The retail note - 21 July 2017
Stephen Springham, Head of Retail Research, breaks down the latest sector headlines.
4 minutes to read
- As predicted last week, the official retail sales figures from the ONS for June were even stronger than those from the BRC. Retail sales values (exc fuel) were up 5.6% year-on-year, with volumes (i.e. real growth) up 3.0%. No doubt helped by the weather, clothing had its best month in five years. Over the last three months, values were up 5.2% and volumes by 2.7%. So much for a consumer slowdown.
- With the knives out for Mike Ashley, Sports Direct’s full-year figures gained widespread coverage, not least the 58.7% decline in pre-tax profit to £113m. Rather than herald a crumbling of his empire, the figures themselves were actually fairly solid if the exceptional factors (failure to cover its currency commitments and the change in depreciation policy) are taken out. Group revenue increased by 11.7% to £3,245 million.
- Strong annual figures from Oak Furnitureland. For the year ended 30 September 2016, operating profit increased by 88.6% to £15.8 million, on turnover up 16.9% to £279.7 million. Over the year, the UK store network increased from 68 to 76 outlets and the business expanded into the US in July 2016 through a new subsidiary (Oak Furnitureland Inc.).
Stephen Springham, Head of Retail Research:
A short retailer survey conducted by Knight Frank as part of an informal lunch this week yielded some very interesting results (not to mention some lively debate). Around a dozen occupiers took part, representing all tranches of the retail and leisure sectors, both large, national multiples and smaller niche players. A small exercise maybe, but with some fairly significant messages which landlords would do well to heed.
Brexit unsurprisingly featured highly on the discussion, but the majority (67%) of respondents stated that Brexit had had absolutely no impact on their UK property strategy. Interestingly, those that said it had had an impact viewed it more as a positive than negative factor, in that it had actually increased their bargaining power with landlords. This underlines our own long-held view that Brexit has not unduly de-stabilized retail occupier markets, other than to reinforce general caution.
As for one of the other key ‘headwinds’, 83% of the respondents did not expect the rates revaluation to wash through and have a material impact on rental levels (outside Central London). Given that rental levels have declined virtually everywhere outside Central London between the two revaluation dates, this is a pretty damning indictment of the business rate system where the upper cap for increase is 42% and the lower cap for rebate is just 4%. The general conclusion was the current status quo was of benefit to neither landlord nor occupier.
Presented with the question as to where the focus of retail’s evolution over the next five years will be, Online scored relatively lowly (8%), while Click & Collect – viewed by many as the future – scored nul points. Both were ‘out-scored’ by Physical Stores (25%). But, most tellingly, the overwhelming majority (50%) effectively voted for ‘All of the Above’, underlining our oft-quoted mantra that online is an ally rather than adversary to the high street and the two work in parallel, rather than in competition. The future of retail is neither bricks & mortar nor online, it is both.
Perhaps the most meaningful messages came from the question as to where we are in the occupational cycle. The actual question posed was “if 12 o’clock represents the top/peak of the market and 6 o’clock the bottom, where do you think we are now in the retail occupational cycle?” The responses were interesting in themselves (17% in the ’12-3’ quartile, the remaining 83% in the ‘3-6’ quartile), the ensuing debate even more so. The general consensus was that it is no longer relevant to think of occupational markets evolving in cycles and the assumption that we will one-day return to where we once were (in the so-called boom years) is misguided.
A non-cyclical model obviously flies in the face of all perceived wisdom in property markets, but in retail occupational markets at least, this is the new reality. Retailers are committed to a sustained period of pragmatism and optimisation, rather than unfettered expansion. Sobering as this may seem, there is still considerable opportunity for retail property investment, but the market needs to understand this pragmatism and expectations need to be re-based. The general gold rush may be over, but there are still nuggets to be had for the more canny speculator.