One Year On from Lockdown 1
COVID-19 Market Update – 19/03/2021
14 minutes to read
Introduction
This is the 35th of a series of weekly notes analysing the state of the UK retail market in the light of the COVID-19 pandemic. This note focusses on three key themes, as we approach the anniversary of Lockdown 1:
- Quantifying the scale of retail fall-out in 2020
- Perspective on John Lewis, Debenhams and M&S repurposings
- Debunking the myth that “essential” retailers are winners from the pandemic
Please do not hesitate to contact myself or any of my retail colleagues if you require any further information.
Key Messages
• 17,500+ chain retail stores closed in 2020
• Store numbers declined by -4.5%, 1 store in 20
• Declines sharpest in London (-5.8%) and shopping centres (-7.1%)
• Net decline of 9,877 stores in 2020
• But there were still 7,655 new openings
• Some market activity beneath wider retrenchment
• Amazon Fresh opens its first store in Ealing
• Question marks as to level of market impact
• John Lewis likely to close a further 8 stores
• JLP reports FY loss of £517m last year
• Online rises to 75% of department store sales
• M&S to repurpose Marble Arch flagship
• “Essential” retailers lay bare full impact of pandemic
• Morrison’s sales +8.6%, profits down -62.1%
• Are “essential” operators really “winners” from the pandemic?
1. Quantifying the scale of retail fall-out in 2020
The anniversary of Lockdown V1 (23 March) is fast approaching. One year ago, I don’t think anybody came close to predicting the scale of things to come and the prospect of us still being in a state of lockdown one year on was unthinkable. Yet it is a reality. In the interim, much has been written about retail and the state of the high street generally, very little of it positive, but much of it actually very ill-informed. For all the changes we have seen, very little change on that front then.
Stringing together the latest vignettes of retail news to form any sort of central view may seem tenuous, but is actually fairly revealing. The latest store openings vs closure data release from the Local Data Company (LDC) / PwC, Amazon Fresh finally opening a store in the UK, John Lewis hinting at further store closures, M&S unveiling plans to remodel its Oxford Street flagship, former Debenhams stores being repurposed to non-retail use and trading results from both Morrison’s and Greggs – disparate news stories that don’t point to a single direction of travel, but a more realistic patchwork of what is actually happening on the ground.
Widespread coverage of the LDC / PwC figures was inevitable given the stark message they portray More than 17,500 stores closed in 2020, marking the biggest decline in shop numbers in over a decade (given the circumstances, surely ever?). The net fall represents nearly one in 20 stores closing in 2020 and marked a 4.5% decline in total shop numbers. The report also warned that an average daily decline of 48 chain-store closures per day could continue in 2021 as many “non-essential” stores closed temporarily during lockdown are unlikely to reopen.
The headline numbers were always going to be alarming – a challenged and oversupplied market entering wholly uncharted waters of national lockdown for the best part of a year was hardly going to flourish. But what is disappointing is the ongoing media sensationalism of a very real crisis in one of the key sectors of the UK economy. The gleefulness with which these numbers were reported in the media this week left a very nasty taste. COVID-19 has changed nothing in that regard.
Of course, there is much detail below the headline numbers. Greater London lost the greatest proportion of shops in the year, down -5.8% overall, while the East of England proved the most resilient with ‘just’ 3.7% of its shops closing. In terms of channels, shopping centres fared worst for closures across all retail destinations as 7.1% of units closed, followed by high street net closures of 5.7%. Retail parks, with higher representation from “essential” retailers, proved more resilient with 3.3% of shops closing overall.
Perhaps more interesting still was the breakdown in closures versus new openings that underpinned the ‘net’ figure of 9,877. Although 17,500+ stores closed, they were partially offset by 7,665 new openings – arguably the most staggering number in the whole release, given how desperate market conditions were last year. A net decline in store numbers is inevitable (indeed, a positive even, if structural weaknesses are to be redressed), but the new openings figures does give some comfort that there is still market activity out there, despite the prevailing climate.
A single store opening in recent weeks has garnered more attention that any for many a year, a certain grocery store in West London. No, not the new Sainsbury’s Local in Hounslow, the massively over-hyped Amazon Fresh store in Ealing. I shall defer full analysis on the store itself until such a time as I have actually paid it a visit (and checked the terms of previous NDAs).
The two USPs? Firstly, the ground-breaking technology that enables shoppers to simply select items and be charged through the app, rather than queue at a checkout (although for the moment at least, the queues to actually enter the store are long, oh the irony). And secondly, it’s Amazon. Without these two things, would a single convenience store have secured such widespread media coverage?
Much has already been written on the store, most of it fawning, very little of it edifying. All about the technology, very little about the fundamentals upon which any foodstore succeeds or fails (quality of product, range, price point, margin mix, availability etc etc). In base terms, you can’t eat technology. Further roll-out is inevitable (a second site has since opened in Wembley) with around 20 more reportedly due to follow in quick succession.
I will defer judgement for now, but I’m struggling to see this as a “pivotal” or “defining” moment for the UK grocery market as some of my Amazon-sycophantic counterparts are proclaiming. The c-store sector is highly mature and Amazon is a relative late-comer to the market. Its brand and technology can only take it so far. Ultimately, if it’s about making money (which it will be) I would wager that the less celebrated Sainsbury’s Local store in Hounslow will outperform the far more revered Amazon Fresh pilot in Ealing.
Returning to the LDC analysis, their head of retail and strategic partnerships Lucy Stainton rightly states: “The question now becomes: have we seen the worst of the damage? These numbers only include store closures we know to be permanent and, when government support schemes end, we expect a further increase in closures.” In other words, the worst may still be to come. A sobering, but realistic appraisal.
A word of caution for the months to come: the temptation to call a recovery in retail markets prematurely. All being well, Lockdown V3 will be lifted from 12 April and we expect a significant and swift consumer rebound as pent-up demand is released. But the high street needs a whole lot more than a couple of months of buoyant retail sales before it can realistically even think about being on the road to recovery. Don’t expect the market to run before it can walk.
2. Perspective on John Lewis, M&S and Debenhams repurposings
Retail is dead, long live alternative use. A simplistic but increasingly prevalent mindset that is not going away anytime soon. Over the last couple of weeks, various announcements from John Lewis, M&S and landlords of former Debenhams stores have served to reinforce this mantra.
More disturbing than the FY results it accompanied was the announcement that not all John Lewis stores will reopen when lockdown was lifted. No further detail was provided (landlord discussions are presumably ongoing), but a further eight permanent store closures are being touted, on top of the eight confirmed last year. The property community is left guessing for the moment at least, although some clarity is expected before the end of this month.
For once, the trading figures were largely academic. For what they were worth, The Partnership reported a pre-tax loss of £517m in the year to 30 Jan, against a profit of £146m the previous year. Part of this was down to substantial exceptional costs of £648m, which included depreciation in store values and restructuring and redundancy costs arising from store closures and at head office.
Unsurprisingly, the Partnership is extremely bullish about online. Sales through Johnlewis.com last year climbed 73% to account for 75% of the total – a leap from 40% before the pandemic hit. In the second half online growth “compensated for the loss of store sales more than we had expected”. Before the pandemic, John Lewis calculated that £6 in every £10 spent online was “driven by our shops”. That ratio has since halved to £3. “We are expecting much of the shift online to be permanent and are adapting the business accordingly”.
Counterbalancing the closures of full-line department stores, the Partnership announced plans to open John Lewis implants in “a significant number” of Waitrose’s 331 branches (with distinct overtones of Argos and Sainsbury’s). Not exactly a seismic strategic move in that most Waitrose stores already offer a click & collect service for John Lewis. And it’s not as if Waitrose stores are massively over-spaced and have room for any sort of authoritative John Lewis offer. A glorified click & collect counter with a bit of John Lewis livery is about all these implants are likely to amount to.
My personal view? A business that is suffering from an identity crisis and is straying too far from what it does best. That risks devaluing its very brand through efforts to cut costs through what are actually false economies. That has interpreted artificial trends of the past year as permanent changes, prompting knee-jerk reactions. That blithely assumes that any lost store-based sales will simply be re-absorbed online, when they won’t.
John Lewis has already announced plans to partially repurpose its Oxford Street flagship to other use. It has been granted conditional permission for the changes by Westminster City Council’s planning sub-committee and can turn as much as 302,000 sq ft of the 678,700 sq ft site into flexible retail or office space. This week, M&S announced similar plans for its own Marble Arch flagship store.
M&S’ redevelopment plans would see it downsize retail space and create offices on upper floors. According to The Times, the existing flagship store would be completely demolished and then redeveloped. The retail footprint would be reduced by around half from ca. 160,000 sq ft currently and condensed from five to three floors. The redevelopment could create up to 300,000 sq ft of new office space over six upper floors.
A major retailer such as M&S knocking down its flagship store and rebuilding it with only around half the existing space will obviously raise eyebrows and feed the retail repurposing narrative. The reality is perhaps a little more nuanced in that the Marble Arch store has never really been the epitome of a flagship store, one that showcases the brand to the best effect. Ironically, it has historically been small relative to other flagships, suffers from compromised configuration (it’s effectively two sites fused into one) and has lacked investment (just go to Selfridges next door or Primark across the road to appreciate the difference).
The reabsorption of the Debenhams space will require similarly creative solutions, of which some are already emerging. Hammerson have unveiled a masterplan to build 338 flats on the site of the former Debenhams store at Highcross in Leicester. Its counterpart in Gloucester is to be transformed into lecture halls and training spaces for nurses and healthcare workers. The University of Gloucestershire has purchased the site and plans to retain the original fascia and refurbish its ca. 200,000 sq ft over five floors, to be operational by September 2023.
Landlords of former Debenhams stores are having to look at alternative uses by default. There is absolutely no “one size fits all” solution and many are highly complicated (and indeed costly) plays. Retail repurposings will continue to dominate narrative going forward, but the reality is that few represent “quick wins”, most will be creative, long-term, capital intensive initiatives and hopefully part of wider, mixed-use regeneration projects.
3. Debunking the myth that "essential" retailers are winners from the pandemic
COVID-19 has inevitably given rise to a number of retail echo chambers, three recurrent themes being: 1. permanent consumer shifts to online 2. WFH giving rise to more localised shopping patterns. 3. it being boom time for “essential” retailers able to open during lockdown. Presented and accepted as facts, I would say all three are anything but. The first two are just lazy conclusions (especially the first one) that will only be proved one way or another in the fullness of time. The third is frankly a myth that is fairly easy to disprove.
No disputing that it is infinitely preferable to be classified as an “essential” retailer than a “non-essential” one and to be able to trade while others remain under enforced closure. It is absolutely no coincidence that those sectors deemed to be “essential” e.g. food, DIY, chemists have seen the most robust retail sales growth over the past year. But I would question any notion that “essential” retailers have ridden on the crest of wave during the pandemic and have in any way prospered.
Forthcoming trading releases from retailers themselves will bear this out. Figures from Morrison’s and Greggs released this week certainly do. “Essential” high street operators will highlight the impact of lower footfall, while the overriding narrative of the grocers will be of robust sales growth, but decimated profits. And the latter is what retailers are ultimately measured on, particularly those that are listed. As the old saying goes, “turnover is vanity, profit is sanity”. Sanity has been most sorely tested over the course of the pandemic.
Greggs reported a pre-tax loss of £14m in the year to 2 Jan, compared with a £108m profit a year ago. Total sales dropped 31% to £811m during the period, while like-for-likes in Greggs’ company-managed shops plummeted -36%. However, the business said its top line made a “progressive recovery” during the second half of 2020 and also hailed a “better-than-expected” start to its new financial year - in the 10 weeks to 13 March 13, like-for-like sales in company-managed shops fell at the slower rate of -29% (or -22% excluding Greggs’ Scottish stores – all of which have been closed to walk-in customers for the majority of 2021 to date).
The message? Even being classified as “essential” and open for trade on a high street does not guarantee high sales volumes. If the footfall isn’t there, neither is the trade. The market needs to read across to other high street players in a similar boat to Greggs, Boots and Superdrug to single out just two. Yes, they have been open, but trade has been nothing like it otherwise would be in many locations.
Morrison’s was the first of the ‘Big 4’ to report and is likely to be a bellwether for the grocery industry as a whole. For the 52 weeks to 31 Jan, group like-for-like sales (exc fuel and VAT) were up +8.6%, while total revenues nosed up +0.4% to £17.6bn. So far, so good.
However, robust sales growth did not feed through to the bottom line. For the year as a whole, Morrison’s posted a -62.1% decline in pre-tax profits to £165m, which included £290m in “direct COVID-19 costs “to help feed the nation through the crisis”. In common with the other major grocers, the company also agreed to repay £230m in business rates relief earlier this year – without this, it would have achieved profit growth of +5.6% to £431m.
Any business that has seen profits collapse to this degree should scarcely be classified as a “winner”. Expect a similar story at Tesco, Sainsbury and Asda when they report, perhaps an even more severe one given that they have far bigger online platforms. Much has been made of the flight to online grocery during the pandemic, much less the profit and margin implications. Consumer demand may have boomed, but it is still a profit-dilutive channel. The implications of this may be overlooked for now, but not when profitability again comes under greater scrutiny, as it inevitably will.
Stronger retailers have endured, but the cost (financial and figurative) of trading during the pandemic has been huge. Make no mistake - the pandemic has not played into any retailer’s hands, there aren’t any real “winners” in the truest sense. Above all else, no retailer has had it easy.