Lifting of the Leisure Lockdown
COVID-19 Market Update – 26/06/2020
10 minutes to read
Introduction
This is the 12th 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:
- Lifting of the Leisure lockdown (in part)
- Week 2 of Retail Re-opening and June rent day
- An update on occupier fall-out
Please do not hesitate to contact myself or any of my retail colleagues if you require any further information.
Key Messages
- Lockdown on pubs/restaurants in England to be lifted from 4 July
- Hospitality in Scotland to re-open from 15 July
- Lockdown to remain on “close proximity” activities e.g. gyms
- Social distancing guidance to ease to “1 metre+” from 4 July
- Leisure re-openings will be phased and highly staggered
- UK Hospitality estimates trade levels of ca. 50% initially
- Pace of recovery very slow, pubs to find feet quicker than restaurants
- Retail rent collection on June quarter day just 13.8%
- Retail REITs are expected to report figures higher than this
- Retail footfall up +35.6% w-o-w, but down -50.2% y-o-y
- Some locations are already reporting higher y-o-y footfall (e.g. Taunton, Exeter)
- Retailers reporting lower traffic, but higher conversion rates and basket sizes
- Hotter Shoes to reduce store estate through a CVA
- JD re-acquires Go Outdoors through pre-pack administration
- All eyes on INTU’s pending administration.
1. Lifting of the Leisure Lockdown (in part)
After a period of long speculation, the UK government has confirmed that significant parts of the hospitality industry will be able to re-open from 4 July. From that date, the lockdown on pubs, restaurants, cinemas, and hairdressers will be lifted in England, with the other UK nations adopting their own individual timeframes. But the lockdown remains in place on a number of other “close proximity” use classes, including gyms, swimming pools/leisure centres, nail bars and soft play centres.
In parallel with this move, social distancing restrictions will also be eased. Although the guidelines are that the 2 metre distance rule should be adhered to wherever possible, a new “one metre plus” rule will apply, where the “plus” refers to operational protocols such as ensuring adequate ventilation, screening, hand sanitising and face coverings. The easing takes effect from 4 July , although anecdotally, many members of the public seem to have assumed it came into force the moment it was announced on Tuesday.
As with retail, pubs, bars and restaurants will have to abide by strict health and safety procedures, operating solely on a table service basis indoors, and owners and operators will be asked to collect customer contact details in order to support test and trace initiatives. Changes to social conduct are to be treated as guidance not legislation, with people encouraged to use common sense. Caution remains the watchword and each of these steps are “reversible” if deemed necessary or appropriate.
Under proposed review of the government's Business and Planning Bill, pubs and restaurants will be able to turn pavements, terraces and car parks into outdoor areas more easily. The consultation period for these applications would drop from 28 calendar days to five working days, with automatic consent granted if there is no council decision after 10 working days. The application fee would also be lowered to £100. The Bill was laid before Parliament on Thursday and will be debated by MPs on Monday.
The operative word in all this is “from” – not every pub and restaurant across the land will open its doors on 4 July itself. As with “non essential” retail over the last couple weeks, re-openings will be phased and highly staggered, with leisure owners and operators not only exploring the feasibility of trading under social-distancing compromises and infrastructure implications, but also weighing up the financial viability of operating at dramatically reduced trading volumes.
Controversial as it may be generally, the relaxation of the 2 metre rule is a key driver (if not gamechanger) for pubs and restaurants. At one metre distancing, UK Hospitality estimates that trade is expected to be at just over 50% of last year after three months of reopening (52% for pubs, 45% for restaurants). At two metre distancing, the corresponding figures would be just 29% and 26% respectively.
Either way, the pace of recovery is expected to be slow , whatever spin the popular media may put on it. Reports and images of huge boozed up crowds in beer gardens (or, indeed car parks) are no more a barometer of hospitality industry health than queues are outside an IKEA/Primark store for the retail sector. But that is what we are likely to be fed in the coming weeks.
There are both parallels and differences between the retail and leisure industries. Indeed, the same applies for key sub-sectors within the latter, with pubs and restaurants commonly grouped together, but operating to different models and dynamics. But a common denominator between every retail and leisure sector and sub-sector is the consumer and his/her propensity to spend – and this is where many concerns lie going forward.
Consumer demand remains difficult to gauge at this stage, but any post-lockdown surge is likely to be short-lived. Let off the leash, the consumer may spend freely in the immediate term. But the pandemic has hit to the heart of consumer confidence and there is genuine concern over the state of the wider economy, perhaps less so the fact we are in recession, more so what this means for job security. Leisure spend is still discretionary and eating and drinking at home (or in a public space) is a ready substitute for dining and drinking out.
Within the hospitality industry, we would expect the pace of recovery in pubs to outstrip that of restaurants, on the basis that the pace of re-openings of the former will be more rapid and the impact of health and safety / social-distancing measures will be more profound on dining establishments (e.g. many consumers will be deterred from eating in a “safe but sterile” environment).
But pubs too will be forced to trade without one of their key stimulants for some time to come – major sporting events. The football Premiership may have resumed, albeit reaching a climax (congratulations to Liverpool) before the lockdown has even been lifted. All other major global sporting events have either been cancelled or postponed until next year (e.g. the Euros, Olympics etc). While pub trade does not stand or fall on the back of these occasions, it can certainly be a major fillip, even if only in the short term.
For the hospitality industry especially, there is also a factor whose influence far outweighs anything, including COVID-19 – the weather. More so than ever, publicans and restauranteurs will be praying for period of prolonged good weather as they embark upon their long road to recovery.
2. Week 2 of Retail Re-opening and June rent day
June rent day passed much as we predicted (see the Retail Note from 5 June 2020). Early indications would suggest that even our projections of only 10-20% full rent collection by 24 June appear to be very much in the right ballpark.
Early figures from ReLeased, the cloud-based commercial property management platform (based on live rental collection data from 10,000 commercial properties and 35,000 leases in the UK platform) showed that just 13.8% of retail rent owed was collected, compared to 19.8% on the previous quarter day in March.
Overall, just 18.2% of all commercial rents in the UK were collected by landlords on 24 June rent quarter date, compared to 25.3% received on March quarter rent day, representing an overall decline of -28% over the three-month period. Although retail was the “worst-performing” sector, it was perhaps surprising to see it not desperately out of kilter with other sectors such as offices (22.8%) and industrial (16.2%).
We are likely to receive rent collection updates from the major REITs over the coming weeks. By and large, we would expect the major retail REITs to report higher collection rates than our projected numbers (10-20%) on account of weightings within their respective rent rolls (our projections are representative of the retail/leisure industry and are unweighted). In very general terms, property portfolios that are weighted towards foodstores will report much higher collection rates than others, whereas those geared towards leisure will be at the opposite extreme.
Rent collection figures will inevitably increase as some payments will come in after rent day itself and concessions are agreed between landlords and tenants. But in many ways, it is less about the actual numbers and more about landlord and tenant collaboration to reach longer term compromise solutions.
Figures from Springboard showed that footfall in the first full week of retail re-opening was up +35.6% week-on-week. Hardly a triumph, as year-on-year the figure was still down by -50.3%. Similar figures from Local Data Company (LDC) showed that footfall was down -62% year-on-year, far lower than the -32% reported in the week prior to lockdown in March.
LDC also highlighted a number of places were footfall was up substantially on both a week-on-week and (more meaningfully) year-on-year basis. This included locations in Manchester (Market St, +39.4% w-o-w, +23.7% y-o-y), Taunton (High Street, +53.7%, +29.6%) and Exeter (High Street, +42.2%, +23.8%). Interestingly, the list also includes INTU’s Trafford Centre (+34.8%, +7.4%).
Early reporting from retailers has been very mixed and, at this stage, very anecdotal. A quote from one major retailer that “trade had been OK – not great, not horrendous” sums up what many are saying. Some fashion operators are even reporting that sales were up last week on a year-on-year basis, but noted that this was driven largely by sales and widespread discounts. Margins will clearly have suffered, but in the current environment, that is largely a secondary consideration for once.
A common report is that that while shopper numbers are down, conversion rates and average transaction volumes are up. This mirrors a trend that the major foodstores are reporting. Clearly, customers are much more purposeful in their purchases and are consolidating multiple shopping trips into one. In “non-essential” retail, this is more likely to be temporary trend, linked to social distancing measures. For foodstores, it may mark a more permanent – and positive – shift. A return to larger basket sizes would definitely mark a positive change for the supermarkets, reversing the trend of greater fragmentation we have seen over many years.
3. An update on occupier fall-out
The pending administration of INTU dominated many of the fall-out headlines this week, but there was also restructuring activity on the retail occupier side in the shape of footwear retailer Hotter and JD Sports-owned Go Outdoors.
Private equity-owned and operating in the over-supplied, soft demand, fashion/footwear sector, Hotter ticks the key boxes for retail failure. Through its owner Electra Private Equity, the business has launched a CVA to downsize its store portfolio after landlord discussions failed. The CVA will see the store estate reduce from 61 to 15 outlets. The group will instead focus more on its digital offering.
Hotter Shoes started in the 1950s as a shoe manufacturer and claims to makes more shoes each year (ca. 1.3m) than any other UK shoe maker. Gresham Private Equity took a minority stake in the business in 2007 and planned to double turnover from £38m within four years and subsequently embarked on a rapid expansion programme, opening 21 stores in 2012 alone. Electra bought it for £200m in 2014. A familiar story of a small business that over-expanded under private equity ownership.
In a slightly more controversial move, JD Sports has re-acquired its Go Outdoors brand through a pre-pack administration. The business was placed into administration at the beginning of the week, before being bought back for £56.5m. JD Sports stated that Go Outdoors, which operates 67 stores, could be salvaged ”if fundamentally restructured”.
Inevitably, this will involve renegotiating rents on a business that JD paid £112m for as recently as November 2016. JD admitted that its primary motivation for putting Go Outdoors through a pre-pack administration process was to secure rents that were more representative of the market value of its store estate: “the terms of the property leases in Go were extremely inflexible, with the stores having an average remaining period to lease expiry of approximately 10 years with upwards only rent reviews, many of which are fixed at rates above inflation regardless of the market rent in the location”.
Controversial in the fact that the parent company itself isn’t in a state of distress and there is more than a hint of market opportunism from one of the strongest operators on the high street, that otherwise has a good track record in working with landlords.