Retail: two years on from COVID
Has everything changed completely? Or has nothing changed at all? We ask the question of five key facets within the retail market.
11 minutes to read
“Everybody’s going through changes, no one knows what’s going on. And everybody changes places. But the world still carries on”. *
COVID has supposedly changed everything. Forever. During the dark days of the series of lockdowns, it was easy to assume that life would never go back to anything like normal ever again. Many wild assumptions were made and massively distorted, atypical trends were extrapolated as “the new norm”. “Uncertainty” and “unprecedented” were the two key watchwords, yet horribly uncertain circumstances were widely used as a precedent for the future. Oh the irony.
But the sky generally has a habit of not falling down, no storm lasts forever. COVID is still with us but the eye of the storm has passed and the initial shock factor has receded. Periods of enforced lockdown are increasingly becoming a distant memory and now that we can at last see the wood from the trees, we are able to take a more measured, objective view as to what has actually changed. If anything.
The travails of the retail sector during the pandemic have been well-documented. Crippled by three periods of lockdown, retailers felt the full force of COVID. An already challenged market faced the ultimate stress-test and many stores did not reopen post pandemic and many retail business failed. Online provided some respite during periods when stores were closed and online sales skyrocketed. Adapting to working from home, many consumers eschewed large retail destinations as they refamiliarised themselves with the retail offer they had on their own doorstep.
Two years on from Lockdown V1 (24 March 2020), how sticky are these trends proving? Has everything changed completely? Or has nothing changed at all? We ask the question of five key facets within the retail market.
Retail Sales – really back to pre-pandemic levels?
The qualification of this is very simple: during periods of lockdown when all but “essential” physical retail shops were closed, retail sales fell off a cliff and consumers stopped spending. They spent a bit more online, but this is no way compensated for lost store-based sales. When stores reopened, retail sales skyrocketed as pent up demand was immediately released.
Some of the quantification of this is also simple: retail sales in March / April / May 2020 (-4.6%, -18.5%, -9.1%) were by far the three worst monthly figures since records began (eclipsing the previous historic low of just -3.1%). In contrast, the bounceback in April / May / June 2021 36.8%; +21.4%; +8.9%) was off the other end of the scale.
But what is the “aggregated” picture i.e. do the peaks outweigh the troughs, or in popular parlance, are retail sales “back to pre-pandemic levels”? This has been declared on many occasions but this is a slightly disingenuous conclusion to reach. Simply comparing one month’s figures against one arbitrary/non-demanding point in the past (February 2020) is neither indicative of a longer term pattern nor does it take into account the “black hole” of spend that was “lost” during the pandemic.
Only when this “lost” spend is fully clawed back can we accurately conclude that retail sales are “back to pre-pandemic levels”. What is the situation two years on? On a headline basis, total retail sales are higher than they would have been in a static market (+5% according to our data), but a little shy of where they probably should be (-1.7%), allowing for a degree of underlying market growth. But some key categories are still in deficit i.e. they have not fully recouped the “lost” spend during the pandemic. By our estimates, overall non-food spend is still -2.5% down (ca. -£4.5bn in absolute terms), with clothing (-16%, -£7bn) footwear (-19%, ca. £1bn), cosmetics (-10%, £540m) and PCs/Phones (-29%, -£1.4bn) some way adrift of where they should be.
All things being equal, only now are retail sales fully returning to “pre-pandemic levels”, but some categories still have ground to catch-up – expect a full equilibrium to be restored in the coming months.
Online – sustainable or artificial peaks?
The headline writers had much to feast on during the pandemic in terms of online growth statistics and online has been widely celebrated as a “winner” during the pandemic (as if a channel of distribution can be a “winner” any more than sport can be a winner over an individual or a team). In all honesty, much confusion as to whether the flight to online was born of temporary necessity or long-term choice.
Online penetration prior to COVID stood at 19.4%. That figure peaked first at 34.4% in May 2020 and then at 37.7% in March 2021. But has receded pretty dramatically on both a month-on-month and annualised basis ever since Lockdown V1 was lifted. In January 2022, the ONS reported a figure of 25.3%, before curiously upgrading the figure to 27.8% in February (despite a -18.1% y-o-y decline). Dubious rebasing of the numbers, by all accounts.
Understanding the mechanics of these online demand spikes is absolutely key. During periods of lockdown, overall spending contracted considerably, but online still grew, vastly inflating the penetration figures on a temporary basis. Also, it is vital to understand the contrasting movements of online grocery and online non-food. Online grocery penetration more than doubled to 12% during the pandemic, but is already receding rapidly (to just 8.9% at February 2022).
That “online spend is above pre-pandemic levels” is a given, but for the time being at least, online penetration will continue to decline. Ultimately, it will stabilise (at a higher level than pre-pandemic) and then resume a more normalised growth trajectory. All things being equal, online penetration probably experienced no more than a ca. 200-300bps “kicker” during the pandemic.
“Massive consumer shifts online during the pandemic” were largely temporary – and those still expecting online penetration to kick on from the artificial 30%+ peaks witnessed during the pandemic live in an alternate reality.
Vacancy rates – really a one-way street?
There has been clear movement on retail vacancy rates over the last two years. According to the Local Data Company (LDC), vacancy rates were relatively stable coming into the pandemic at 13.3%. Between February 2020 and 2021, this rate increased by +170bps to 15%, surpassing the previous high water mark of 14.6% in 2011/2012. Come February 2022, this figure has risen a further +60bps to 15.6%.
The rise in vacancy has obviously been driven by considerable upheaval in occupier markets. On the one hand, there have a been a few large-scale retail casualties, most notably Debenhams and the Arcadia Group. On the other hand, many others have retrenched or rationalised their portfolios to cut costs and future-proof their business. Generally, there has been a push towards having fewer, but better stores (on rebased rents).
But it is not an entirely one-way street. Delving deeper into the LDC data, there is a surprising level of positive market activity too. In 2020 and 2021, there were 39,060 and 43,167 new store openings respectively. Although this inevitably did not offset the level of closures in both years (50,379 and 51,069) it is nevertheless an indication that many operators (both multiples and independents) are still acquiring new stores.
Stabilisation of occupier markets, renewed acquisition activity and a reduction in overall retail footprint as some retail floorspace is repurposed to other uses are likely to keep vacancy rates more in check going forward. Indeed, this is already filtering through. Retail vacancy is already starting to trend down from highs of 15.9% seen in the latter half of 2021.
Retail vacancy rates have risen by +230bps over the last two years and are tangibly higher than they were pre-pandemic. The direction of travel, although gradual, is a positive one, but realistically, it will be a number of years before retail vacancy rates are sub 13%.
Localism – permanent shift or enforced fad?
A resurgence of localism – one of the perceived positive by-products of the pandemic. Enforced periods of working from home and wider travel restrictions generally led to consumers shopping much closer to where they live and (re-)discovering the retail and leisure offers close to home. A major fillip for local and neighbourhood centres and smaller / independent operators, with a whole host of positive ESG credentials to boot.
An anecdotal observation that is harder to quantify. Maybe not the most scientific of measures, but the Pret Index is an interesting barometer of the rate of recovery across various destinations. It shows a clear demand spike in London Suburbs, at the expense of the West End (to a degree) and the City (especially). These trends are mirrored in marginally more scientific footfall data from Springboard. In 2021, footfall in Outer London was -27.3% lower than 2019, compared to -52.0% in Central London. Nationally, Market Towns (-30.9%), Coastal Towns (-31.0%) and Historic Towns (-32.2%) all “out-performed” Regional Cities (-37.8%). But for “out-performed” we should probably read “performed less badly”.
Clearly, one of the two key moving parts here is the movement of office workers, the permanence of WFH and the realities of hybrid working. All topics that have been, and continue to be, debated to death. Everyone has a view, but suffice to say, nothing will be as binary as the loudest “influencers” would have us believe.
The second moving part in the equation is perhaps more interesting and fundamental to retailing – actually how good is your local centre? Does it still retain a sense of relevance in times of non-lockdown / semi normality? If the answers to these two questions are in the affirmative, there is obviously a far higher chance of the flight to localism proving sticky. But in many locations, there is still too wide a gap between the local retail and leisure offer and the aspirations of the people that live there – and COVID has laid this bare. A weakness or an opportunity?
Rents and capital values – unrecoverable freefall?
On the real estate side, retail rents and capital values have tumbled during the pandemic. History will no doubt record the pandemic as a period when retail property values collapsed irreversibly. The beginning of the end, if you like.
In contrast to other facets, this is fairly easy to quantify using monthly MSCI data. For the cumulative two year period between March 2020 and 2022, all retail capital values declined by -8.4%, while retail rents rebased even more dramatically by -10.7%. Stark as these numbers are, they do not tell the full story.
On the one hand, they are averages and may not reflect the performance of either the component sub-sectors nor of individual assets. Shopping centres (capital growth -32.6%, rental growth -16.1%) fared much worse than the blended average figure for all retail, while retail warehouses (capital growth +3.4%, rental growth -6.4%) performed significantly better. Standard shops (capital growth -17.8%, rental growth -15.1%) were somewhere between the two extremes.
On the other hand, there are also both timing considerations and current directions of travel. The ‘freefall’ of retail rents and capital values started a long time before the onset of COVID; many of the structural failings of the retail sector started to come to head a number of years ago and the reset of retail was firmly gathering pace before the pandemic struck. All retail capital values moved into monthly decline from January 2018, with rental values following a similar path from April the same year. Indeed, the decline in capital values was far steeper in the two years prior to COVID (March 2018-20 -17.7%) than it was in the two year period of the pandemic itself (March 2020-22 -8.4%). Value rebasing has actually decelerated over the past two years.
All the doom and gloom has deflected attention away from the fact that we actually hit the bottom of the market during the pandemic. All retail capital values actually returned to monthly growth from May 2021. Initially driven purely by retail warehouses (from December 2020), even shopping centres returned to positive monthly growth from January 2022. Overall retail rents have stabilised from January 2022, with mild growth in retail warehouses offset by low negative growth in shopping centres.
COVID did not single-handedly cause a collapse in retail rents and capital values, it just meant we got to the bottom sooner than otherwise might have done. Realistically, it will take many years for retail real estate to recover the value lost during the pandemic – less good assets may never recover it.
The beginning of the end? Or just the beginning of a new cycle?
“Ch-ch-ch-ch-changes. Turn and face the strange. Ch-ch-changes. Just gonna have to be a different man. Time may change me. But I can't trace time”. **
* ‘Changes’ – Alan Price. Or “that song from that VW advert” for those of us of a certain generation.
** Shame on you if you don’t know this one.
For further insight into the UK retail market, subscribe below.
Subscribe