A grand re-opening?
COVID-19 Market Update – 12/06/2020
10 minutes to read
Introduction
This is the tenth 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:
- Our expectations for Monday’s re-opening
- What we learned from the BRC retail sales figures for May
- 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
- Monday = start of Retail’s return from its “ground zero”
- Re-opening will be phased and staggered
- Only 50-70% of retail stock will re-open on Monday itself
- Trade volumes will be substantially down for some time to come
- Media images of shopper queues do not signify recovery
- Total retail sales down -5.9% in May (source: BRC)
- Second worst monthly performance on record (after April)
- In-store non-food sales down y-o-y by -50.3%
- Online non-food sales grow y-o-y by +60.2%
- Online’s share of non-food spend increases to 61.9%
- Monsoon Accessorize to live on through pre-pack administration
- Quiz also subject to pre-pack administration
- TRG’s CVA confirmed, 125 Frankie & Benny’s / Garfunkel’s outlets to close
- Unnamed value operator reportedly on brink of administration / CVA.
1. Our expectations for Monday’s retail re-opening
Monday marks retail’s “Independence Day” – the day the lockdown on “non essential” retail is lifted. To keep things in perspective, this is just the first step on a highly protracted and bumpy road to recovery, rather than a triumph in itself.
We have already articulated our thoughts and expectations as to how the lifting of the lockdown will play out in the Retail Note of 15/05/20. These expectations are broadly unchanged and may be summarised as follows:
- Although no longer subject to enforced lockdown, not all retail outlets will necessarily open on Monday. The re-opening process is likely to be both phased and staggered, with retailers prioritising outlets that best lend themselves to social-distancing.
- Trading volumes at re-opened stores will be significantly lower than “normal” levels, perhaps just 30%-50% initially, for three key reasons:
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- A number of consumers (ca. 46%) still do not feel comfortable visiting a physical store, so will stay away for the time being.
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- Operating under social-distancing conditions will limit in-store traffic and compromised stores will see significantly reduced trade.
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- Despite considerable pent-up demand, the UK consumer is very squeezed and confidence is very low on the back of job security concerns.
It is difficult to quantify the proportion of stores that will re-open on Monday as this will vary considerably by operator. Major retail landlords we have spoken to seem confident that as much as 70% of retail stock will re-open next week. Our feeling is that this may be slightly optimistic and tentatively project that this figure will be closer to 50%.
The process of re-opening is a substantial undertaking. In additional to necessary health and safety modifications to stores, retailers have to recall furloughed staff and in many cases, fully restock stores. In seasonal markets, particularly fashion, product that goes into a store now will be markedly different from that which was withdrawn back in March. With limited supply chain continuity, many retailers are effectively at a standing start in understanding evolving consumer/seasonal trends.
There are a select number of retailers that are planning to re-open their full estates from Monday. These include Primark, whose larger stores lend themselves to social-distancing (though high footfall does not). Others that intend to open in full include Frasers Group (Sports Direct, Flannels, Jack Wills), Superdry, Game, Dune, Mountain Warehouse and The Works.
For many others, re-openings will be staggered. John Lewis will open two stores (Kingston and Poole) as of Monday, with 11 more following on 18 June. Debenhams will open around 50 of its residual estate (less than 50%), while Next will initially only re-open 25 sites and these are likely to be out-of-town and retail park locations.
Be very wary of media coverage of retail re-openings. Next week’s reporting will inevitably highlight significant queues outside shops and shopping centres across the land. These are more a reflection of social-distancing compromises, rather than rampant high street footfall. Any suggestion that these images represent a retail re-bound are as premature as they are misguided.
Monday marks retail’s return from its “ground zero”. Trends will slowly improve as the rest of the year unfolds, but realistically we won’t be in position to even think about a recovery until 2021 at the earliest.
In many ways, as the “cost holidays” (e.g. landlord concessions, staff furloughs, business rate holidays) unwind and lapse, the real tests for retailers are still to come. Monday marks a positive step in the right direction for the UK retail market, but the hard work for retailers really starts here.
2. What we learnt from the BRCs retail sales figures for May
May’s retail sales figures were dire. Marginally less dire than April’s. But dire nonetheless. Curious, nay staggering that some quarters of the media interpreted this direness as some sort of recovery, underlining the fact that month-on-month trends are a very weak barometer of true market performance.
Total retail sales declined by -5.9%, against a relatively soft comparable of -1.9% in May 2019. Although a relative improvement on the -19.1% slump reported in April, this was still the second worst month since the BRC’s records began in 1995, by a considerable margin. May’s figures took the 3-month and 12-month averages to -9.4% and -2.6% respectively.
The reported like-for-like growth figure of +7.9% is fairly spurious. This figure includes online sales, but strips out “non-essential” stores still mandated to close by the government. Not only does this figure reflect a non-level playing field, it also sends out the rather dubious message that all “essential” retailers have flourished during the lockdown, which is patently not the case.
In its headline release, the BRC did not quantify grocery sales growth in May, other than to state that it was “in growth year-on-year”. For the three months to May, total food sales grew by +5.6% (+8.7% like-for-like). Given the major pre-lockdown stockpiling surge in March, this implies considerable slowdown in April and May.
Predictably, in-store non-food sales are experiencing the highest degree of pain. In-store sales of non-food items declined -50.3% on a total and -21.9% on a like-for-like basis in the three months to May 2020, far worse than the 12-month average decline of -14.8%.
Equally predictably, there was a surge in online demand. Online non-food sales increased by +60.2% in May compared to 4.4% in the same month in 2019. Consequently, online non-food penetration grew from 31.4% in May 2019 to 61.9% this May. These are artificially high figures and will not be sustained when physical stores re-open.
Unlike some quarters of the media, the BRC did not talk up its own numbers (but to be fair, the BRC has always historically talked down figures that were actually good). The headline of the May release that “Retail [is] Not Out of the Woods Yet” is actually a huge under-statement. The figurative woods is actually a jungle and retail will be in the thick of this for many months to come.
3. Further occupier fall-out?
Two pending occupier failures (Monsoon Accessorize and The Restaurant Group) flagged in last week’s note materialised this week, while there was also a fresh casualty in the fashion market in the shape of Quiz. Another value-based operator is also heavily rumoured to be on the verge of administration, but unconfirmed at time of press.
As suggested in last week’s note, Monsoon Accessorize will live on under different ownership, but with owner/founder Peter Simon indeed very much still at the helm. The business this week underwent a pre-pack administration, with Mr Simon re-acquiring the brands from the administrator FRP Advisory through a new holding company Adena for up to £15m, along with the head office, design teams and the group’s distribution centre in Wellingborough, Northamptonshire.
The deal secured up to 2,300 jobs and the new group said it hoped to save “as many as 100 stores” from the current portfolio and it will now “enter talks with the landlords of many” of the group’s stores to “see if they can reach terms to reopen them when the current lockdown ends to secure further jobs”. This is likely to see a push towards shorter leases (with annual mutual breaks) and possibly turnover rents (at 10%?) for a fixed period, before reverting to a base figure thereafter.
In a rare acknowledgement of landlords’ contributions, Peter Simon stated: “I would like to thank landlords for the helpfulness and enormous forbearance they have shown so far, which has enabled us to get to this point.” More generally, he underlined “that fashion has a future on the high street, and [they] are prepared to commit time and money making it work.” More tellingly still that the two brands “will both emerge smaller and stronger after this but essentially the same” – an apposite microcosm of the UK retail sector generally?
As previously flagged, The Restaurant Group’s (TRG’s) CVA was formally launched this week. This will see the closure of 125 Frankie & Benny’s and Garfunkel’s sites, with other brands such as Wagamama’s largely unaffected. The business also said it would attempt to renegotiate rents and terms on a further 85 sites.
This restructuring is largely an acceleration of previously announced plans. Many reasons have been cited for TRG's struggles, ranging from the valid (rising staff and operating costs), inaccurate (decline in casual dining demand amongst consumers) to frankly bizarre (shift to online shopping). The words of CEO Andy Hornby that "the proposed CVA will deliver an appropriately-sized estate for our Leisure business to ensure we are well positioned” probably reflect the main cause of its struggles – the business is over-expanded and certain brands are not strong enough to warrant that many sites.
Fast fashion brand Quiz this week appointed KPMG as administrators. The brand operates 82 standalone stores in the UK and Republic of Ireland through its wholly-owned subsidiary Kast Retail Limited. As part of the pre-pack, the business is “proposing to subsequently acquire from Kast (acting through its administrators) the business and certain assets of Kast for a cash consideration of £1.3m”, which will come under the umbrella of Zandra Retail Limited, another wholly-owned subsidiary of Quiz.
Quiz said this proposal would “enable the group to operate an economically viable store portfolio alongside its online, UK concession and international channels” which will be unaffected by the administration. The retailer blamed the administration on the enforced closure of stores due to the coronavirus pandemic; accelerating shift in consumer behaviour towards online; “difficulty in renegotiating reductions to the high levels of rents and rates” and a “sustained period of macro-economic uncertainty” in the UK.
As with most occupier distress, Quiz’s issues predated the outbreak of COVID-19. For the last financial year, the business was barely profitable (reporting an operating profit of just £230k) and for the 6 months to 30 September 2019, it booked a loss of £6.8m. It had a tough Christmas, with sales down -7% in the 7 weeks to January 2020. But as of 9 June, Quiz said it had £5.93m of cash and additional banking facilities of £1.75m and was still in discussions about securing a longer-term credit line.
The fact that online sales declined by -14.8% over Christmas and significantly under-performed the store-based business raise doubts more over product than channel strategy. The brand has clearly suffered contagion issues through its relatively high exposure to concessions in Debenhams stores, which have themselves suffered to a greater or lesser degree. But the simple fact is that fashion sector is over-supplied, to the point that not all operators can flourish.
At time of writing, there are a number of rumours that a CVA may be pending for one of the value-based operators. Said retailer has been on our internal “watch list” for some time, but we will wait for further information / confirmation.
The key message here is that there may be fall-out even within those segments of the market that are perceived to be more robust than others. Even “essential” retailers in a market where consumers are trading down are not incubated from potential distress. Whatever the macro-situation, the simple fact is some operators are better than others and it is important to understand these nuances, rather than rely on sector-generic assumptions.