Covid-19 - Retail: the fallout from lockdown
Stephen Springham explores what we know, expect, and question about the future of retail market.
5 minutes to read
What we know
Lockdown closes non-essential stores. The UK officially went into lockdown on 24 March and all “non-essential” retail units faced enforced closure for a minimum of three weeks. “Essential” stores are defined as supermarkets, pharmacies, petrol stations, newsagents, bicycle shops, home and hardware stores, launderettes/dry cleaners, pet shops, post office and banks (with off licences subsequently added to the list). Taking into account “essential” stores that have voluntarily closed, ca. 83% of retail stock is currently not open for business.
Zero cashflow for many retailer occupiers. By their nature, retailers are highly cashflow-dependent. Enforced closure of stores has cut off this lifeline and online is only very partially able to compensate. Already stretched balance sheets have come under even more intense pressure.
Quarterly rent payments are being missed. Quarterly rent day fell a day after the UK went into lockdown. We estimate that only around 33% of retailers met their quarterly rent obligations in full and on time. This was broadly supported by shopping centre REIT INTU, who reported that it had only secured 29% of its quarterly rent roll, compared to 77% this time last year. Hammerson’s equivalent figure was 37%.
Landlord concessions very common. The majority of retail and F&B operators pushed for at least some form of concession, typically in the form of rent holidays (3 or 6 month or indefinite). Other issues that came into play were a switch from quarterly to monthly rent payments and in some cases, a transition to turnover rents. With little choice, landlords generally (but not universally) have agreed to these concessions, possibly also re-gearing leases to incorporate an additional term commensurate with the length of the rent holiday.
What we expect
There will be substantial occupier fall-out as a result of Covid-19. Many retail and F&B businesses, including many well-known and long-established high street names, will inevitably fail over the coming weeks and months. 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 totalling 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. To date (7 April 2020), major retailers to formerly enter administration include Debenhams, Cath Kidston, Laura Ashley and Brighthouse. There have also been casualties on the F&B side, in the shape of Vapiano, Caluccio’s and TRG’s Chiquitos and Food & Fuel brands. Many more will follow in the coming weeks.
June’s quarterly rent day will be an even greater pinchpoint than March’s. With stores in lockdown for a significant proportion (possibly all) of Q2, retailers will approach June rent day in a far more challenged cash position than they did in Q1. The call for rent holidays and further concessions will be all the more vociferous.
Polarisation in consumer demand between retail sub-sectors. Retail sales will inevitably show a net decline during the pandemic, but this will mask huge variances between sub-sectors. At the one extreme, grocers are seeing annual growth in excess of 20%. At the other, fashion operators are seeing year-on-year sales fall off a cliff. Online will inevitably see double digit growth, but will not simply absorb the slack from lost sales from physical stores.
The ethics of “non-essential” online retailing increasingly called into question. Several retailers (e.g. Next, River Island, Moss Bros, Net-a-Porter) have already closed their online divisions in a bid to safeguard the health of their warehousing staff. Others suggest they can maintain online operations without compromising their workforce.
What we question
How will rent holidays be recouped? 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 and are far from being resolved.
Whether there will be a huge “bounceback” in consumer demand when the pandemic passes. “Revenge spending” will become an increasingly populist term but may not have much substance in reality. This is apparently already a factor in China, but that is a vastly different consumer market than the UK. Yes, there will be pent-up consumer demand in the UK, a stockpile of cash for many people (but not all) and propensity to splash out, but will this not be counterbalanced by employment concerns and the threat of economic recession? A temporary consumer “bounceback” at best.
The pace of return to “normality”. This is far more than a blip. Even if the pandemic itself passes within a few months (a big “if” in itself), the damage endured by the retail sector will only heal over a very protracted period of time. When stores finally re-open, retailers will not simply recoup the trade lost in the intervening period and this will have ongoing cost implications – and impact their ability / willingness to pay rent to landlords.
The fight for survival trumps everything. In the face of an existential crisis, many retailers are not looking beyond the immediate future. Are issues such as ESG and CSR really on any retailers’ agendas in the current crisis? And do consumers really take into account retailers with questionable CSR ethics and factor this into their shopping preferences?
Whether the crisis will actually prompt permanent changes to the way we shop. Enforced store closures are resulting in an inevitable flight to online. Although many consumers have tested online grocery for the first time, the rate of growth (+13%) is lagging overall market growth (+21%). The shortcomings of an online-only retail market have been laid bare by the pandemic and may actually lead to greater appreciation of the high street.