Retail: every lazy assumption challenged
A Knight Frank retailer lunch debunks many media myths, solid HY figures from Primark and Hotel Chocolat, Homebase returns to the black but Topps Tiles issues a profit warning.
9 minutes to read
• In a pre-close trading update, Primark owner AB Foods reported that HY sales and operating profits had both grown above expectations. Group sales grew by +4.2%, while UK sales were up by +3%. However, like-for-like sales are expected to have dropped -1.3% over the half-year period. Primark also became the first major retailer to sound a warning (albeit fairly muted) over the threat of Coronavirus and potential supply shortages on certain lines as a result of factory delays in China.
• Ongoing strong performance from Hotel Chocolat. The business posted a +14% increase in sales to £91.7m for the 26 weeks to 29 Dec. Underlying EBITDA increased by +7% to £18.5m. During the period, the company opened nine new locations in the UK, two in the US and three in Japan, which contributed to a three percentage point rise in sales growth.
• The process of reversing many of the strategic decisions made by previous owner Wesfarmers is already bearing fruit at Homebase. For the year to 29 Dec, the business achieved profits of £3.2m, compared to a loss of £144.5m in the previous year. Like-for-like sales increased +2.6%, partly driven by £10m of investment in stores which saw 51 outlets refurbished. During the year Homebase acquired Bathstore (26 standalone stores and 49 concessions). Two of the standalone stores in Cheadle and Sutton have been transformed into a new store format called ‘Decorate by Homebase’ which will open just before Easter.
• Topps Tiles has issued a profits warning as trading has “remained challenging against a backdrop of continued weak home improvement spending”. Retail like-for-like sales in the eight weeks to 22 Feb decreased by -5.5% and the group now expects that FY profits will be “materially below” the bottom end of market expectations.
Stephen Springham, Head of Retail Research:
Everything you know is wrong. Maybe that is a bit extreme, but almost every accepted assumption about the UK retail sector came under severe challenge at in house lunch Knight Frank held this week with those that know best – retailers themselves. We hosted 10 leading figures from major high street occupiers, collectively operating more than 1,200 sites across the country (and many more internationally).
The media-inspired narrative on the UK retail sector is broadly thus: the high street is dying, Brexit is another nail in the coffin, all sales through stores are gravitating online, Amazon is hoovering up everything in its path, retailers are shedding stores at a rate of knots, store sizes are shrinking and shopping centres are no longer fit for purpose and will be re-developed into other property classes.
Needless to say, the ‘coal face’ view from retailers themselves is somewhat at odds with this lazy, sensationalised and ill-informed narrative. No one is in denial as to the huge challenges UK retailers face, but the operators themselves offer a far more multi-dimensional and nuanced view.
Held under Chatham House(ish) Rules, the results of the brief Survey Monkey could be summarised as follows:
When do you think, as a business, you will feel confident that costs including rent have re-based to corrected levels?: a.Q3 2020 b. Q3 2020 c. H12020 d. Never?.
A sobering wake-up call (as if it were needed in the retail sector). None of the respondents anticipated that costs would re-base to corrected levels this year. A slight majority (6) went for H1 in 2021, while the remainder (4) are not confident that this will ever happen. The key message being that the travails of the retail market are not merely the result of a cyclical downturn, what we are seeing is permanent structural change. The retail market has changed forever, not all of this change is bad by any means, but any expectations that the market will simply ‘go back to normal’ are desperately wide of the mark.
Has Brexit and the General Election outcome left you more or less optimistic over future UK trading prospects?: a. More b. Less?.
Encouragingly, the majority of respondents (7 versus 3) felt more optimistic on the back of Brexit and the General Election outcome. This certainly flies in the face of the perceived wisdom of most economists who have long assumed and argued that Brexit will wreak havoc on UK retailers. We deliberately did not give the retailers an ‘about the same/no difference’ middle-ground option in order to gauge the polarity of opinion. In general terms, most retailers seem fairly ambivalent as to the whole Brexit debate and tend not to see it as a major influence on business performance, whatever any economist may say.
In five years’ time do you think you will have more or fewer stores than now?: a. More b. Fewer c. Roughly the same?
Significant division of opinion here and probably an accurate reflection of the whole retail market. Only half (5) of respondents anticipate having fewer stores, while 2 expect to have more stores. The balance of 3 expect to have roughly the same store count, albeit through churn (new acquisitions offsetting gradual closures of under-performing outlets). This represents a fair microcosm of the entire UK high street – some operators are definitely still retrenching and right-sizing their portfolios. But it is not a one-way street – a number of retailers are still firmly on the acquisition trail. Many others are in something of a holding pattern, churning unprofitable stores for selective new ones.
Will those stores on average be?: a. Smaller. b. Larger c. About the same size?
Arguably the most revealing of all the questions. The common view is that with the ongoing rise of online, physical floorplates will irreversibly decrease as retailers will simply not need as much space. Yet only 1 respondent expected average store size to decline over the next five years. The majority (5) expected store sizes to remain constant, but 4 expected to operate larger stores going forward.
The rationale for this is largely twofold. Firstly, for all the over-supply in retail generally, many retail units (especially on the high street) are highly compromised, either because they are too small or ill-configured (often both). Upgrading stores to more appropriate (usually larger) floorplates is a legacy but ongoing process, even in the current market. Secondly, there is a well-documented push in retail towards the ‘experiential’ (for want of a better word). It is far easier and cost-effective to create an all-singing, all-dancing ‘experience’ on a larger floorplate.
If you had to choose just one segment/channel for all your stores to operate from, which would it be?: a. High Street b. Shopping Centres c. Retail Parks d. Online?
A very surprising vote of confidence for the supposedly most challenged and anachronistic retail channel – Shopping Centres were selected by no less than 5 of our respondents. A further 3 opted for high streets and 1 for retail parks. Despite all the narrative and noise around e-commerce and the fact that it is still the highest growth segment in retail, just 1 respondent chose online as their preferred channel.
The debate also drew attention to a channel that we omitted from the options – factory outlets. It was almost universally agreed that this remains one of the best retailing models and one which works well for both retailers and landlords. Indeed, many of the more traditional retail channels could learn a lot from the factory outlet model.
After a location is identified, what is the most important aspect when considering a new store?: a. Flexibility b. Rent c. Capital/rent free incentives d. Adjacencies?
All were deemed important, but flexibility far outweighed all the other options (6 respondents). Adjacencies were the second most important (2), with rent and capital/rent free incentives each receiving just one vote. This is a significant reflection of the current market – in the past we would have expected many acquisition decisions to be determined far more by rent and capital contribution, but flexibility is now the watchword in practically every conversation we have with a retailer. Landlords, take note…
When was the last time you shopped “in store”?: a. Within the last 2 days b. Within the last week c. Within the last month d. It varies?
Nobody went for the cop-out ‘it varies’ option, while the majority (7) of respondents had shopped in a physical store within the last two days. A further 2 had shopped in store over the last week, and only one over the last month. Good to see retailers practicing what they preach but these stats may also be reflective of the general public at large. Many consumers claim to do all their shopping online, but in practice, how many actually do?
Biggest threat to retail sales / profitability?: a. Business rates imbalances b. Coronavirus c. Climate change d. Amazon?
A landslide for Amazon, surely (if our friends in the media are to be believed)? Actually, no. A total of 4 respondents did identify Amazon as the biggest threat, but inequities of business rates secured a larger share of the vote (5). Mr Sunak take note as you draw up your Budget. Alternatives to the current business rate system were debated, with an online tax one possibility, but some sort of delivery tax a preferred option. But little anticipation of anything radical being implemented anytime soon.
Climate change secured but one vote. Although ESG generally is rightly rising up the agenda, faced with saving the planet or securing their own survival, most retailers would probably err towards the latter. No respondents went for coronavirus, although we may want to review that situation in six months’ time.
Which retailer (aside from your own company) do you most admire?
An unprompted / non-multiple choice question yielded the following responses: Selfridges (x2), Space NK, H&M, Apple, Leon, Lush, Comptoir Libanais, Fenwicks, West Elm, JD, Patagonia, TK Maxx and Waterstone’s. An eclectic and interesting list that is difficult to argue with, and a timely reminder that there are still a lot of great retail / F&B operators out there.
Waterstone’s was perhaps the most surprising name on the list and was therefore the subject of much discussion (and indeed admiration). A retailer that nearly disappeared completely, but retrenched considerably and re-invented itself completely by focussing on retail fundamentals – passionate and visionary leadership, a love of the product, knowledgeable staff, a pragmatic approach to new site acquisition and an ‘experience’/community-based store environment. All this from a retailer operating in Amazon’s initial sector of strength and perceived position of dominance. A laser-like focus on retailing fundamentals that other operators would do well to replicate.
The key takeaways?
- The high street is evolving massively, but it is not dying
- Landlords that haven’t already wised up to this need to wake up and smell the coffee
- Government bodies have a very limited understanding of the dynamics of modern-day retailing
- Sweeping generalisations and lazy assumption on the UK retail sector do scant justice to its many complexities.