Analysis: How landlords can better support retailers

Much to some people’s amazement, the high street is not going to disappear in the next decade.

There’s no doubt stores have come under pressure from online growth.

Sales densities have plummeted as ecommerce has grown; online now represents 20% of total sales among the 180 retailers tracked on Retail Week Prospect – double what it was five years earlier.

But as Marks & Spencer’s chief executive Steve Rowe said at Retail Week Live earlier this month: “Stores are fundamental to the digital-first future.”

The high street, however, has to evolve and landlords need to be open to reshaping store space as well as flexible leases.

Dedicate space to online

While stores struggle to compete with online on range, price and accessibility, physical space can offer greater convenience.

Landlords should – in part – see physical shops as fulfilment hubs for online orders, with greater investment in click-and-collect over the next decade.

“The high street has to evolve, and landlords need to be open to reshaping store space as well as flexible leases”

Argos, which topped Retail Week’s top 30 multichannel retailers report last year, leveraged its 800-strong store estate to create a hub-and-spoke model.

This enables small-format stores to offer industry-leading same-day collection for around 20,000 products by tapping into stock at larger shops in the area.

Provide more reasons to visit stores

Excess store space can be reimagined in other ways, though.

Retailers with large stores are increasingly looking at more inventive ways to make better use of their space and, at the same time, upcoming brands want to be in prime locations that they cannot always afford.

For instance, Glasgow saw a 12.5% rise in rents in the fourth quarter of 2017, according to research by commercial real estate firm CBRE.

This has resulted in more brands opening shop-in-shops as a cheaper way of getting into prime locations.

This month, furniture brand Swoon launched a concession in Debenhams.

Landlords should welcome this, as the benefits are mutual.

Sharing space helps retailers spread the burden of rising rents while providing landlords with a more interesting retail mix that pulls in shoppers.

Be open to emerging brands

While some traditional retailers have overstretched their portfolios, landlords can turn to emerging brands to energise the high street.

A raft of online retailers want a physical presence.

Farfetch, Missguided and Made.com – which are all established online – have since set up physical stores, and are among the fastest-growing retailers in the UK.

But, in order to continue attracting etailers and brands to bricks and mortar, leases need to become more flexible.

Flexible leases

Retail is fast-moving, so the vast reduction in typical lease lengths has been warmly welcomed by retailers, from 7.7 years in 2007 to the average 7.0 years by 2017, according to a report by Property Industry Alliance.

But even seven years can be a burden.

“Retailers with large stores are increasingly looking at more inventive ways to make better use of their space”

Jonathan De Mello, head of retail consultancy at Harper Dennis Hobbs, says retailers are calling for shorter leases.

“Retailers are often in a situation where they’re trying to test a location and understand demographics, and if it doesn’t work out, they need the flexibility to be agile,” he explains. 

To overcome this, landlords should consider shorter leases with more break clauses. Furthermore, turnover rents offer a more dynamic and often affordable way of paying rents that can appeal to emerging brands and retailers.

However, De Mello says that currently landlords are “generally quite rigid with leases, wanting upward-only rent reviews and 10-year terms”.

He adds: “The market has moved on. The timespan a retailer has to make its mark is increasingly short.”

Luisa Janisch, CBRE associate director of UK retail research, is hopeful, though.

“By 2030, we expect a trend towards more flexible lease terms and shorter lease lengths,” she says.

Such platforms are emerging, including Airbnb-style Appear Here sites, which offer short-term retail spaces.

Offer digital infrastructure

Leases can be made favourable in other ways, such as bundling digital services.

Shopping centre owners, including Intu and Westfield, offer apps that provide navigation to stores and offers, as well as digital signage across their malls for retailers to tap into.

“Sharing space helps retailers spread the burden of rising rents while providing landlords with a more interesting retail mix that pulls in shoppers”

The benefits, however, are marginal.

De Mello says such initiatives are “unlikely to make or break a retailer”, but adds: “Landlords should absolutely be offering these incentives as part of their service charge.”

Beyond digital

Ultimately, the best way landlords can support retailers over the next decade is to provide flexibility in lease agreements.

Long terms may secure income for landlords, but poorly performing retailers choked by rent commitments can be pushed into administration, leaving landlords with empty units.

Beyond the pressure from online, Brexit has introduced uncertainty in terms of consumer confidence, as well as the viability of cross-country supply chain operations longer term.

And if retailers cannot credibly forecast the outlook beyond Brexit’s transition period, how can they commit to long-term or rigid store contracts going into the next decade?