Lost in space
01.01.70 | Paul Smiddy
The sky is darkening with flocks of chickens coming home to roost. Too many retailers have been opening stores in the UK on the assumption that demand for their goods and services would grow steadily towards a very distant horizon. When I was working for a growth retailer many moons ago, the default mode was that we would add about 10% new sales area each year. We could find enough good sites that, with judicious financial analysis, we could be convinced provided a solid investment prospect. Many other retailers had similarly broad yardsticks.
Strangely for a country which generally produces quite good economic data, there are few reliable statistics about the provision (and growth) of retail space. But I have tracked a proxy for this for a while. The British Retail Consortium—that trade body which would endlessly bleat about the need for lower interest rates, but now has gone strangely mute on the subject—produces monthly sector sales data, which give both total and like-for-like store sales growth.
Taking one from the other gives you the amount of sales growth driven by new space. Now, like investment bankers (who should know better), property developers are notoriously poor at adjusting their activity rates to cope with economic cycles. The impact of new stores has fallen from contributing sales growth of almost 4% in 2005, but it is still running at 2.3% according to the latest available month’s data. Space is pouring into the UK market at a painful rate for its weaker players.
Planning steady, annual, physical growth of 10% now looks absurd. The unfortunate conjunction of a recession and increased penetration by online merchants has threatened the profitability of many across the retail scene. Every retailer always has a weaker segment of his portfolio that he would like to close. For many, the number of such problem children has grown. As I have said before, London-based chatterati find this problem more difficult to discern. We exist in a relatively sheltered part of the economy; but the retail scene is less buoyant in Bradford than, say, Bond Street. It is notable that newspaper publishers currently talk about advertising revenue growth in provincial titles being less resilient than that of national titles.
For retailers that are prepared to enact extreme measures, a radical solution is available —the Creditors’ Voluntary Arrangement. This enables the retailer to threaten its landlord with corporate failure, and hence all its leases reverting, if the landlords do not consent to take back the most onerous sites. This ploy has been relatively widespread in the clothing and footwear sectors.
One “sportswear” (as in nightclubs, rather than athletic clubs) retailer has been particularly miffed that its main rival, JJB, has pulled this stunt not once, but twice. I have some sympathy with their view that this tilts the competitive field unfairly. The need for CVAs is, however, a symptom of an underlying UK business malaise: the rigidity of lease structures. Were they shorter and more flexible—and possibly tied to turnover or profit, as is typical in the travel sector—both parties might be happier in the long-term.
Where is the pain being felt most? Readers will recognise that entertainment retail is right in the crosshairs of online merchants. Game Group expanded its UK store chain for too long, and suffered an ignominous dismemberment. HMV has moved nearer to being owned by the big music publishers. But even the mighty Tesco has now realised that opening an endless number of horrid white-and-blue boxes is not the route to corporate (let alone public) happiness.
The band of retailers critically examining their bricks—and possibly devoting more resource to clicks—is growing. The effect of this slowdown in retail property development is broad: property consulting firms who have grown fat on that 10% autopilot mentality are now shedding labour in painful fashion. And some high-street landlords are certainly facing plenty of chicken ordure.