Leisure – a sober re-opening
COVID-19 Market Update – 13/07/2020
9 minutes to read
Introduction
This is the 13th 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:
- Hospitality – did “Super Saturday” live up to its billing?
- John Lewis – our read on the store closures
Please do not hesitate to contact myself or any of my retail colleagues if you require any further information.
Key Messages
- Lifting of Leisure lockdown in England a subdued affair to date
- Only 42% of pubs re-open on first week-end
- Just 12% of restaurants re-open
- Like-for-like sales at re-opened sites down -45% y-o-y
- 55% of UK consumers still don’t feel safe eating/drinking indoors
- Town centre footfall up +10.6% w-o-w, but down -42.6% y-o-y
- Chancellor to invest £4bn to kickstart hospitality industry
- Hospitality VAT reduced from 20% to 5% until January 2021
- Moot point as to whether this will stimulate demand
- No fresh incentives for the retail sector in Summer Statement
- John Lewis announces 8 store closures, affecting 1,300 staff
- Two transit stores (St Pancras/Heathrow) not surprising
- Virtually all store disposals opened over the last 5-10 years
- Grand Central Birmingham the highest profile
- Estimated 60-79% of JL’s sales will be online this year
- Question marks as to JLP’s strategic direction.
1. Hospitality – did “Super Saturday” live up to its billing?
Lifting of the Leisure lockdown (in England at least) and the announcement of major incentive packages in the Chancellor’s Budget should have made last week a great one for the hospitality sector. But it is a measure of the challenges that the sector faces that neither prompted much more than a grunt of resignation across the hospitality sector.
“Super Saturday” stands virtually unchallenged as the most desperately unimaginative media moniker for anything remotely interesting, sporting or otherwise, to happen on a Saturday. And, of course, 4 July was afforded that very same lazy strapline and there were predictable images of massed crowds in certain areas (the streets of Soho being a particular favourite). Neither did justice to an affair that was in reality far more muted.
Figures from Coffer Peach Business Tracker made for sobering reading (pun intended). Just 42% of pubs re-opened for business on the week-end of 4-5 July, whilst as few as 12% of restaurants re-opened their doors. As predicted, the re-opening programme for both sectors will be highly staggered, with the former finding their feet somewhat quicker than the latter.
Separate figures from Mintel show that 55% of UK consumers say they would be currently uncomfortable about visiting a restaurant/bar indoors. This is the highest figure in Europe (Spain 51%, Italy 39%, France 36% and Germany 34%). No doubt partially a reflection of where the UK sits in the COVID-19 curve relative to our European cousins, but nevertheless still a considerable constraint on hospitality market recovery.
Those hospitality businesses that did open in the first week post leisure lockdown saw far lower levels of trade than normal. Figures from Coffer Peach Business Tracker showed that like-for-likes sales at re-opened operators were down -45% year-on-year. Allowing for a slight “opening spike”, this figure would seem to support UK Hospitality’s earlier projection that trade levels are unlikely to significantly surpass 50% for the first three months post re-opening.
Those wedded to the “Super Saturday” narrative pointed to the fact that footfall seemingly enjoyed a “double digit” increase (+10.6%), “more than double” (+4.1%) that of the week before. Hardly a triumph when the year-on-year figure shows a decline of -42.6%. Expressed another way, approaching one month after the retail lockdown was lifted in England, footfall in our town centres is still only around one half of what it would ordinarily be.
But Chancellor Rishi Sunak did at least acknowledge the challenges facing the industry in his Summer Statement, reducing the rate of VAT on certain aspects of hospitality from 20% to 5% for the period from 15 July to 12 January 2021. This includes food, accommodation and attractions, but won’t apply to alcohol. The move is budgeted to cost the Treasury some £4bn.
VAT cuts to stimulate consumer demand are, in my opinion, an economist’s response to issues that run far deeper. But this is a significant reduction – far greater, for example, that the wider reduction in VAT from 17.5% to 15% implemented during the Global Financial Crisis in 2008. But whether VAT cuts actually stimulate demand is a moot point.
The experience of the wider VAT cut between 2008 – 2010 is inconclusive. Retail sales generally held up far better during GFC than was widely expected. Only “big ticket” operators (e.g. electricals, furniture) reported any tangible uptick in demand and even then, this demand was very “spikey” – a sudden surge before the deadline followed by an equally abrupt slump immediately after. Very few retail operators reported an incremental increase in overall sales.
Will Mr Sunak’s intervention achieve the desired effect? The saving of a few pounds is unlikely to sway the 55% of people that still feel unsafe eating out at all, hence why some critics have labelled it a “deadweight” incentive. But if it stimulates increased demand from an audience that is already pre-disposed to eating out, then it does still have merit. A case of not necessarily enticing more people to spend, but people to spend more.
One thing is certain: the VAT reduction will not single handedly provide salvation for the hospitality sector. Some quarters of the retail sector are already up in arms at the Chancellor’s willingness to address the challenges in the hospitality sector, but apparently ignore theirs. How about something that will help both – a fundamental review of the business rate system, for starters?
2. John Lewis – our read on store closures
Retail store closures are hardly news at the moment. But when a retailer as revered as John Lewis announces that it is to close eight stores, it transitions from the business section to the front pages. A wake-up call (for anyone that still needs it) that no retailer is immune to either wider structural change within the industry, nor the devastating catalyst to its acceleration that is COVID-19.
The eight stores facing closure fall into three camps: two transit stores (St Pancras station and Heathrow Terminal 2), four At Home stores (Croydon, Newbury, Swindon, Tamworth) and by far most significantly, two “full line” John Lewis department stores (Grand Central Birmingham and Watford). The news was not a “bolt from the blue” as the closures were previously signaled, but there were still some surprises in the stores affected.
The least surprising were the two transit stores. At the time of their respective openings (St Pancras in particular), other retail analysts opined as to their significance as “physical hubs in a wider multi-channel ecosystem, a microcosm of the brand etc etc”. Personally, I never saw the point of either of them and to them, they seemed something of a vanity exercise.
Far more significant is the fact that the majority of these stores have opened over the last 10 (even 5?) years, with Watford being the main exception. This calls into question some of the Partnership’s track record of acquisitions in recent years and, more fundamentally, as to whether they have as good an understanding of the co-dependencies of physical stores and online that they profess (and that many in the outside world believe).
Grand Central Birmingham is the highest profile store on the disposal list. Opened less than five years ago, the store was the crowning glory of the re-development New Street Station. John Lewis closing down within such a short timeframe and having no direct presence in the UK’s second largest city (Solihull only being a secondary presence) is a major development.
Without, of course, having access to actual trading data, I cannot comment on individual store performance, but would refer to my earlier Retail Note from 20/02/20. For all their strong presentation and embrace of “experiential”, I questioned whether the very latest John Lewis stores to open (Birmingham, Leeds, Oxford and Westfield London) had the requisite “soul” to succeed and make enough money to be viable. To a degree, we now know the answer, at least in one case.
Watford came as the biggest surprise to me personally, as it is an established store, with the “soul” that is very hard to define. It had also been subject to significant investment in recent years on the back of the extension of the INTU scheme that it anchors. Proof that there is always far more to store performance than meets the eye and probably that having sufficient “soul” needs to be harmonized with the right occupancy and operating costs.
As I articulated in my Retail Note from 20/02/20 these are desperately worrying times for the John Lewis Partnership. The business is not at risk of failure, but that should not detract from the scale of the challenges it faces. Store closures never make for positive news (not least for any hard-working staff that are made redundant), but are sometimes a necessary evil.
More worrying is the fact that these store closures seem to herald a change of strategic direction, one of cost cutting rather than of top line growth. By flagging that “60% to 70%” of its sales are likely to be online this year also smacks of seeing only one side of the multi-channel equation. The Partnership is at risk of relinquishing one of its key USPs – the quality of its staff and high levels of customer service, a real point of difference in the retail sector.
For me, the most obvious manifestation of John Lewis’ (relative) fall from grace has been its far too ready embrace of Black Friday in recent years. More so than most other retailers, John Lewis has far more to lose (gross margin and brand equity) than gain (maintaining sales volume) by partaking in Black Friday. Why try and be Amazon, when you can be John Lewis?
While it seems strange to be writing about a pre-Christmas event on a very warm day in July, I wonder why so few people make the link between retail failure and Black Friday? COVID-19 has been blamed for many things (rightly and wrongly), but Black Friday is just as damaging to the retail sector, not least because it recurs every year. Unlike COVID-19, many of its wounds are self-inflicted by retailers.
How many retailers now proposing CVAs, going through pre-pack administrations or going to landlords cap in hand were merrily giving away margin and diluting their brand year after year in what should be their peak trading period? If retailers are looking to have COVID-19 clauses put in the leases, why are landlords not reciprocating with anti-Black Friday ones of their own? Just a thought…