Talkin’ ‘bout a (Retail) Revolution

13 August 2018

The recent media coverage of events in the retail sector has predominantly been focused on the doom and gloom of retail insolvencies, growing sector unemployment and declarations that the traditional high street is in turmoil.  The high profile failures (and occasional rescue) of the likes of House of Fraser, Toys R Us, Maplin and Poundworld have contributed towards a regular flow of negative headlines. The controversial use of CVAs as a tool to offload loss-making stores for businesses such as New Look, Select, Carpetright, Mothercare, has given journalists no shortage of material to back up their claims that a crisis is unfolding, or according to some tabloids, suggest that retail is facing a massacre or extinction.  But, in reality, there are plenty of signs of resilience and opportunity, especially through the use of technology and innovation.

There’s no doubt that the UK retail sector has had turbulent times in recent years, as the rise of internet shopping has delivered tough competition for traditional retailers, with its added convenience, choice, improved speed of delivery and product ratings. Traditional retailing is fighting back – adapting, modernising and experimenting with an improved variety of in-store experiences, such as personal shopper services, cookery classes and even flexible offices, alongside services such as click & collect.

Flexibility of goods and services, but not of assets

A particular struggle for retailers is that many of their stores are not well designed for modern shopping tastes, particularly if the buildings are old, and so alterations (particularly those of a structural nature or which are likely to affect plant and equipment) are likely to be prohibited, restricted or expensive.  A lack of flexibility is often the catalyst for store closures when a particular asset starts underperforming.  Where traditional long retail leases are in place, this burdens a struggling retailer with a substantial portfolio reduction cost, or limited options in terms of lease assignments or underletting.

Rising overheads such as business rates create a major problem, even though we are seeing flexibility in terms of the average duration of a lease, break options and options which allows for concessions, sub-letting or part and sharing occupation.  These benefits allow retailers to experiment with third party “pop-ups” or new-to-market operators. For example M&S, through their partnership with Founders Factory are staking a claim as incubators of early stage retailers.  Sainsbury’s have partnered with subscription-model food delivery service “HelloFresh” to offer their previously delivery-only meal kits in-store. New multi-use assets are needed to complement existing retail uses and be adaptable to future requirements, with the potential for ‘digital malls’ maximising virtual technology to heighten the consumer experience.  Government, local councils, developers, funders, investors and occupiers will need to collaborate in order to create a sustainable retail destination of the future.

The challenge of Online Retail

The contraction of the brick-and-mortar stores, coupled with growing online retailing, is making the last-mile delivery service essential.  Having well-positioned logistics bases and efficient home delivery operations is essential not just for online giants like Amazon but also smaller distributors.  We are seeing increasing demand for modern and efficient smart technology-equipped warehousing and logistics premises far more than big-box out-of-town retail.

Alternative use of space?

The re-use of vacant units on out-of-town trade and retail parks could unlock some much needed space. These parks, and even redundant parts of town-centre stores, could also be used for last mile logistics hubs. At present, the fly in the ointment is that industrial rents have not reached the required level to achieve the values set for such sites, and we are more likely to see landowners looking to redevelop underperforming retail to office or residential.  However, research from Gerald Eve’s Multi-let report found that retail-related and associated logistics operators already account for 43% of all occupied space, up from 33% a decade ago.  The report stated that ‘last mile’ logistics firms are driving up average rents up as void rates are falling. This so-called “quiet revolution” is happening as the infrastructure necessary to fulfil online orders is put in place.

The look of “Futureville”?

A recent article from the FT providing an interesting assessment on how we might look back in 12 years’ time on the pressures currently facing town centre retail, and highlighted some of the challenges that town centres will face in reinventing themselves.  The good news is, despite the journalistic negativity, there is plenty of healthy and constructive debate taking place. The theme of the UK Urban Land Institute’s annual conference last month was that many parts of the real estate industry are “on the cusp of change”. At the conference we saw just how innovators, disruptors and makers are forcing the built environment to become more flexible. Understanding how to incorporate more flexibility into existing arrangements and relationships will be essential to the maintenance and development of a healthy and prosperous retail and real estate industry in years to come.

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