The high street – upheaval or evolution?
COVID-19 Market Update – 23/10/2020
12 minutes to read
Introduction
This is the 22nd 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 two key themes:
- Upheaval on the high street starts to bite
- Retail sales continue to defy economists’ expectations
Please do not hesitate to contact myself or any of my retail colleagues if you require any further information.
Key Messages
• Record number of store closures in 1st half of year
• 11,120 closures vs 5,119 new openings
• Net figure of 6,001, +71% on last year
• EWM likely to survive despite administration
• Gap to potentially withdraw from the UK
• Mike Ashley lodges bid for Debenhams
• Sky to launch chain of high street stores
• Retail sales values +6.0% in September
• Best monthly performance since March 2019
• Non-food returns to y-o-y growth (+0.5%)
• Non-food buoyed by HH Goods (+10.1%) and DIY (+25.4%)
• Clothing sales decline by a further -14.9% y-o-y
• Clothing spend cumulatively down -98% since March
• Online sales slip by -1.2% m-o-m
• Online penetration declines to 27.5%
1. Upheaval on the high street starts to bite
Some of last week’s key retail vignettes: a report from PwC/Local Data Company showing record high street closures; the Edinburgh Woollen Mill reportedly on the brink of collapse; Gap reportedly considering a complete withdrawal from the UK; Mike Ashley reportedly in the mix to take over Debenhams; Sky to open their first physical stores. Retail may be highly challenged, but one thing it is not is dull.
The PwC/LDC report made for predictably grim reading. A record number of stores closed during the first half of 2020. A total of 11,120 multiple-operated stores shut their doors for good between January and June, offset against 5,119 new openings. That left net store closures of 6,001 – up +71% compared with the same period last year, when a net 3,509 store closures were recorded.
On a regional basis, Greater London was hardest hit in absolute terms, with 1,008 net closures. Yorkshire and the Humber recorded the biggest loss of chain stores in percentage terms, with a net 3.4% of outlets disappearing. York was the worst affected area, according to the data, with 55 net shop closures during the first six months of the year.
To be fair, the PwC/LDC reports had been showing a broadly similar trend for a period of time even before COVID-19 came along. But this latest one clearly shows an acceleration of what was happening on the high street even before the pandemic took hold.
Reports of this nature prompt a whole host of emotions within me personally and professionally. On the one hand, there is a sense of gladness that the structural failings of the retail market are finally being laid bare, but this is often outweighed by despair at the almost sensationalistic glee that they are reported in the media. There is also genuine concern for those people whose livelihoods have been affected.
But the overriding one is probably a sense of relief; on the one hand, that one of the most severe structural failings of the retail sector (over-supply) is starting to be slowly redressed (sadly, by default rather than design) and on the other hand, that there is still activity in the market. Over 5,000 new openings may have been far outweighed by closures, but it is still a significant figure nonetheless. The high street may be retrenching, but there are still plenty of operators out there that are active and rightly believe in its future.
But further fall-out is still inevitable. The Edinburgh Woollen Mill Group is the latest retailer reportedly about to go pop. And this would be a far bigger failure than most would credit, as the business is effectively a consortium, comprising a whole host of brands in addition to the eponymous EWM chain (Peacocks, Bonmarche, Ponden Home, Jaeger, Austin Reed). It operates over 1,100 stores and employs as many as 21,000 staff.
As with any CVA/administration (c.f. my comments on New Look a few weeks ago), EMW is fraught with complication. But was it inevitable? There are two considerable “push” factors. The most obvious one, to which nobody can be blind, is the devastating effect COVID-19 has had on the clothing market in particular. Since March, clothing sales have been cripplingly down by a monthly average of -37%. With an older target market (50+), many of EWM’s customer would have been far less predisposed to visit stores than other socio-economic groups. And it also had very limited multi-channel capability upon which to fall back.
The other major “push” factor is far less COVID-centric. Almost without exception ,the various brands within EWM have all previously failed in different guises and under previous ownership. EWM systematically bought them up in the wake of their respective demises. One of the key determinants in assessing retailer failure is whether a business has previous track record in this area. EWM may not tick this box as a consortium, but the sum of the parts certainly do.
But there are also two huge “pull” factors that more than muddy the waters. Firstly, the business wasn’t displaying any signs of distress prior to COVID. On the contrary, it was actually trading very well. The latest available accounts (for the truncated 27 weeks to 2 March 2019) showed an operating profit of £33.5m on turnover of ca. £327m. Any retail business that can achieve a double-digit operating margin (10.25%) would hardly seem a candidate for failure, on the surface at least.
Secondly, the business is owned by entrepreneur Phillip Day, who, if media reports are to be believed, is personally worth some £1.2bn+. Clearly, there is a lot of behind-the-scenes negotiation currently playing out, but it is highly unlikely that the EWM group will fold completely. I would actually go as far as venture that it will actually re-emerge, possibly through a pre-pack administration, in broadly a similar guise as now, with underperforming stores (and possibly brands) offloaded. And with only notional change of ownership.
Fellow clothing retailer Gap having a long-term future on the UK high street seems less likely. The US business is conducting a thorough corporate review and is reportedly considering closing all of its European stores and operating in the region purely through partnerships. The business currently has 129 stores across Europe, including 70 in the UK and a further four in Ireland.
Corporately, Gap has been struggling for a number of years. The review comes after the business reported a COVID-impacted -18% decline in sales in the three months to August, with pre-tax losses for the period amounting to $41m. Revenue performance in Europe was one of the driving factors behind this loss, with sales down -47% during the quarter to $71m. The retailer’s parent company said it would be closing 200 of its own and Banana Republic stores globally this year alone.
Gap potentially withdrawing from the UK has prompted outcry, but should we be surprised if this comes to pass? Not really. The business opened its first store in the UK back in 1987 and was long perceived to be one of the relatively few retail internationalization success stories. The media and fashionistas can naval gaze as to the quality of its product and competitiveness of price point relative to its peers, but Gap’s potential demise in the UK is more fundamental.
Gap’s freshness as a brand has declined significantly over the years. In the intervening time, the UK clothing market has expanded to the point of chronic over-supply – too many operators chasing relatively soft market growth (and a COVID-inflicted car crash in 2020). Only the strongest brands can withstand this pressure and Gap no longer belongs to this elite group – product on constant sale instore is the most telling manifestation of wider brand devaluation.
And the ultimate proof is in the pudding of the company accounts. In the UK, (unlike EWM) Gap has been unprofitable for many years, I believe, the best part of a decade (maybe longer even?) Clearly, it cannot continue to lose money indefinitely and it has been a case of ‘when’ rather ‘if’ for a number of years. That time may be now. And with it comes timely reminder of the challenges of successful international retailing. Gap succeeded for longer than most, but time has finally caught up with it in the UK.
From one embattled retailer to another. A further plot twist this week in the long-running Debenhams saga. As previously predicted, Mike Ashley has entered the fray as a potential buyer of the department store chain and according to The Sunday Times, has lodged a bid, The nature of the bid is, of course, as yet unknown, as is whether there are alternative bids on the table.
Frasers Group had previously owned 30% of Debenhams prior to its collapse and Mr Ashley had attempted to buy the chain before it went into administration. He reportedly lost around £150m when it was ultimately taken over by lenders. On this basis, it seemed inevitable that he would return for a second time. Whether his bid is successful will be revealed in the fullness of time.
Clearly, Frasers Group would not be bidding on Debenhams purely to redress lost pride. There is no way Mike Ashley would want to pour good money after bad and he must see an opportunity to run the business in a sustainable way to generate a return. In may not prove a palatable solution for every landlord (to put it mildly), but the business would at least be secured a future that many did not credit it with.
Meanwhile, new occupier demand from an unlikely source - Sky is poised to open a network of high street stores for the first time, with its first outlet set to launch in Liverpool One this week despite local lockdown restrictions.
The broadcasting giant plans to open around five “social hub” stores a year, with outlets divided into areas for different customer needs including an Access All Areas stage where shoppers will be able to try out different interactive in-store experiences and a Customer Hub where shoppers will be able to speak to advisors. Sky has also tied up with tech repair chain iSmash for an in-store partnership where shoppers can have their damaged smartphones fixed.
In the context of wider high street malaise, Sky’s foray is relatively small beer and it will not redress many more closures. But it is significant in that it proves the direction of travel if far from a one way street, that street being one of irreversible decline. Sky is not alone, there are plenty of other operators (retail or otherwise) currently looking to take space in our town centres. They, like Mike Ashley, do not subscribe to the notion that the high street is dead and that now is actually the perfect opportunity to strike. Plenty of phoenixes will emerge from the ashes of COVD-19.
2. Retail sales continue to defy economists’ expectations
Official retail sales figures for September from the ONS were, for once, fairly consistent with those released by the BRC, as analysed in last week’s Retail Note. But much of the economist-friendly narrative remains deeply misleading in understanding the relative health of the high street.
In terms of the correct headline numbers: UK retail sales values (exc fuel) were up +6.0% year-on-year in September, while volumes (net of inflation/deflation) were up +6.4%. This represents the strongest monthly rate of growth since March 2019 (+6.5%, distorted by Easter timings) and May 2018 (+6.3%). More significantly, this represents the strongest month of recovery since lockdown was lifted.
Much of the ONS narrative remains sadly disingenuous, more fodder for the economist community and media than meaningful reflection of what is actually going on. The obsession with pre-pandemic comparisons (September sales were apparently +6.5% higher than in February) glosses over the ground that was lost in the interim and gives a false sense of recovery. As do meaningless month-on-month comparisons, which showed value growth of +1.5% vs economists’ consensus of +0.4% (if you insist on majoring on the wrong number, at least have decent crack at forecasting it!).
Ironically, the most significant factor in the whole 100+ page release was given no airtime in the narrative – non-food sales achieved their first positive year-on-year growth since January and enjoyed (if that is the right word) their best monthly performance since October last year. Although growth of +0.5% is still fairly pedestrian, this still marks a major turning point for a sector that suffered average monthly declines of ca. -34% between March and June.
But, of course, non-food comprises a number of sub-sectors and the performance of these remains highly polarized. Household Goods saw year-on-year growth of +10.1%, spearheaded by a continuation of the DIY mini-boom (+25.4%) and more modest growth in furniture (+4.5%) and electricals (+0.9%). Star performing non-food categories overall were dispensing chemists (+87.1%) and floorcoverings (+51.2%), although jewellery (+8.2%) warrants individual mention as it saw its first month of growth since February.
Clothing sales showed a gradually improving month-on-month trend but the sector is still firmly in the mire. Year-on-year fashion sales declined by a further -14.9% in September, scant consolation in this being the “least bad” month since February. Clothing sales have declined by a monthly average of -37% since March and cumulatively over that period, spend has been down by -98%. Hardly back to pre-pandemic levels.
Food sales continued to hold up (albeit at a lower rate than the BRC implied), with little evidence to support the notion of a fresh wave of stockpiling amongst consumers. Food values grew by +3.7% in September, a marginal acceleration on the growth seen over the two preceding months (+3.3%). Volumes grew by +3.6%, suggesting only minimal price inflation.
As inferred by the BRC in their numbers, online sales growth continues to decelerate. Month-on-month, all online retail sales declined by -1.2%, with the fall in grocery (-1.5%) steeper than in non-food (-0.4%). Online’s share or retail spending reduced to 27.5% in September, a full -600bps lower than the high water mark seen during lockdown.
The ONS figures give credence to the notion of a consumer that is still willing to spend, but also to a sector that is still in crisis-management mode. And will be for some time. The latest figures predate the fresh round of regional COVID restrictions and the full impact of these will only become fully apparent in the months to come.