Over the past week three big stores based retailers - Debenhams, Arcadia and Bonmarche - have all gone bust.  Although unsustainable stores were only part of the problem for these long-term struggling businesses, they contributed to their demise. 

  • Retailers are reassessing their portfolios in terms of location, rent and profitability
  • Retail chiefs say shopping centre stores are being considered for closure or rent reduction is being sought
  • It remains to be seen whether large-format city-centre stores will survive in a post-Covid world

The economics of running stores have grown increasingly difficult over the past eight months. With quiet city centres, weak demand and a step-change in online, are stores still part of retailers’ future plans?

At the beginning of this year, Lush boss Mark Constantine told Retail Week if he had his way the ethical beauty business would focus on large city-centre stores like the one it had recently opened in Liverpool.

Lush Liverpool 4

Lush’s experiential Liverpool store was the blueprint at the beginning of the year

The retail business had also in recent years unveiled multi-floor experience-led stores in other major cities such as Birmingham, Munich and Shinjuku in Tokyo and Constantine was hungry for more.

“Would I like to only run large stores like Liverpool? Yes, I really would,” he said.

Constantine was not alone. Retailers ranging from Boots in Covent Garden to Primark in Birmingham were betting on large-format, city-centre stores to drive their business’ growth.

But a lot can change in 10 months, and the ongoing coronavirus pandemic has decimated trade and drastically decreased commuter, tourist and general footfall.

Lush property director Paul Wheatley says it has put all store expansion projects on hold and is already in the process of closing some stores across its international estate.

“There are stores we took over in the last two to three years which are completely unsustainable now from a rent standpoint,” he says, which could include some of those big experiential stores Constantine was so excited about.

“We can’t pretend we can continue to trade whenever and wherever, given the current climate”

Paul Wheatley, Lush

“We have stores we believe are unviable from a profitability standpoint going forward and we are talking to landlords now. We can’t pretend we can continue to trade whenever and wherever, given the current climate.”

Against the current backdrop, many retailers are considering drastic action. According to the 2020 Korn Ferry UK Retail Chair survey, 35% of retail chairs expect to reduce their store portfolio over the next 12 months, with 8% of those planning to shut all stores entirely and move to an online-only business model.

Half of retailers that planned to close stores, however, planned to close a more conservative 10% of their current footprint – something that one property expert said was apparent in the flurry of CVAs the sector has seen in recent months.

Bubbles-for-analysis-piece-2

“What we are generally seeing is that very few CVAs involve getting rid of substantial parts of a retailer’s portfolio – when one is done its rationalisation without the legwork of negotiating leases one by one.”

Retailers including New Look, Clarks, All Saints and Poundstretcher have launched CVAs this year, and Tesco chair John Allan says this tactic of getting out of undesirable leases will become more and more commonplace in the coming year.

“Lots of retailers are sitting on excess space and we need to come up with more imaginative ways of dealing with it than the current plethora of CVAs. That’s not fully played out as yet and we will see a lot more action on that front next year,” he said in the Korn Ferry report.

Tough times

Even retailers that do not want to resort to drastic measures such as CVAs are finding life in lockdown incredibly tough.

CWM equity partner Jonathan De Mello says: “All retailers, and particularly those with legacy estates, want to reduce their size and the costs attached to them as much as possible,” he says.

“Particularly in city centres like the West End where retailers were dealing with footfall down by half even before the second lockdown. The lack of workers and tourists in city centres combined with projections on home working being here to stay and the higher rents in those areas means those locations are particularly vulnerable. Retailers are reviewing their estates and deciding what will and won’t work long term.”

The boss of one fashion retailer said that even before the pandemic, half of his store estate was loss-making and that fundamental change is needed to redress this balance.

“With service charges, rate reviews and minimum wage increases combined with the fact that in fashion the average transaction value is not going up, you can come up with a very quick equation that indicates the current model doesn’t work and is not going to work, whether we find a vaccine tomorrow or not,” he says.

Empty Oxford Circus

City-centre shopping destinations like Oxford Street are increasingly quiet

One homewares boss said the vast majority of his landlords have been willing to negotiate on rent during the pandemic but stresses that this is aided by the fact he sees a consistently sized store estate in his long-term plan for the business.

“We asked landlords to go half and half on rent with us when the lockdown began, and have been having those conversations since March,” he says.

Originally there was reticence but, because the business is committed to retaining stores long term, two-thirds of landlords have agreed to those terms.

“I doubt that’s a stance they would have for everyone though because they don’t see a future for every retailer that is lowballing or withholding rent entirely.” 

The fashion boss believes an increasing number of retailers are resorting to administrations and CVAs because landlords refuse to give them any leeway. 

“We asked landlords to go half and half on rent with us when the lockdown began, and have been having those conversations since March”

Boss of a homewares retailer 

“If you are an apparel retailer in this market you essentially have four options – an administration which forces the conversation with landlords but is a crappy way to do things. The second is CVA, which effectively does the same job and allows you to rebase rent, but you upset stakeholders.

“The third is an active discussion with landlords and sharing information about where you are pre- and post-Covid and renegotiating based on that. The fourth is to wait for a lease break and negotiate turnover-only rent.”

Although the fashion boss prefers the latter two options he understands those that take the more drastic administration and CVA routes: “People do lose patience and resort to it and I can’t say I blame them.”

Stores most under threat

So is there a common thread in the types of shops retailers are earmarking for closure?

The fashion retail boss singled out shopping centre stores as those he needs to reduce rent on or considering exiting as soon as possible.

While Lush’s Wheatley says it’s too early to predict post-pandemic trading trends, the case for exiting underperforming shopping centre stores was most compelling.

Westfield Stratford

Shopping centre stores are most at risk of closure following reduced footfall under the pandemic

“At the moment we are certainly looking hard at shopping centres and whether they are the right place for us to be going forward,” he says.

“You’ve got service charges, historically high rents, and with the current sales in some of the regional centres, even when stores were open, it’s hard to justify from a profitability standpoint.

“By contrast a local high street store where shoppers can be out in the fresh air and that we could potentially use to fulfil online orders to local customers feels appealing.”

Wheatley also has his reservations about the long-term viability of large-format city-centre stores, which once stood at the heart of Lush’s expansion plans.

“We need to see how those [large format] stores work in a post-Covid world. You may not want to walk around a 20,000 sq ft store with staircases – alternatively a big format like that might feel safer than a smaller one. 

 “The challenge is city centres across the globe aren’t doing well, and we have to make sure our model is sustainable enough to have local stores where they are needed”

Paul Wheatley, Lush

“There’s no doubt stores like Shinjuku and Oxford Street allow us to showcase Lush at its very best and give us a point of difference, but those stores have got to adapt to the world we are in. The challenge is city centres across the globe aren’t doing well, and we have to make sure our model is sustainable enough to have local stores where they are needed.”

And some sectors will see more closures than others. De Mello believes music and gaming retailers will find it the hardest to justify a sizeable store estate post-Covid, particularly as streaming has accelerated further during lockdown.

He also predicts that electricals and white goods stores will have a future in retail parks, but are unlikely to have a major presence on the high street as shoppers make more big-ticket purchases online.

New stores must be capex neutral

The retailers still expanding their store portfolios are only doing so with significant incentives.

The property expert says: “In a world where everyone is capital constrained, retailers are driving toward fewer deals and the ones they do make need to be as capex neutral as possible, so deals where landlords can fund the things like store refits make them more attractive. 

“There were times in the past where retailers would look at stores on the fringes of prime locations on the basis that leasing it would be capex neutral. Today, retailers expect prime real estate to come with that same lack of investment.”

The property expert says the majority of retailers that are planning to take new space are doing so on turnover rent deals.

This puts landlords – many of whom have been deprived of months of rent as non-essential stores lunge in and out of lockdown – in a tricky position.

The fashion boss, who himself will be making tough decisions about closing stores in the year ahead, expects many of his rivals will be doing likewise and predicts the sector will experience a “significant” contraction in store numbers in 2021.

However, he thinks physical stores are still important. “Our chance to interact with our customers face to face is more limited, and it becomes a slightly cold, emotionless transaction without stores. But there needs to be a fundamental rethink of how landlords and retailers collaborate if we want to avoid significant closures in the coming year, which no one wants.”

By contrast, the homewares boss says he plans to open more stores in 2021 and is confident the high street will survive – albeit it will look different to how it does today.

“There needs to be a fundamental rethink of how landlords and retailers collaborate if we want to avoid significant closures in the coming year”

Boss of a fashion retailer

“I think we’ll see entrepreneurial new brands with a local focus, and brands that are currently digital-only making the move to physical to plug the gaps made if some legacy businesses do scale back their stores,” he says.

“If you looked at photos of high streets 50, 30, 10 years ago it is always changing. This year is going to bring in a lot of change, but stores will still have value.”

Retail bosses face a tough challenge to decide how many stores are needed and where. The rules that applied at the beginning of the year seem thoroughly out of date – it’s up to retailers, landlords and shoppers alike to determine what new rules to follow.