Looking beyond the Retail lockdown

Written By:

Stephen Springham, Knight Frank

15 May 2020

13 minutes to read

Categories: Property Sector Retail Topic Covid-19

Introduction

This is the seventh of a series of weekly notes analysing the state of the UK retail market in the light of the COVID-19 pandemic. This note explores three key themes:

• Our expectations on how lifting the Retail lockdown will play out 
• Tempering expectations of a swift consumer bounce back
• What we learned from the BRC’s April retail sales release

Please do not hesitate to contact myself or any of my retail colleagues if you require any further information.

Key Messages

• 1 June – lockdown “may” be lifted for “non-essential” stores
• 1 July – lockdown “may” be lifted for Leisure/F&B operators
• But not all stores and outlets will open as and when they can
• Retailers are “apprehensive and wary” of re-opening
• Lower trade volumes, yet higher operating costs make certain stores unviable
• Re-opening priority given to larger stores esp. retail warehousing
• Shopping centres face a multitude of social-distancing challenges
• 46% of people “trying to limit the time they spend in store”
• Mixed messages from store re-openings overseas
• First meaningful “temperature check” on trade not until Christmas
• Trade unlikely to return to “normalised levels” until H2 2021/Christmas 2021
• BRC retail sales down -19.1% in April due to lockdown
• Non-food online sales spike +57.9% in April
• Consumer bounce back highly unlikely when lockdown is lifted
• Sobering outlook for retail sales for the remainder of 2020
• “Brexit was a phoney crises for the retail sector, COVID-19 is a very real one"
• “A structurally challenged market having the economic rug pulled from beneath it.”

1. Our expectations on how lifting the Retail lockdown will play out 

As part of the UK’s government’s “roadmap out of lockdown” announced this week, we now have a degree of clarity on the timing of the proposed reopening of the retail and leisure sectors. “Non-essential” stores come under Step 2 of the plan, which becomes operational from 1 June. Leisure (including F&B) falls under Step 3 of the plan, which comes into force a month later (i.e. from 1 July).

However, 1 June is unlikely to be the “Independence Day” some sections of the media are depicting, for a number of reasons. Firstly, the dates are provisional and highly conditional on a number of targets being met (although there isn’t much transparency as to what these targets actually are). Secondly, the retail operators themselves are likely to take a softly-softly approach to re-opening, rather than try to re-commence trading with all guns blazing.

Apprehensive and wary are probably the adjectives that best describe most retailers’ attitudes to re-opening (certainly among those we have spoken to). There is a sense of relief that that enforced closures may soon be coming to end and cashflows can re-commence, but this is overshadowed by concerns of how to adapt stores to make them compliant to social-distancing and complete uncertainty over potential trading volumes in both the short and medium term.

It is highly unlikely that every shop across the land will re-open on 1 June. Retailers are currently reviewing their portfolios to understand which ones lend themselves best to social-distancing measures and to understand the costs involved (additional door/security staff, inflexible movement of instore personnel, perspex screening, floor taping, additional POS etc etc). One national fashion retailer we spoke to operating small to medium sized stores (ca. 2k – 4k sq ft) estimates that this will cost an additional ca. £10,000 per store.

It follows that stores with a larger floorplates are likely to be given priority. In terms of a broad pecking order, this would suggest the following re-opening sequence – retail warehouses, high street and then shopping centres (with Leisure last of all). Shopping centres are probably the most complicated as (largely) they are enclosed spaces and have the most moving parts. Sensibly, REVO has produced helpful guidance to support the reopening of shopping centres, but many challenges still remain.

Retailers’ trading expectations post re-opening are very muted (for our own analysis of how retail sales will develop in the coming months, read the next section of this note). If there is a benchmark, it is fellow “essential” retailers that have traded throughout the lockdown with social-distancing compromises. The portents are not good – after a pre-lockdown surge, the supermarkets have seen trade diminish considerably during lockdown. And what they sell is largely non-discretionary. The likes of Boots, Superdrug and WH Smith have seen even softer demand.

Some multi-national operators are able to draw on their experiences in other countries that have preceded the UK in lifting lockdown. The picture is very mixed to say the least. In terms of those that have gone public, Superdry has now re-opened in Austria, Denmark, Sweden and Germany. In Germany, footfall was down initially by -70%, but has since “improved” to -30%. Primark has re-opened in Austria and the Netherlands and despite lower footfall, has observed an increase in overall basket size.

A multi-national fashion retailer we have spoken to paints a more telling picture. In Germany, in their first week of re-opening, sales were down by over -90% on normal levels, but have since “recovered” to -75%. The view is that that if they can’t broadly get to 50% of normal trade levels, it is not viable to open the store. This will no doubt inform their re-opening strategy in other markets, including the UK. They have also expressed valid concerns as to the collateral damage in-store social-distancing compromises may have on their brand.

Sales forecasting is nigh on impossible in this market. Retailers we have spoken to suggest trade levels may be as low as 30% in the months post re-opening. None expect a return to 100% anytime soon. The prospect of vastly reduced trade yet increased operating costs will make many stores unviable for the foreseeable future. In layman’s terms, it’s less financially onerous for retailers to keep certain stores closed than to re-open them.

It’s very difficult to put any sort of timeframe on a recovery. Most retailers are already looking to Christmas as the first point of meaningful temperature check. But recognising there are considerable pinchpoints before then (e.g. quarterly rent days in June and September and the prospect of changes to the government furlough scheme etc).

Realistically, few retailers are anticipating a return to “normalized” trading levels until this time next year, at the earliest. Even then, Christmas 2021 may be a more realistic barometer.

2. Tempering expectations of a swift consumer bounce back

1 June is unlikely to herald an immediate and rapid bounce back in consumer demand. As with so many things, there are considerable “push” and “pull” factors. In many cases, these two opposing factors cancel each other out, but in terms of retail sales, the “push” is likely to far outweigh the “pull”.

The major “pull” factor is pent up consumer demand. With stores under enforced closure for around 10 weeks by the time the lockdown is lifted, consumers have effectively been on a leash for all that time, online channels providing only a limited outlet. The prospect of the “end being sight” of the pandemic generally will be a cause for celebration for many and a reason to splash the cash. And in many (but not all) cases, that cash will be there, with most people having reined in spending generally during the lockdown.

Optimists may point to the example of China, which apparently saw pent-up demand result in a spending splurge when the lockdown was lifted there (coining the phrase “revenge spending”). The link is tenuous – the UK is not China. The two countries are completely different in almost every aspect, economically, demographically and retail market structure. What may have happened in China is unlikely to play out in the same way in the UK.

There are three key formidable “push” factors, certainly in the short- to medium-term.

1. Consumer reluctance to return to public spaces (especially retail stores)
2. Stores that are open adhering to social-distancing compromises
3. Genuine economic concerns

On the first of these points, many consumers will (rightly) remain very conscious of the ongoing risks of the pandemic, even when the lockdown is lifted. Although rules on movement may be relaxed, many will limit their exposure to risk and that will impact on their willingness to visit the high street. Market research by Mintel (for 23rd-30th April) found that 46% of people said they were trying to limit the time they spend in store. Although this figure had fallen from 50% in the previous wave (16th-23rd April), it is still significant.

The second of these factors has been covered in the previous section. Social-distancing-compliant stores generate lower footfall and trade and frankly take much of the fun out of shopping – and shopping (especially for discretionary items) is still a leisure/”fun-based” pursuit.

The economic concerns are the most complex. Retail sales will take considerable time to recover, for a whole host of reasons. But the full effect of this may be not be apparent if media coverage plays out the way I anticipate.

Be wary of inevitable media coverage of long queues outside re-opened retail stores. Certainly do not interpret this as a surge in demand or a reliable reflection of consumer bounce back. An external store queue is a by-product of in-store social-distancing, rather than rampant footfall. If that store were not trading under compromised circumstances, that queue would merely be dispersed within the store. And there would be many more people in besides. Images of queues are not a barometer of strong consumer demand.

Be wary of how retail sales data is interpreted by both the media (and, sad to say, most economists). Month-on-month and quarter-on-quarter comparisons are meaningless at the best of times and will be even more misleading as the rest of the year unfolds. Yet most commentators will inevitably major on them. Monthly trends will definitely improve considerably from June, Q3 will on the surface be far stronger than Q2. All for the very obvious reason that sales will be lower when the market is subject to lockdown. But monthly and quarterly trends will be very poor indicators of underlying retail spending trends.

Year-on-year retail sales figures are really the only ones that matter – and they are likely to paint a far more realistic and sobering picture. In base terms, retail sales are likely to be substantially lower for the rest of year, even when stores re-open.

The issue is that perfectly decent retail sales figures pre-COVID 19 have been widely talked down erroneously as part of general negative retail narrative (with Brexit being a spectacular red herring in this regard).

The hard numbers are thus: in 2019, retail sales values increased by a relatively strong +3.4%. Q2 was +4.1%, Q3 +3.4% and Q4 +2.6%. Largely overlooked and misrepresented at the time, this is decent growth and will provide a challenging comp base as this year unfolds – what the retail sector would give now to emulate figures that were largely dismissed at the time.

There was absolutely no tangible evidence of Brexit having any impact on retail sales, despite all narrative to the contrary. Brexit was a phoney crises for the retail sector, COVID-19 is a very real one.

Consumer confidence is often taken as a key barometer of retail market performance, when the reality is that actual consumer behaviour does not necessarily mirror consumer sentiment. Established trackers such as Gfk split overall consumer confidence into two constituent parts – ‘General Economic Situation’ and ‘Personal Financial Situation’. Over the last couple of years, the two have diverged massively, the overall figure not doing justice to the two extremes.

Whereas Brexit negatively affected consumers’ confidence in the ‘General Economic Situation’, they did not make the same correlation with their ‘Personal Financial Situation’. The latter is far more a key driver in their willingness to spend, which is why retail sales have held up far better in recent years than many expected.

COVID-19 is a very different prospect altogether, it has rocked consumer confidence to the core. We don’t have the data as yet, but I would expect confidence in consumers’ ‘Personal Financial Situation’ to have plummeted already, with little prospect of immediate recovery, whatever shape the macro-economic trend is. Unlike Brexit, this will severely impact retail sales patterns for the foreseeable future.

The UK is already in recession, as forthcoming data releases will inevitably show. From a consumer confidence (and retail sales) perspective, history would suggest that the most sensitive of all economic indicators is the state of employment markets – not so much wages growth versus inflation as many economists profess, much more general job security. With so many people currently furloughed and a prevailing sense of job uncertainty, this is likely to weigh considerably on retail sales performance for some time to come.

Retail malaise in recent years has been misconstrued as economic when it was actually structural. COVID-19 is essentially turbo-boosting the structural change that was taking place anyway within the retail industry. But what we have now is a structurally challenged retail market that is having the economic rug pulled from beneath it.

But don’t for one moment write off the retail sector. After all, it is still worth some £360 billion a year and store-based formats still command a dominant share thereof. Retail definitely does have a future, albeit one that may look different from the past. Fewer but fitter operators. Less but better space. A far greater sense of purpose and relevance than it may have now.

3. What we learned from the BRC’s retail sales release for April

Not a tremendous amount that we didn’t know already. Predictably, April saw a “record fall in retail sales”, the worst since the BRC launched its sales monitor in 1995. Unsurprising, given the fact that this was the only month over the last 25 years when the vast majority of non-food stores endured enforced closure under the national lockdown.

Year-on-year retail sales in April fell by -19.1%. In reality, the actual numbers are fairly academic and do not fully reflect the scale of the impact the pandemic is having on most retailers. For what they are worth, the 3-month and 12-month average monthly declines were -7.5% and -2.3% respectively.

Rather spuriously, the BRC calculated that like-for-like retail sales actually grew by +5.7% year-on-year in April. This was derived by excluding closed stores from the comparison and was in no small measure driven by online growth. If anything, this calculation brings into the question the very mechanics of “like-for-like” as a retail industry KPI. “Like-for-like” is supposed to represent growth net of new space, yet all online growth is regarded as organic and therefore “like-for-like”. 

Non-food online sales spiked by 57.9% in April. With a playing field about as level as a cliff face, online saw its share of overall non-food spend increase to 69.9% compared to 29.9% a year ago. The BRC clearly subscribe to the rather short-sighted view that all enforced changes to shopping behavior over the last few weeks will be permanent, rather than temporary, glibly pointing to “an acceleration of online sales likely to be here to stay”. I somewhat doubt this and can say with some confidence, the figure will be considerably lower this time next year.

There was also some plateauing of the gulf in performance been “essential” and “non-essential” retailers reported in March and the early stages of the pandemic. But even with a slowdown in April, grocery sales over the last 3 months have grown by +6% overall (+4.5% like-for-like). But this strong sales growth detracts from the major operational upheaval the pandemic has caused even for “essential” operators and very significant cost implications of trading.

The BRC noted that “food sales were disappointing” in April. To expect anything otherwise when all supermarkets and c-stores are adhering to strict social-distancing and operating under deeply compromised circumstances would be seriously misguided.