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How many stores does a retailer need?

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Could HMV’s decision to downsize signal a more general trend for retailers to slim down their property portfolios, asks Nicola Harrison

Last week’s shock decision by embattled entertainment specialist HMV to shut 60 stores across the group brought new urgency to a question increasingly asked in retail: how many stores does a modern, multichannel retailer need?

The growing opportunity of online retail combined with the heavy costs of operating stores would prompt some to answer “not very many”.

If that is a correct assessment, there will be massive property implications for the retail sector and property firms already having to cope with high vacancy rates.

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HMV’s closure plans will save the retailer 10% on its £150m rent bill in the next 12 months. Given the problems faced by HMV, owner of the eponymous music chain and bookseller Waterstone’s, the decision looks like a sensible adaptation to its changing market.

But could HMV’s downsizing also be the beginning of a trend for store groups more generally to slim down property portfolios in the face of falling sales and the growing power of the internet?

Research conducted by property consultancy CB Richard Ellis in 2009 found that retailers can now operate from fewer, higher quality locations. The study revealed store groups can access 50% of the UK population with just 90 shops, compared with 200 in the 1970s.

According to CBRE head of retail consultancy Jonathan De Mello that is because of the rise of big shopping centres with large catchment areas, which makes coverage easier for retailers, as well as improvements in infrastructure that make it easier to travel across the UK. And, of course, because of online. He says international retailers frequently want to be in prime locations while “infilling” with their online operations.

Retailers launching now certainly do not seem to have the appetite to take up great swathes of space on the high street. For instance, Boux Avenue, the new lingerie retailer set up by Ryman owner and Dragons’ Den star Theo Paphitis, plans about 30 stores initially and aims for its online operation to be a vital route to market.

The first stores will open in March and Paphitis hopes the high-profile, high-footfall locations, such as Bluewater and the Trafford Centre, will serve the shoppers being targeted.

Changing focus

John Duxbury, director of asset management at landlord Prupim, believes that given the focus on fewer, much larger and more dominant centres combined with the continuing and significant opportunities presented by online retailing, “new retailers will never build up the massive portfolio of stores that they would have aspired to 10 years ago”.

Today there are, however, retail chains with many hundreds of stores. Clinton Cards, for example, has 824 shops. Does Clinton, which issued a profit warning last week, believe it could operate more profitably with fewer stores?

Clinton group finance director Paul Salador does not think so. He says there are “no plans for mass closures” and maintains: “Clinton can operate successfully with 800 stores, but there are always improvements that can be made in the portfolio. I believe people still want to go out and shop. People are still going out and building shopping centres.”

He says that even with Clinton’s new focus on etail - it is relaunching its new website “imminently” - there will be a need for a big high street presence.

But some retailers think otherwise, and are cutting space as online business grows. Bicycles and car parts retailer Halfords plans to reduce its selling space by at least 10% to 15% because it believes it can make the same sales from smaller space as its online arm develops.

Topshop parent Arcadia could close as many as 200 stores as it restructures its property portfolio in the next three years. Arcadia boss Sir Philip Green has pointed out that the hundreds of leases coming up for renewal create an opportunity to consolidate the presence of his brands in many towns and reduce the group’s rent bill.

Last year Game revealed it would shut 43 shops, including 25 Debenhamsconcessions.

And there have already been extensive store closures among retailers that conducted CVAs in 2009: outdoor specialist Blacks shut 89; sports retailer JJB closed 140; and DIY group Focus brought the shutters down on 38.

Will there be more CVAs in 2011 as struggling retailers continue to see the practice as a convenient way to get out of unprofitable stores?

Matthew Hopkinson, director at retail location analysts Local Data Company, says: “We’ll potentially see more CVAs. Blacks has shown encouraging results after it extracted itself out of stores where it wasn’t doing very well.”

Whether they use the tool of the CVA or not, Hopkinson believes more retailers will follow HMV’s example of shutting stores as they try to steer through punishing trading conditions.

He points out that there are 62 HMV and Waterstone’s stores in the London area, 12 in Glasgow and 10 in Edinburgh. Such locations, where there are multiple shops, are likely to be where closures occur, and a lot of them will be lease expiries.

Hopkinson cautions: “There are lots of retailers that are over spaced. We’ll end up with a lot of unlet units.”

He believes the trend among retailers such as Mothercare to migrate from high streets to big shopping centres and out-of-town retail parks will continue because of lower costs and ease of supplying stores.

“I am frequently asking retailers: ‘What percentage of your stores will be in shopping centres or out of town in 10 years’ time?’,” he says. “There’s been a growth in retailers opening on retail parks - it’s becoming retailers’ preference,” he explains.

Room for more

But many successful retailers continue to open stores on the high street. JD Sports Fashion, which prospered in the downturn and over Christmas, has 350 JD Sports and Size? stores and sees room for more.

JD chief executive Barry Bown thinks it is “difficult to say” what the right number of stores is.

“You’ve just got to tailor your assets to suit the market,” he says. “We have 350 stores and to go up to 375 to 400 would be good. We’re also going through an ongoing process of moving into bigger premises, moving from 1,500 sq ft to 2,000 sq ft, to about 4,000 sq ft to 5,000 sq ft.”

The big four supermarkets are all still expanding aggressively, while other retailers such as bookseller and stationer WHSmith and sofa giant DFS are on the hunt to open more shops.

Ronan Faherty, commercial director at the UK’s largest developer Land Securities, says: “We still have some great retailers like H&M acquiring stores and have great interest in sites. I don’t believe every retailer will follow [HMV’s example].”

He acknowledges the argument that as online sales continue to burgeon, having scores of stores may become less necessary. But he says: “I believe the two will coexist. It’s about finding the right balance. Retailers have to embrace online, like ourselves - we need to embrace it.”

The industry has always had to deal with change, he points out.

Duxbury does not believe many more big retailers will decide to contract in the same way as HMV. “I don’t see this as the death of the high street as fundamentally British shoppers want to go out and enjoy themselves, mixing shopping and leisure activities. You can’t get that experience from looking at your PC.”

Westfield director of operations Bill Giouroukos agrees that rising online sales do not sound the death knell

for shops. “I’ve been hearing for decades about the death of physical retail and shopping centres,” he says.

“Retailers are continuing to expand and not just in the major centres. There are a number of retailers knocking on our door about opening new shops.”

He believes there is enough room for physical retail as well as online, and that both need to work together.

“It’s not about us and them any more,” he says.

He adds that secondary centres “won’t die either but they have to change along with people’s changing needs”. For example, he says, Nottingham and Tunbridge Wells do not need centres as large as Westfield London, but the developments do need to “serve a purpose”.

On demand

Ciaran Bird, head of UK retail at CBRE, which acts for HMV, does not think HMV’s decision is reflective of things to come. “There’s still an awful lot of demand,” he says.

“Retailers will be far more efficient with the management of their portfolio. HMV is being efficient.”

But there is no denying that, for whatever reason - be it declining sales or a strong online business - some of the less prime high streets are declining as retailers shut up shop.

Towns such as Scunthorpe are suffering - Marks & Spencer closed its store there last week. And 30% of Woolworths’ stores still lie vacant, two years after the 800-store chain collapsed, according to analysis from the Local Data Company.

What will become of less prime centres? Faherty remains optimistic: “All these places will find their place.”

Duxbury believes there will “absolutely” be demand for retail property in 10 years’ time but cautioned there will be less demand for secondary locations.

“If I was a landlord of a poor secondary or tertiary pitch I’d be getting a lot more worried about it and reviewing my investment strategy,” he says.

While online presents a significant opportunity for retailers, the signs from strong store groups such as JD Sports and H&M are that bricks and mortar still matter.

The store may also adapt to a new purpose in the multichannel age. Click-and-collect services are growing fast but, of course, cannot be offered if there are too few convenient locations to collect from.

Former M&S boss Sir Stuart Rose is among those who have flagged the potential for a changed role for shops in addition to their sales purpose.

The likelihood, despite the need for downsizing in some cases, is that the store will maintain its appeal for the foreseeable future.

Are prime locations the most profitable?

Opening in flagship shopping centres is not a low cost way of operating because retailers are expected to pay a premium for high footfall. There is a school of thought that suggests retailers may not be able to sustain a strategy of opening in prime locations.

Research released this month by property agent King Sturge found that “prime often isn’t profitable for retailers”. The report says: “Occupier demand is usually higher for prime and higher-profile sites invariably generate the highest sales. But higher occupational costs often make these the least profitable sites. Prime may therefore come under pressure as retailers seek to shore up the bottom line and possibly rationalise.

“There is an overwhelming preoccupation with prime retail among property investors, developers and indeed retailers themselves. We question whether this is wholly justified and sustainable as markets continue to tighten.

“As costs come under further review and rationalisation programmes are implemented, the paradox is that the areas with the highest occupier demand could actually be those with the highest level of shake-up going forward.”

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