Hot issues for the retail market in 2018

Performance barometers

Notwithstanding the challenges that face the retail market, metrics quantifying market performance can often be a poor measure of the actual state of retail when taken in isolation, and do not do justice to the continued success stories of different kinds of retail places.

National footfall trends have little bearing on retail sales even when internet sales are removed. Footfall across shopping centres has decreased year-on-year for the best part of a decade, with last year’s springboard benchmark showing decline of -2.8% across the country.

In contrast, spending levels across retail, food & beverage and leisure continue to see year-on-year growth. GlobalData expect retail sales in prime shopping centres to increase by 1.4% per annum 2018-22, with high street sales growing 1% per annum. In 2018Q2 sales volumes climbed 1.3%, lifting the annual rise to 3.9% and suggesting that the sector has made an outsized contribution to GDP growth (Oxford Economics).

So, while physical presence has decreased this doesn’t mean people are shopping less, but instead points to a change in consumer behaviour around how they shop. Consumer confidence remains tentative, but there are some early signs that the consumer environment and in turn sales volumes will improve as we move through 2018; softening inflation and wage growth has seen real wage growth move back into positive territory.

Vacancy rates can also be misleading. The UK national retail vacancy rate at the end of 2017 was 11.2% (LDC). However, this rate varies significantly for different kinds of retail place. In the community shopping centre market Ellandi record unit voids in 2018Q2 at 5%, down from 7% yoy; well below national levels and broadly equivalent to regional malls. For these locations at least occupational rates have improved over the last year.

There are concerns too that the latest tranche of Company Voluntary Arrangements (CVAs) and administrations will cause significant voids. While retail failures are undoubtedly an issue, especially for landlords with multiple affected occupiers, the overall impact on retail occupational levels is relatively low. We have analysed the recent tranche of CVAs and administrations and while the full outcome is yet to be seen, our worst case scenario indicates that national retail vacancy will only worsen by 0.18% should all impacted brands fail completely. We should reiterate of course that not all places are affected the same way and some locations have been impacted by multiple CVA/administrations, causing above average voids.

Cost pressures are making for a tough trading environment and squeezing retailer’s margins, as a perfect storm of increased staff costs, a weakened pound, cost of raw materials and over extended liabilities has resulted in several business failures. There are challenges too with rental levels and business rates with calls from the occupational market for reform in these areas. Rent reduction is also often a key objective of a CVA.

The impact of CVAs on community retail

The story of 2018 has so far been around the series of high profile CVAs that have hit the market. This is ongoing and therefore analysis of the impact can be relatively short-lived. However, we have looked at the picture at the end of 2018Q2 to examine the impact on different kinds of retail places.

Most of the high profile CVAs from the first half of 2018 will not have an impact on community shopping centres because the retailers concerned are not well represented in these locations. However, the sector does have exposure to brands like New Look and Select, with 114 stores between them located in community shopping centres. Other high profile brands that have so far gone into CVA in 2018 have fewer than seven stores in community schemes between them.

The positive story so far regarding the impact CVA affected brands have on community shopping centres is that few stores have actually closed. While some portfolio consolidation is anticipated and necessary to eliminate under-performing stores, the businesses under CVA typically still have the need for their portfolios in local places to reach their customers.

New Look have reiterated the importance of local retail presence in reaching their target market and while ecommerce is an important area of growth for the business, 34% of online orders are collected in store demonstrating a close relationship between their customers and shops.

The primary impact of these particular CVAs is therefore not on high street vacancy, but on landlord’s income with units having a rent reduction, or a movement from quarterly to monthly rents. 58% of these CVAs have resulted in stores with >40% decrease in rent, 21% with rents reduced up to 25%, while 21% have moved to a monthly payment.

Either action results in reduced rental pressure and increased rental affordability for the retailer. So, while there will of course be some pain for the landlord in terms of rental income and asset valuation, the theory at least is that the tenancy is more sustainable and occupational levels are maintained.

However, while a CVA can provide a positive fix for the retailers in the short term, there remains uncertainty on the future health of the brands affected and CVAs have been known to ultimately result in retailers disappearing from the high street completely.

Across the wider market there have been reports that some landlords have refused a CVA having identified an alternative occupier on a more favourable rent. It is assumed that this outcome will also succeed in avoiding increasing unit vacancy.

The fortunes of Poundworld remain a concern with 47 stores located in community shopping centres.

Growth of ecommerce

Ecommerce continues to be blamed for much of the impact on retail space. The online share of UK retailing is forecast to increase to 18.5% by 2022, however, the rate of growth is starting to slow. Books and music are dominated by ecommerce and a quarter of fashion sales are already made online.

However, there are a number of sectors that will continue to see the majority of their sales via physical stores. Food & grocery sector is forecast to see 9% of sales online by 2022 and despite several very effective online businesses in the health & beauty sector, growth in online sales are expected to stay below 12%. Homewares also have below average online penetration.

As this report finds, for some brands the store remains the main point of engaging with customers, even in sectors (like games) where online has the greatest overall market penetration.

Click & Collect (C&C) currently accounts for an estimated 10.5% of non store sales, yet its forecast growth is set to outpace that for e-tail delivery, providing a positive outlook for physical store presence.

C&C is forecast to see average annual growth of 9.3% through to 2022, with e-tail growth of 6.1%.