering, schools, colleges, health centres, flexible workspaces, greenspaces and an affordable public transport system.  All these elements will help to support a leaner and hopefully fitter retail sector.

In the meantime, it is understandable that retail landlords fight tooth and nail to protect income levels, but future landlord-occupier agreements need to allow the latter to trade with greater profitability and flexibility. There needs to be greater transparency and better data sharing between the parties; not to mention a sharing of the risk and potential upside too. 

Moreover, the business model must also recognise the omnichannel reality of retailing, providing environments for digital-led operators to thrive, yet taking account of the contribution shops make to online trade, through showrooming, click-and-collect, and the much discussed ‘halo effect.’

Imagine high streets and shopping centres full of units which can be rented by the day or even the hour, offering maximum flexibility to brands, whether as short-term stores, incubators for new concepts, or spaces for events. Spaces that truly work for omnichannel operators that also keep locations fresh and interesting for the shopper.

There is much discussion about the re-purposing of retail, but this is easier said than done in many cases and will take time to work through. It may be too costly or impractical to repurpose a typical town centre secondary shopping centre, while many retail park locations may not be best suited to residential.  

Source: Next Plc. Note, the capital expenditure figures exclude the capital contributions received from retail landlords.

There are a few bright spots amidst the gloom and, with the right property strategy, retailers can navigate these seismic changes. In its half year report to July 2020, Next provides an insight into its approach to the changing landscape.  At the mid-year point, the company was expecting to renew 60 store leases – demonstrating its commitment to front end retail - extending their term by an average of 3.5 years. However, it was anticipating new rental levels to be 50% lower, with nearly a third of the new leases turnover-based. Interestingly, its stress test assumptions on future store sales also build in like-for-like annual falls of 10%. 

Next expects to see a significant shift in capex away from stores to warehousing in the coming years – mirroring the expected continued growth in online more widely. It will be interesting to see the full-year update in April, but this approach seems very prudent and, from a retailer’s perspective, is arguably a blueprint for the survival of what’s left of the sector.  

Darren Yates is the founder of Buildback Consulting.