Introduction

This is the first of a series of weekly notes analysing the state of the UK retail market in the light of the COVID-19 pandemic. This initial note addresses ten of the most commonly-asked questions and seeks to provide answers as far as possible. Subsequent notes will update on any events and developments that may transpire that week and provide our interpretation of both immediate and longer term implications.

The basis of opinion is our extensive knowledge of the UK retail sector, coupled with ongoing dialogue with key retail industry practioners, including most leading retailers and retail property landlords.

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

Key Messages

• COVID-19 is the ultimate stress-test for an already-challenged UK retail market

• Significant occupier fall-out is inevitable, despite positive government intervention

• Most business failures will have been accelerated by, rather than caused by, COVID-19

• COVID-19 doesn’t actually change anything – it accelerates wider structural change

• Retailers with strong brands, good management and robust balance sheets will survive

• Q1 rent day a major pinchpoint - <33% of retailers paid their full rent obligation on time

• Most retailers sought concessions from landlords, typically 3/6 month rent holidays

• June quarterly rent likely to be even more of a pinchpoint, cash positions will worsen

• Open dialogue between landlords and tenants the key to a sustainable retail market

• Consumer demand held up surprisingly well in early stages of the pandemic (Feb)

• Demand has since polarised massively in the face of the lockdown

• Grocery sales running ca. 20-30% ahead of last year, but non-food has fallen off a cliff

• Online is only absorbing a limited proportion of the slack from store-based retailing

• The shortcomings of online infrastructure have been exposed over recent events

• Non-food online platforms will increasingly be closed to protect warehouse staff

• COVID-19 has reinforced the collaborative nature of physical and online

• By default, the pandemic has brought about necessary permanent reform of the Business Rate system

• And raised appreciation of Retail as an integral part of our communities and daily lives.

10 Key Questions

1. What are the facts as they stand?

The UK government stepped up its fight against COVID-19 this week and announced that only “essential” retail stores could continue to trade from 24 March for a minimum of a three week period. “Essential” stores are defined as supermarkets, pharmacies, petrol stations, newsagents, bicycle shops, home and hardware stores, launsderettes / dry cleaners, pet shops, post office and banks (with off licences subsequently added to the list).

Local Data Company (LDC) estimates that 69% of all stores in the UK are “non essential” and are therefore subject to enforced closure. Taking into account “essential” stores that have voluntarily closed, ca. 83% of retail stock is currently not open for business.

The Chancellor has extended a one year business rates holiday to all retailers and F&B operators in a package of updated economic support, after originally announcing this would only apply to commercial premises with a rateable value under £51k. The package also includes £330bn of government-backed loans and guarantees for UK businesses, with Rishi Sunak promising he would ‘go further’ if the package was not adequate, acknowledging this is an economic emergency.

In a measure that will also provide some insurance to retailers, the government has also pledged to pay the wages of employees unable to work due to the pandemic, in a radical move aimed at protecting people's jobs. It will pay 80% of salary for staff who are kept on by their employer, covering wages of up to £2,500 a month.

The other key new measure affecting the retail sector is a moratorium on commercial landlord sanctions for at least three months, meaning tenants who miss rent payments because of coronavirus can keep their leases. Under a moratorium on lease forfeiture for occupiers, landlords will not be able to exercise any right of forfeiture on tenants that cannot pay their rent. The provision will only delay the right of forfeiture; it will not affect a landlord’s right to claim forfeiture or recover rent after the three-month period ends. The government said it will monitor the impact on commercial landlords’ cash flow and “continues to be in dialogue with them”. Some temporary relief for retail tenants, but difficult negotiations around quarterly rent day and much deeper consequences further down the line.

2. What will the scale of occupier fall-out be?

Not surprisingly, there will be substantial occupier fall-out as a result of COVID-19, either directly or indirectly. Many retail and F&B businesses, including many well-known and long-established high street names, will inevitably fail over the coming months. As has been well-documented, many operators were struggling prior to recent events and enforced store closures and virtual zero cashflow as a result will be the straw that breaks many retailers’ backs. Government intervention and concessions from landlords will not be enough to save many operators.

The scale of this fall-out is nigh on impossible to quantify at this stage. The Centre for Retail Research has predicted that more than 20,600 stores may not re-open by the end of the year, with job losses potentially totaling over 235,000 as businesses review how many stores they expect to operate in 2021. By way of comparison, last year 4,547 stores closed. Without downplaying the scale of the issue, I would take these figures with a pinch of salt.

To date (27 March 2020), the only major retailer to formerly enter administration is Laura Ashley. But casualties have also already been announced on the F&B side, in the shape of Vapiano and TRG’s Chiquitos and Food & Fuel brands. Many more will follow in the coming weeks, with Carluccio’s and Byron Burgers reportedly pending at time of writing.

It would be wrong to “name and shame” likely casualties in the current climate. In very general terms, those at the sharpest end will be weaker brands in over-supplied sectors (e.g. fashion) with flaky balance sheets (and high levels of debt). Current or historic private-equity ownership is always a major red flag. Conversely, those best-equipped to survive will be strong brands with good management and robust balance sheets (and little debt).

To take a step back, the retail market is always a survival of the fittest. COVID-19 is throwing additional obstacles into what is already a highly competitive race. Harsh as it may seem, COVID-19 is only accelerating the demise of less fit retailers that would probably have failed further down the line, regardless of the pandemic.

3. How did quarterly rent day play out?

The fact that quarterly rent day fell a day after the UK went into lockdown was a coincidence of epic proportions – you really could not make it up. Unsurprisingly, the ensuing “negotiations” between landlords and tenants reached unprecedented levels. We have been privy to many of these negotiations.

We would estimate that only around 33% of retailers met their quarterly rent obligations in full and on time. This was broadly supported by INTU, who reported that it had only secured 29% of its quarterly rent roll, compared to 77% this time last year.

The majority of retail and F&B operators pushed for at least some form of concession. Typical concessions requested / demanded included:

- 3 month rent holidays

- 6 month rent holidays

- Indefinite rent holidays (usually caveated around when sites reopen for trade)

- Outright refusal to pay rent

Other issues that came into play were a switch from quarterly to monthly rent payments and in some cases, a transition to turnover rents. In our opinion, both make sense and are something we have championed in the past. Monthly rents mitigate the risk of quarterly pinch points and ease cashflow generally. As landlords seek to re-coup any income lost through rent holidays, a monthly system is a far better platform to achieve fluidity of payment. Turnover rents are more complicated than they seem, but should provide a much more transparent modus operandi.

More worryingly, there was absolutely no dialogue at all between some retail operators and landlords – the former did not pay, but did not provide formal instruction of their intentions. Non-communication is the most counter-productive response and will leave those “at the back of the queue” with any landlord concessions. Any dialogue at all is better than radio silence.

Landlords generally (but not universally) have agreed to these concessions (what choice do they have?). In return for a rent holiday, many are re-gearing leases to incorporate an additional term commensurate with the length of the rent holiday. This is usually a multiplier of the holiday. But we would stress that that none of these deals have actually been agreed yet, they are currently just being discussed. It is also worth noting too that a lease extension has Stamp Duty Land Tax (SDLT) implications, which either the landlord or retailer will have to pay for – a further issue for negotiation.

But there are still huge question marks going forward, principally around how the rent holiday can be re-couped and how the next three months will play out. If the lease is not re-geared, when will the rent holiday be re-paid (if it is not to be written off)? Over the course of 12 – 18 months appears to be a more palatable solution to the landlords, although not necessarily to retailers, who don’t want to be committing  to a higher rent when they do reopen. Again, negotiations are ongoing.

There are questions over the likelihood of double payments in Q2. If many retailers are struggling to meet their Q1 rent obligations, cash-flow pressures will be even more acute come Q2. 

4. Is this just a blip and how soon will we get back to “normal”?

This is far more than a temporary blip, this is a watershed moment for the UK Retail. Yes, the retail market will ultimately recover and any talk of the “death of the high street” is as misplaced as ever. But many of the fundamentals that have come to represent “normal” will be substantially re-defined.

At the same time – and you won’t read this anywhere else – COVID-19 doesn’t actually change anything. The UK retail market was already in the throes in major structural change (see Knight Frank’s Retail Newsletter ‘The Price of Change’ for far more detail) before the pandemic broke out. The COVID-19 pandemic does not change any of the pillars of this change, but actually reinforces them. COVID-19 is an accelerator of wider structural change in retail, rather than an instigator of change in itself.

The million dollar question as to how long the lockdown will last and when stores will be able to re-open is sadly unclear at this stage and it would be unwise to make any rash predictions to this effect.

5. Consumer demand/retail sales – trends to date?

To state the blindingly obvious: the outbreak of the virus and subsequent lockdown has played havoc with consumer spending patterns.

On Thursday 26 March, the ONS released official monthly retail sales data. The figures were to 29 February and are therefore largely retrospective, relating only to the initial period of the COVID-19 outbreak. But they are telling nonetheless and paint a slightly less desperate picture than we might imagine.

The purest and most meaningful headline numbers (year-on-year, exc fuel) showed that despite mounting uncertainty, retail sales values grew +1.0% and volumes (‘real’ growth, net of inflation) were up by +0.5%. The non-seasonally adjusted (i.e. the actual numbers, undoctored by ONS smoothing) showed even stronger growth (values +2.3%, volumes +2.1%).

Although much of the ONS narrative and media interpretation inevitably focused on the far less meaningful month-on-month trends and didn’t strip out fuel as a heavily distorting factor, the fact remains that going into the crisis, consumer spending was actually holding up fairly well – as it has been for some time.

In what is likely to be last set of monthly figures “under normal trading conditions” for some time, grocery was already out-performing non-food (+3.2% versus +0.2%), but there were some brightspots in the latter e.g. DIY +3.5%. Online growth also continued to slow, to a low of just 5.3%, whilst the online-only retailers recorded their lowest growth (+7.1%) for over two years - a trend likely to be reversed in March.”

Fascinatingly from a retrospective standpoint, the ONS also canvassed retailers on the adverse impact on performance of COVID-19 in comparison to the weather. Overwhelmingly, retailers cited the weather as a more major factor than COVID-19 (grocery stores – 34 versus >10, non-food stores – 128 versus 32). I suspect this mindset will have changed over the last couple of weeks.

6. What is the current situation re. consumer spending?

We will have to wait until 23 April for the official ONS retail sales figures for March. These will reflect the first full week of the lockdown (24 March) and the three weeks prior. Ahead of that we will receive updates from the likes of the CBI, BDO and the British Retail Consortium (BRC). Notoriously less reliable than the ONS, these will provide little more than a general steer.

Reporting on footfall trends seems spurious in the extreme given that most high streets and shopping centres are effectively closed and the nation is advised to stay at home. For what the figures are worth, Springboard has reported that footfall numbers were down -75.4% year-on-year this week and -67% week-on-week. With next to nothing open on most high streets, I’m frankly surprised there is any footfall at all.

Current sales trends amongst retailers are largely anecdotal. And given current market conditions, polarities between sub-sectors are huge. At the one extreme, foodstores remain open and are struggling to cope with consumer demand (although figures from Retail Economics suggest that only 1 in 4 consumers are guilty of ‘stockpiling’). Anecdotally, the major supermarkets are seeing sales ca. 20-30% ahead of last year, although it would be disingenuous to describe this as a ‘boom’ as many in the media are. This is a ‘boom’ the foodstore operators could do without and the strains on supply chain are plain to see. Yes, they are seeing a huge surge in demand, but fulfilling it is coming at huge cost, figurative as well as financial.

It follows that all other “essential” retail sub-sectors that remain open are seeing strong top-line growth, most notably pharmacies and healthcare generally. Anecdotally, we would venture that retail sales growth in these categories is currently comfortably double-digit.

At the opposite end of the spectrum, sales in discretionary categories such as clothing have fallen off a cliff and this is where much of the pain lies. As of 24 March, clothing retailers have had to rely solely on their online arms to generate sales. Retailers such as Primark that trade purely through stores have seen their whole cash-flow turned off and parent company ABF has indicated that it will lose £650m a month while its stores are inoperational.

Of course, online channels have thus far remained open and have unsurprisingly seen a surge in demand. Online will clearly account for a much higher proportion of retail sales figures in the coming months as store-based retail is largely immobilized. But it is far more complex than spend that would have been made instore simply transferring online. When stores close, online doesn’t simply pick up the slack. For one thing, the supply chain infrastructure is simply not there for this to happen. Only a small proportion of store-based spend will transfer online, the remainder will remain “unspent”.

At time of writing, a growing number of non-food operators are also ceasing their online operations, primarily out of consideration for warehouse staff safety. Many more will undoubtedly follow suit in the coming days. Even online channels aren’t fully incubated against the COVID-19 threat.

7. Likely spending trends in the medium to longer term?

No one can predict how long the lockdown will last. We can also only tentatively predict what the wider economic impact will be. It is therefore premature to predict what the medium to long term outlook is for consumer spend, although there are a number of schools of thought.

Those of an optimistic persuasion are predicting a massive surge in consumer demand once the threat of COVID-19 eventually passes. There is some evidence of what is being termed “revenge spending” in China, with retailers (particularly at the luxury end of the market) reporting a splurge in demand now that containment measures are being lifted. Clearly, there is considerable pent up spend in the UK now consumers are denied the privilege of even visiting shops, but will this result in a spending deluge once restrictions are lifted? I remain to be convinced. In any case, it would probably be more beneficial to see a more gradual and sustainable recovery in retail sales, rather than a temporary, short-lived spike that will quickly tail off.

COVID-19 has obviously had a much wider economic impact than just retail spend and there is now the very real threat of recession. Although retail sales have a history of disconnecting with wider GDP growth in times of wider economic strife, we cannot divorce the two completely.

Other analysts are already looking to previous recessions and crises (financial or otherwise) to gain a read on potential consumer spending going forward. I will do likewise in the coming weeks, but recognise already that this is a crisis without precedent.

8. What changes to consumer behaviour could we see in the wake of the pandemic?

Again, lesser retail analysts are already making bold predictions as to how COVID-19 will change consumer patterns going forward. The obvious, and frankly most facile, one is that it will lead to an inexorable surge in online sales, the premise being that the enforced switch to online retailing will be a permanent rather than temporary one. I’m not so sure that it will on the basis that there are a number of “push and pull” factors in play.

Online penetration in grocery has historically been far lower than non-food categories (ca. 6.5%). Over the last few weeks, many more consumers than before have signed up for grocery deliveries, either on the grounds of self-isolation or to circumvent instore out-of-stocks. The key question is how many of these will be long-term “converts” and how many revert to store-based channels, as and when they are able. For some, this may mark an irreversible switch, but it would be fanciful to assume that this is just a one way street and that everyone will make a permanent transition.

At the same time, the COVID-19 lockdown has equally exposed the many shortcomings and common frustrations of online shopping – limited delivery slots, websites crashing, unfulfilled orders etc. Above all else, recent events have shown beyond all doubt that online is not the panacea many believe it to be and we are a million miles away from having the infrastructure to live in an online-only world.

As we have said many times in the past, the future is not about stores. Nor is about online. It is about both and how the two seamlessly interact. Recent events have only served to reinforce this mantra. Online has struggled without its store-based partner to fully support it.

9. Any positives at all that can be drawn from the wider carnage?

Given the current state of the market, crumbs of comfort may seem few and far between. But we would highlight a couple, one very tangible, the other more abstract.

On the tangible side, the COVID-19 outbreak is likely to lead to the fundamental, root and branch review of the Business Rate system that many have long clamoured for (ourselves included). As it stands, high street operators will only benefit from a rates holiday for one year. Realistically, however, we cannot simply revert to the old system in a year’s time, as if nothing has happened. Albeit by default rather than design, the system will have to be radically overhauled. How it is reformed has yet to be formulated, but at least the issue now commands its rightful place on the political agenda.

On the more abstract side, recent events have inevitably given rise to increased levels of dialogue between landlords and retail tenants, again more by default than design. We have long argued that closer collaboration between landlords and tenants is a prerequisite for a sustainable retail market, it is just a shame that it has taken a crisis for this to happen.

10. Any other observations?

Perversely, the COVID-19 enforced lockdown may have benefited the high street in ways that may have seemed unthinkable. Just maybe, it has increased people’s appreciation for something they may previously have taken for granted. The past few weeks have provided a timely reminder as to how integral retail is to our everyday lives and underline the vital service that shops provide to our community. The phrase “you don’t know what you’ve got til it’s gone” doesn’t just come to mind, it’s screaming out.

To those that still subscribe to the hackneyed notion of the “death of the high street”, we’ve now had a glimpse as to what that might look like. Be very careful what you wish for.