Three More Weeks of Lockdown - Minimum
COVID-19 Market Update – 17/04/2020
9 minutes to read
Introduction
This is the fourth 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:
- What retail sales figures from the BRC tell us
- “Non essential” online retail starts to come back online
- Further occupier fall-out
Please do not hesitate to contact myself or any of my retail colleagues if you require any further information.
Key Messages
• March retail sales down -4.3% year-on-year (like-for-likes -3.5%)
• Very much a month of two halves
• Pre-lockdown sales (to 24 March) +12%: post-lockdown (to 4 April) -27%
• April’s figures will reflect a full month of lockdown and will be more dramatic
• Positive demand for some non-food categories (e.g. electricals, homewares, toys)
• Non-food online sales jump +18.8% year-on-year to account for a share of 44%
• But online only picking up a portion of the slack of lost store-based sales
• Key retailers slowly re-opening their online operations
• But with very limited capacity, due to necessary operational compromises
• Risk that operating with reduced online capacity alienates customers/damages brand
•Further occupier fall-out a reflection of chequered ownership history
• All four of this week’s “casualties” have history of private equity ownership.
1. What the retail sales figures from the BRC tell us
The latest retail sales figures from the British Retail Consortium (BRC) inevitably made for grim reading. There is an element of the “boy who cried wolf” in the narrative, the BRC having already exhausted use of negative hyperbole in far less challenging times than this, but for once, few could argue with the fact that March showed the biggest year-on-year decline since records began in 1995.
Total retail sales declined by -4.3% year-on-year in March. Like-for-like sales (which excludes the impact of new space) were down -3.5%. On the surface, these figures do not do full justice to the scale of the crisis and are less dramatic than we might expect. But there are strong accompanying caveats: they were against fairly soft comparables last year (total sales -1.8%, like-for-like -3.5%) and covered the period from 1 March to 4 April – only the last two weeks of which the lockdown was in place.
On the latter point, March was undoubtedly a month of two halves. Total retail sales in the two weeks to 24 March were actually up by +12%, fueled to a strong degree by a surge in grocery demand (as outlined in last week’s Retail Note). However, since the lockdown, trade has inevitably fallen off a cliff, with total retail sales slumping by -27% in the period from 25 March to 4 April.
Given that food demand spiked in the first half of the month and largely held steady in the second, it implies that many non-food categories experienced a far more precipitous decline in demand than these headline figures suggest. However, even within non-food there were some variances, with relatively strong demand for brown/grey electrical goods and home appliances, home accessories, toys/baby equipment and fitness equipment. But by all accounts, clothing has been at the very sharpest end of a slump in demand.
In simple terms, any spending “boom” seen in “essential” retail goods has not offset huge declines in spend in “non essential” categories. As we have suggested before, online is only picking up a small proportion of the slack of this “lost” store-based spend.
Online non-food sales grew by +18.8% in March, much higher than the 12 month average of +4.4%. Online’s “share” of non-food spend accordingly increased year-on-year from 29.3% to 43.5%. But these figures are hardly a triumph, with many operators (pure-play and multi-channel) struggling to rise to the operational challenges of heightened online demand and incurring significant cost in so doing.
The BRC’s figures are not gospel as they only represent their membership base, which doesn’t include some of the UK’s largest retailers e.g. Tesco, Amazon, Primark etc. But they do give a broadly representative picture. A more comprehensive view will come next Thursday (23 April) in the shape of the official ONS release. But in reality, the actual numbers are subordinate to the bigger picture, which for many operators is simply survival.
Ordinarily at this time of year, we would be talking about “Easter timing distortions” in the numbers and how the timing of Easter massively skews monthly figures one way or the other. Easter was sadly a non-event for the UK retail sector this year. The media get very excited around Black Friday and wildly exaggerate the importance of sporting events to the retail sector, when actually Easter is still the second busiest time of the year for the retail sector, in “normal” times at least. That it passed this year with barely a whimper is further testament to the full scale of the crisis.
Of course, March’s retail sales figures, be they from the BRC or ONS, only reflect the start of the crisis. April’s will reflect the full impact of a whole month’s lockdown – and will undoubtedly make for even more grim reading.
2. “Non essential” online retail starts to come back online
On Thursday 16 April, the UK government confirmed what most expected – that the lockdown would be extended for a minimum of a further three weeks. There is no prospect of “non essential” stores reopening before mid May at the very earliest, while “essential” stores will continue to adhere to strict social-distancing disciplines – necessary, but very disruptive to trade.
A number of retailers that previously suspended their online operations to ensure the welfare of their warehousing staff are slowly resuming service. Next is thus far the most notable example, last week relaunching its transactional website “in a very limited way”, with a focus on categories that “customers most need”, notably childrenswear and homewares. However, the website hit capacity within 2 hours of re-opening, underlining the constraint that necessary working compromises have on its ability to fulfill online demand.
Other examples include Dunelm and B&Q. The former reopened its website for orders on Thursday, having closed its online operations and stores last month. However, the reopening of Dunelm’s website's operations will be highly phased. B&Q is offering its customers only “essential products” as it also reopened its website this week. This will offer B&Q some respite in what would usually be its peak trading period (Easter and May bank holidays), but the limits on capacity are clear to see.
In France, conversely, Amazon was forced to temporarily close its six warehouses this week after a court ordered it to stop all but essential deliveries. An internal document sent to unions on Wednesday said the closures would last from Thursday until at least 20 April. The court said Amazon had “failed to recognise its obligations regarding the security and health of its workers”. In a statement released after the ruling, Amazon said: "We’re puzzled by the court ruling given the hard evidence brought forward regarding security measures put in place to protect our employees."
These developments collectively highlight some of the conundrums of online retailing. Clearly, there are benefits of having some sort of revenue stream, however compromised, while physical stores remain under enforced closure. But the major downside risk of offering a capacity-constrained service is frustrating / alienating consumers and therefore inflicting collateral damage to your brand. The same brand risk applies, on an ESG level, of continuing to trade online without full deference to staff welfare.
3. Further occupier fall-out
A further two retailers filed for administration this week – fashion chains Oasis and Warehouse, while two others put themselves up for sale – menswear retailer TM Lewin and footwear specialist Office.
To my mind, there are three generic boxes that determine whether a retailer warrants being “at risk” or “on a watch list”. 1. Private equity ownership (current or historic). 2. A track record of previous administrations/CVAs. 3, Exposure to the fashion market (the most over-supplied UK retail sub-sector, with too many stores and too many operators). Oasis and Warehouse both tick all three of these boxes.
Both Oasis and Warehouse are owned by Kaupthing Bank. They both previously came under the ownership of holding company Aurora Fashions, which also included Karen Millen and Coast (both spun off and sold to Boohoo in a pre-pack administration last year which saw all stores close down). Aurora Fashions was itself a “phoenix from the flames” business, a reincarnation of the Mosaic Fashions conglomerate which collapsed into administration in 2009, in the wake of the demise of its parent Baugur Group. Chequered ownership history to say the least.
Despite the administrator’s inevitable statement that “Covid-19 has had a devastating effect on the entire retail industry and not least the Oasis Warehouse group”, the corporate issues facing both businesses significantly pre-dated the outbreak of the pandemic. The future of the 2,300 staff, 92 standalone stores and 437 concessions hangs in the balance. Both were decent brands back in their respective days and could be restored in the right hands and under the right management. But will this be forthcoming in the current environment?
The private equity owner of men’s shirt specialist TM Lewin has put the business up for sale. Bain Capital has reportedly asked interested bidders to submit their offers this week and the bidding auction will be run by corporate finance firm Alantra. The business operates ca. 68 stores in the UK and ca. 89 internationally.
Office has also been put up for sale, with professional services firm Alvarez & Marsal (A&M) being drafted in by the business’s South African owner Truworths International to launch an accelerated sale process. Last year, Office appointed A&M to review its financial position and to consider options for the business which included a possible CVA. It initially opted for a refinancing, closing selected stores at lease expiry. It operates ca. 115 standalone stores and 24 concessions.
Despite its long history of private equity ownership (Office was previously owned by Tom Hunter’s West Coast Capital, then Silverfleet Capital, before Truworths acquired it for £256m in 2015), the business is still a strong brand and is profitable – although operating profits in 2019 of £4.7m showed a sharp decline on the previous year (£15.3m).
Retail is a survival of the fittest at the best of times. These are anything but the best of times. Private equity ownership (current or the legacy thereof) provides a weak defence in the face of the immense challenges the market faces and remains a huge handicap in the wider fitness race.