Commercial Insights - Retail: The Fall Out From Lockdown
May 2020
5 minutes to read
What we know
The retail sector has been in lockdown since 24 March. This has forced the closure of “non-essential” stores for an initial three weeks, subsequently extended by a minimum of a further three weeks. 69% of UK retail stock comes under the banner of “non-essential” yet only 17% of stores have stayed open during the lockdown. Those eligible to trade (e.g. DIY operators) are only now slowly opening to the public and adhering to strict social-distancing.
Only around one third of retailers and leisure operators met their Q1 rent obligations in full and on time. Many sought some sort of landlord concession, typically a rent holiday (3 or 6 month or indefinite), a partial payment, or a switch to month payments, or a transition to turnover rents. Many negotiations are ongoing. Most of the foodstore operators complied completely. Conversely, very few leisure and F&B operators paid anything.
Retail sales fell off a cliff post-lockdown. The ONS showed that retail sales values (exc fuel) were down -3.9% in March, the worst monthly performance since records began in 1989. This headline figure masked significant movements over the month. The BRC indicated that retail sales were up +13% in the two weeks prior to lockdown, but slumped -27% in the two weeks post. Consumer demand for clothing has been especially weak, with sales down -35% year-on-year.
Inevitable occupier fall-out. Debenhams has been into a “light touch” administration following its CVA last year and revealed that seven stores will no re-open when the lockdown is lifted. Clothing brands Oasis and Warehouse have likewise entered administration and are currently seeking an 11th hour buyer, Cath Kidston undertook a prepack administration that retained only the brand name and online business (but excluded the store estate), while Office and TM Lewin have been put up for sale by their respective private equity owners.
What we expect
A trickle of occupier fall-out turning to a flood. Retail businesses, by their very nature, are highly cash flow dependent. For many, this cash flow has been vastly reduced or turned off completely, leaving many in a precarious financial situation. Those highest on the “watch list” are operators under private equity ownership (current or historic), those with a track record of past failure and those heavily exposed to the fashion sector (which is vastly over-shopped and subject to very soft consumer demand).
Retail sales will plummet further in April and May. Retail sales will inevitably plumb new depths in April and May as “non-essential” stores remain under enforced closure. After something of a pre-lockdown surge, even “essential” retailers are now seeing sales levels decline as they trade only under deeply compromised conditions as social-distancing measures remain in force. Online sales will continue to grow in double digits, but will only pick up a relatively small proportion of lost store based sales.
June’s quarterly rent day will be an even greater pinch point 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 – even those that made their Q1 payments may not necessarily do so in Q2.
Lifting of the lockdown will be highly phased. “Non-essential” retail outlets will only be allowed to re-open in mid-May at the earliest. Certain sub-sectors are likely to be able to open before others. Other European countries (e.g. Germany and Italy) have prioritised small, independent operators, although this flies in the face of the practicalities of enforcing in-store social distancing. The UK phasing is likely to be determined more by sector than business ownership. Retail is likely to precede Leisure.
What we question
The extent to which consumer demand will “bounce back” when the lockdown is lifted. Even when stores start to re-open, recovery of trade will be very gradual. On the one hand, stores will still be subject to considerable social-distancing compromises. The experiences of “essential” retailers trading through the lockdown has been of significant sales declines through trading under compromised circumstances (and significantly higher costs). Trading levels will take considerable time to “normalise”.
The pace of return to “normality”. “The new norm” is likely to become a new buzzword, which has little tangible grounding. Retail sales will remain under pressure for some considerable time. On top of the phased nature of the lockdown lift and compromises to stores, the consumer has most definitely been damaged through the pandemic. Brexit was seen as a test of the wider economy, whereas COVID-19 is seen as far more closely related to consumers themselves. Retail spending patterns are much more closely aligned to the latter than the former.
Will rent holidays ever be recouped? 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.
"Above all else, the pandemic has proved the co-dependencies of online and physical retail, rather than their perceived conflicts."
Whether consumer behavioural changes are permanent. Enforced store closures have inevitably resulted in a flight to online. In March, online penetration in non-food increased to 40%+, but in grocery it remains low at just 5.8%. All metrics highlight the fact that online is failing to pick up the slack of lost store-based sales. When stores re-open, online’s share in non-food will return to pre-lockdown levels of ca. 20% and resume its historic growth trajectory. Above all else, the pandemic has proved the co-dependencies of online and physical retail, rather than their perceived conflicts.