London – for once the Laggard

Introduction

This is the 16th 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:

• Central London – understanding the path to re-opening and recovery
• What we learned from the latest BRC retail sales figures

Please do not hesitate to contact myself or any of my retail colleagues if you require any further
information.

Key Messages

• West End retailers expected to lose £5bn in sales this year
• West End footfall still at only around 27% of last year’s levels
• Still less than half the rate achieved at other UK high streets
• Tourists usually account for ca. 46% of West End retail spend
• Office workers account for ca. 9% of West End retail spend
• But office workers the key driver for the hospitality market
• UK inbound tourist numbers projected to be down -59% in 2020
• Related tourist spend projected to be down -63% in 2020
• Only 53% of all UK workers estimated to have returned to usual workplace
• Only 34% of office workers are estimated to have returned
• Around one third of London office workers not back in office before Xmas
• BRC reports year-on-year retail sales growth of +3.2% in July
• Second successive month of positive growth, albeit driven by food
• Grocery sales still growing, but decelerating as hospitality sector re-opens
• Non-food online sales grew 41%, but decelerating as high street slowly re-opens
• Furniture and homewares perform well; fashion sales still in deep decline.

1. Central London – understanding the path to re-opening and recovery

Central London has always been an outlier to the wider UK retail market. Historically, it has almost always outperformed. The Global Financial Crisis barely registered in the West End retail market - while retail rents and capital values across the country rebased at a rate of knots, those in the capital went in the opposite direction. Annual rental growth was often double-digit and prime yields compressed to sub 3.00%.

Such is the irregularity of COVID-19 that it has not only undermined these dynamics, but actually turned them on their head. In many respects, Central London is actually lagging behind the rest of the country in both its pace of re-opening and extent of its recovery. While the West End previously almost defied gravity, it now appears to have a redoubled level of gravity weighing it down.

Cue a response from the New West End Company (the Central London BID) and London Mayor Sadiq Khan. This week, they have jointly called on the government to provide financial support for businesses in the West End struggling in the wake of the pandemic. Mr Khan has written to prime minister Boris Johnson warning of a “perfect storm” in Central London through a lack of tourists, people working from home and the requirement for social distancing.

Mr Khan is calling for direct financial aid for retail, hospitality and leisure, and an extension to the business rates holiday beyond March next year. He said the government should also introduce a support scheme for SMEs that are struggling to meet rent bills, as well as further support for jobs, the self-employed and investment into NHS Test and Trace. The Mayor said: “In the face of a perfect economic storm, our businesses need urgent and sustained support from government to ensure they can survive this pandemic.”

New West End Company quantified the scale of the problem, predicting that West End retailers will collectively lose £5bn in sales this year. Footfall is currently at 27% of last year’s levels and is only around half that high streets elsewhere in the country are achieving. What we are clearly seeing is something of a chicken versus egg situation – retailers are de-prioritising re-opening stores in Central London as the footfall and trade is not there. And shoppers are not going there because not much is open.

How dependent is the West End retail market on tourist trade? Short answer – very. Our own analysis (using CACI data) suggests that tourism accounts for as much as 46% of comparison goods retail spend in a year. In terms of wider context, this average across the UK is around 10%. For regional cities such as Manchester and Birmingham the proportion is 31% and 18% respectively. Even a major tourist destination such as Edinburgh is still less dependent on tourism than the West End (35%).

How dependent is the West End retail market on worker population trade? Short answer – far less so. The same data from CACI indicates that workers account for only 9% of comparison goods spend in the West End, compared to a UK average of around 6%. Edinburgh and Birmingham are on a par with the national average, while Manchester is more akin to the West End, if anything slightly higher.

Of course, the hospitality sector is distinct from this and the contribution of London’s worker population to the hospitality spend is substantially higher. In essence, London’s retail market is heavily dependent on overseas / domestic tourists, but less so office workers. In contrast, London’s hospitality sector is heavily dependent on both.

Projections on tourism for the this year make for predictably grim reading. According to VisitBritain, inbound visitor numbers last year were 39.9m (+3% y-o-y) and related spend totaled £25.5bn (+11% y-o-y). At the latest time (and these projections are understandably subject to constant revision), VisitBritain is anticipating that inbound tourist numbers will be down -59% this year (to 16.8m) and related spend will decline by -63% (to £10.6bn).

These are national figures, rather than London-specific. But it would not seem unreasonable to assume that they apply in equal measure to the capital, if anything possibly more. With almost daily newsflow on new quarantine advice and legislation, the actual figures are subject to almost constant change. But it is more than fair to assume that there will be no rebound in tourist trade anytime soon, certainly not this year.

In terms of workers, data from the ONS shows that 52.9% of the UK population had returned to their usual place of work by the end of July. But a study conducted by research unit AlphaWise at US bank Morgan Stanley found that only around 34% of UK white-collar workers are back in the office, far lower than other European markets (e.g. France 83%). Meanwhile, the Google Mobility Report (which estimates changes in how many people are staying at home and going to places of work compared to normal) shows a slowly improving “back to work” trend in London. But the indication is that less than 50% of London workers have returned.

More sobering still are the findings of a poll conducted Portland Communications suggesting that one third of London workers will not be back in the office by Christmas, with eight out of 10 saying they feared returning to their desks. This is despite the government encouraging office workers to return, dropping advice to “work from home if you can” from the start of August. Employees returning to their desks is now largely at the “discretion” of employers, but reluctance to get back on trains and the Tube remains the main stumbling block.

The actual statistics themselves, although not irrelevant, are subordinate to the bigger picture – London’s worker population will clearly not be back at full capacity for some time to come, certainly not this year.

New West End Company’s submission to the government contained five proposed areas of focus:

• • Transport: encourage people to use trains, tubes and buses
  • Consumer Confidence: encourage more people back into the West End
  • International Visitors: attract more high-spending international visitors
  • Business Support: extend business support for companies still unable to operate effectively
  • Planning, Licensing and Regulation: greater flexibility to enable recovery and growth.

It is difficult to argue with any of these points, but the issue is, it smacks more of a “wish list” than an actionable framework. In very simple terms, it is difficult to see what any government could proactively do to address some of these points in the prevailing climate of uncertainty. After all, COVID-19 has not gone away, the public is aware of that and any government guidance to the contrary would be entirely misplaced. They could extend the business rates holiday as Mr Khan is suggesting, but total reform of the system would be a more productive measure, as we’ve argued previously.

Will the Central London retail and hospitality markets recover and when? The first question is far easier to answer than the second. Ultimately, the Central London retail market will recover and again prosper. The simple metric is that London Retail is ultimately wedded to the fortunes and profile of London as a city generally. Few, if any, are seriously questioning the viability of London as a city and that it will ultimately regain all of its pre-COVID preeminence.

But it is impossible to put any credible timeframe on this. The prospect of a “second” or multiple waves, set against great unknowns surrounding potential vaccines do not lend themselves to fixed or rigid roadmaps to recovery. The London Retail market is dependent on tourists, the London Hospitality market is dependent on both tourists and office workers. Realistically, neither are likely to return to anything like full capacity until 2021 at the very earliest.

2. What we learned from the latest BRC retail sales figures

Two swallows do not a summer make. The BRC’s retail sales figures for July again surprised on the upside, reflecting a second successive month on positive year-on-year growth. But are the figures entirely credible? Not too many retailers are taking to the street in celebration.

Total retail sales increased by +3.2% in July. The churlish could point to the fact that this marked a deceleration on the rate achieved in June (+3.4%), the pedants could reply that this reflected two very different comp bases (-2.2% in June 2019, +0.5% in July 2019). Neither would be wrong, but both would miss the bigger picture as to whether this represents a genuine recovery for the high street.

Not quantified directly in the BRC release, but there is an overriding feeling that any headline growth is being driven largely by food. Grocery was somewhat vaguely flagged as being “in growth” in July, but there is a strong suspicion that the three-month average growth rate (+6.1% overall, +8.2% like-for-like) is decelerating as the hospitality sector gradually re-opens and that particular uneven playing field slowly levels out.

On the subject of uneven playing fields, the BRC continues to cheerlead for online in its narrative. Non-food online sales grew by +41% in July, a deceleration on the rolling 3-month average of +50% achieved during lockdown. As more stores re-open and the high street gradually finds its feet, this rate of growth will inevitably come down much further.

More encouraging was the strong performance achieved by some non-food categories, notably furniture and homewares. But other sectors such as fashion (especially), health & beauty and jewellery continued to be highly challenged.

But the bigger picture is that the UK retail market is still far from being at full capacity. Around half of all physical stores remain closed and Mintel’s COVID-19 tracker shows that 43% of consumers are still limiting their time in-store and 40% say they feel uncomfortable handling/touching products in-store. That is why it would be dangerous to interpret the BRC’s figures as a sign of recovery, let alone bounceback.

Where do we go from here? The official ONS retail sales figures for July are released on 21 August and will give far more colour on the underlying picture (somewhat shrouded by spurious month-on-month comparisons, sadly). Given the exceptional weather and the fact that “staycationing” spend will remain within the confines of the UK retail market, there is reason to be cautiously optimistic about the final outturn in August.

But September will be key, as traditionally this is one of the highest spend months in the retail calendar. And, lest we forget, in September, quarterly rent day will again loom large, another painful pinchpoint to navigate…

Stephen Springham

Partner – Head of Retail Research

+44 20 7861 1236

stephen.springham@knightfrank.com