Retail: Two Years on from COVID

Written By:

Stephen Springham, Knight Frank

22 Apr 2022

10 minutes to read

Categories: Property Sector Retail World Regions UK

Key Messages

• Some COVID-induced trends more ‘sticky’ than others.
• Retail sales not yet fully “back to pre-pandemic levels”.
• Still a spend deficit in non-food of -2.5% or £4.5bn in absolute terms.
• Retail sales recovery continues in March, despite reports to contrary.
• Retail sales values grow +6.7% y-o-y in March, volumes down -0.6%.
• High inflation still having a limited impact on overall demand.
• Main drag on performance was from food (-4.2%) and online (-21.8%).
• Non-food sales report healthy growth of +29.5% y-o-y.
• Online penetration reduces to 26.0%.
• Online penetration significantly below pandemic peaks (ca. 38%).
• COVID more a +200/300bps kicker to online rather than permanent shift.
• Vacancy rates tangibly higher now (15.6%) vs pre-pandemic (13.3%).
• Vacancy rates are now receding, albeit very gradually.
• Retail property capital values declined by -8.4% during the pandemic.
• All retail rents rebased by -10.7%.
• Correction was actually more severe prior to the pandemic.
• The bottom of the market was hit during the pandemic.
• Retail capital values have been back in monthly growth since May 2021.
• Retail rents have stabilized since January 2022.
• The ‘stickiness’ of pandemic-induced localism open to debate.
• Polarity been good and bad local centres will determine longevity.

Two Years On from COVID – what has actually changed in the retail sector? We have become so accustomed to somewhat lazy fallbacks such “permanent consumer shifts”, “irreversible change” and “new norms” that we may have actually lost sight of reality. Two years on from Lockdown V1 (24 March 2020) we are better placed now to take stock of which of the trends observed during the pandemic have proved sticky and which were just passing fads borne of extraordinary circumstances.

In the full Research piece we address five key questions:

1. Retail Sales – really back to pre-pandemic levels?
2. Online - sustainable or artificial peaks?
3. Vacancy rates – really a one-way street?
4. Localism – permanent shift or enforced fad?
5. Rents and capital values – unrecoverable freefall?

By happy coincidence (or excellent timing on our part), today’s ONS retail sales release addresses the first two of these questions directly.

Retail sales – only now getting back to where they should be

Very mixed messages on retail sales that today’s release will not dispel. On the one hand, the ONS (and media) have been boldly declaring that “retail sales have returned to pre-pandemic levels” for many months now. On the other hand, the narrative around a consumer squeeze is all but deafening and any shred of a downturn is amplified out of all proportion. The reality is somewhere between these two extremes: we are only now seeing retail spend return to a meaningful definition of “normal” (i.e. on a sustainable basis that includes all “lost spend” during the pandemic fully recovered). And, to date, there is limited evidence in the actual numbers to suggest wholesale belt-tightening on the part of consumers.

To summarise our two-year analysis: coming into March, total retail sales are higher than they would have been in a static market (ca. +5%), but are a little shy (-1.7%) of where they probably should be allowing for a degree of underlying market growth. But some sectors are still in deficit i.e. they have not fully recouped the “lost” spend during the pandemic. Overall non-food sales are still -2.5% down (ca. -£4.5bn in absolute terms), with clothing (-16%, -£7bn), cosmetics (-10%, -£540m) and PCs/Phones (-29%, -£1.4bn) some way adrift of where they should be. Our estimates suggest this lost ground will be fully recovered by April (or May at the latest), only by which time can we accurately call that retail spending is back to pre-pandemic levels.

Retail sales – March in isolation

Despite a lot of consumer-squeeze influenced headlines, the recovery in retail sales actually continued apace in March. The main drag on performance was grocery and online, with non-food enjoying a strong month.

Year-on-year retail sales values (exc fuel) were ahead +6.7%. Including fuel, growth was in double-digits (+10.2%). Given well-documented inflation, volume growth was far more meagre (+0.9% inc fuel, -0.6% exc fuel). For Q1 as a whole, retail sales values (exc fuel) were up +10.1% on last year, while volumes were ahead by +3.5%. The far less meaningful month-on-month figures paint a less rosy picture and predictably are those being most widely reported. Including fuel, m-o-m values were down -0.2%, while volumes were down -1.4%. The most negative number, the one that most media channels are majoring on.

Food sales (-4.2%) were the main drag on overall performance, along with a continued reverse in online sales. Non-food (+29.5%) had a strong month, in part flattered by a relatively modest comparative the previous year (+5.3%), March 2021 representing the last month of Lockdown V3.

Following the now firmly established trend, those sectors that witnessed constrained demand this time last year enjoyed stellar bounceback this time around. These included Clothing (+78.6% vs -11.8% in 2021), Footwear (+96.6% vs -11.7%), Cosmetics (+43.2% vs -21.0%), PCs/Phones (+136.4% vs. -46.9%), Jewellery (+82.2% vs +0.9%) and Books (+108.3% vs. -42.4%). Some categories achieved the distinction of achieving growth-on-growth, including Sports Goods (+30.8% vs +21.0%), Carpets (+137.3% vs +7.4%) and Furniture (+45.2% vs +6.3%). Those sectors that saw a decline in March were trading against a highly demanding demand spike last year e.g. DIY (-16.3% vs +51.3%) and Garden Centres/Pet Stores (-18.7% vs +65.8%).

Online – further reality check

The most fanciful predictions of COVID-induced change were undoubtedly around online. With every passing month, the notion of a massive, irreversible shift to online on the back of the pandemic seem less fanciful than frankly ridiculous.

That online penetration levels are considerably higher now than they were pre-pandemic is a given. 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).

The figures from March show further unwinding. All online sales declined by -21.8% y-o-y, and -6.0% m-o-m. Online grocery sales declined -20.4% y-o-y, while online non-food sales were down –30.3% y-o-y. Non-store operators (i.e. online pure-plays) saw sales decrease -14.8% y-o-y. Online grocery penetration stood at 9.3% in March (compare this with some predictions of 20%+) while all online penetration stood at a slightly dubious 26.0% (50%+ anyone?). Excluding the somewhat suspect adjustment to the figures in February would suggest a figure closer to 23%.

For the time being at least (until May 2022), 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. No more, no less.

Vacancy / localism / retail property metrics

So much for retail sales and online, a quick summation of the other three “two years on” questions.

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%.

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%.

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. But this is very wide of the mark.

Movements are 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. 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?

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. Footfall data suggests that local centres (Coastal/Market/Historic Towns) fared better than Central London and Regional Cities, but this is neither definitive nor necessarily conclusive. 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?

To access the full “Two Years On” piece and infographic, please click here.