…who are as ignorant of each other’s habits, thoughts, and feelings, as if they were dwellers in different zones, or inhabitants of different planets.”
The quote, of course, is Disraeli’s, and it was brought to mind after I read this piece by Marcus Leroux in Monday’s paywalled Times.
The gist of the article (for those of you without a Times subscription) is that 25% of non-essential retail spending takes place in just 3% of Britain’s shopping areas. Of course, the crushing dominance of London – West End, City, Knightsbridge, Westfield – will help to skew those numbers, as London’s share of tourist retail is exceptionally high. But forecasters CACI have reviewed 4,000 different shopping destinations, grading them from A to E, with anything below a C having questionable long-term viability.
The retail landscape has become more differentiated in recent years, as a combination of demographic polarisation, plus online, supermarket and out-of-town shopping, has caused the geography of the UK to divide more starkly between winners and losers. I pondered this in a blog I published at the start of this year, seeking to identify 80 centres that I believed had future relevance; in Leroux’s piece, he notes that around half of Thorntons and Argos stores are in D and E banded locations. And when stores close, which centres do you think will bear the brunt?
Well, here’s the good news (he said, a little acidly): the clone town will be a thing of the past. No longer will there be identical parades and malls of the same jewellers, fashion stores, chocolatiers and gift shops, from Cornwall to the Highlands; instead, we risk a brutally stratified selection of pound shops, pawn shops and cheap booze in struggling towns and suburbs, while chi-chi boutiques and cafes overwhelm the rest.
I’m not convinced this is a good thing (I am a One Nation kind of guy); and I wonder if all of the government’s attempts to focus on local retailers (Portas towns et al) only takes us a short way down the road. I very much support reducing business rates, slackening planning red tape and freeing up parking in order to revitalise a shopping district – but that revitalisation requires strong and solid national chains as well as entrepreneurs and start-ups. Any smart indie retailer understands the appeal of well-known neighbours, preferably robust and well-managed ones.
There is a significant risk that squeezed, mid-market retailers will be closing in the top locations, pushed out by high occupancy costs and sophisticated online shoppers; and closing also in the poorer towns, where falling sales are precipitated by falling employment, collapsing aspirations and a general hopelessness.
We may need to move away from the purist “you can’t buck the market” view to a more nuanced standpoint that recognises that decent communities need a well-balanced high street (as well as good jobs, schools, healthcare, housing…), and that allowing high streets in densely populated areas to fail is akin to leaving broken windows unattended. Of course, those retailers need to provide goods and services that their customers need – which of course is what mid-market chains have always delivered, tweaking their value offer as appropriate to local demographics. But once “some quarters in the City” (Leroux) have prevailed on Argos et al to close their D and E locations, recovery in those towns will become just that little bit more difficult.
Blindingly obvious “two nations” photo: Cheryl de Carteret on Flickr
You’ll have to bear with me; I’m a following a train of thought here. There’s nothing scientific about this, but there’s plenty for retailers and mandarins to think about.
I was reading a piece on The Next Web, about the rise in the US of online-only brands. The article (which you can read here) discusses US enterprises like Dollar Shave Club and Warby Parker whose business model is built around having no bricks and mortar availability for their products. As Everlane CEO Michael Preysman says:
We are going to shut the company down before we go to physical retail… Traditional retail models are bloated with unnecessary costs. Online just makes more sense: we’re national from day one, we have a single store, we don’t have to cover costs of physical inventory in stores and we don’t have to pass on a 2x markup through retailers.
This moves us on from showrooming, and into a world where the showroom has been specifically designed out of the equation. In terms of business planning, this is a big leap forward from “omni-channel” – the message from companies like Everlane is that, while there may be multiple ways for brands to communicate with each their customers, there is only one channel through which they will make their goods available to you.
This marinaded in my mind for a little while, then we started Twittering this morning about the sad closure of a fine record shop. Record shops have been in the advance guard for physical closure and collapse in the retail sector for many years; however few we have left, it seems as they though they keep on failing. As Steve from Rounder Records wrote:
We are closing because we can’t make it add up any more. We are a business that has been decimated by downloads (both legal and illegal), VAT avoidance by the big online retailers, a double dip recession, & the decline of the high street. Our lease has ended and we have nowhere to go.
So, I started to think, how many properly staffed, paying-their-taxes retail businesses (or indeed retail categories), anchored in bricks and mortar and supporting a vibrant high street, have to go to the wall before HM Treasury starts to feel the pinch?
Here are some purely illustrative and not properly audited at all numbers to think about. Let’s assume – as the British Standards Institution believes – that total retail sales in the UK are worth around £300 bn. (That’s 300,000,000,000 in pound coins.) And, to keep it easy, let’s assume that half of those sales – excluding food, children’s clothes etc – attract VAT.
20% VAT on a gross £150 bn equals £30 bn. That’s a lot of schools’n’hospitals. Of course, most online retail transactions attract VAT at the appropriate rate, but some don’t – all those downloads from Luxembourg, for instance.
Right, £150 bn less VAT equals £120 bn. Stick with the train of thought:
Business rates at, say, 4% of ex-VAT sales, will raise £4.8 bn.
Staff costs, at 10% of ex-VAT sales, will raise £2.4 bn in income tax on those wages, assuming tax is paid at a flat 20%. (Netting out personal allowances against higher tax band payers, for the sake of argument.)
Employers’ NI on those same staff raises around another £1 bn.
And if all those retailers make 5% net profit (happy thought) ,on which they pay 20% corporation tax, that’s another £1.5 bn.
Of course, online retailers have the same cost-heads, but with fewer staff, cheaper premises etc, the tax-take from their business activity is going to be significantly smaller than from a traditional bricks and mortar retail model.
Now, I probably ought to be having this debate over a third pint on a Friday night, but somewhere in this maelstrom of lower prices for consumers and lower operating costs for online retailers (yes, I know, they have to spend much more on marketing), there’s a lower tax take.
If online becomes progressively more dominant, as this graph from The Daily Telegraph suggests:
– and as I discussed in this blog at the end of last year, at what point will the current tax regime start to feel the strain?
It rather looks as though the Exchequer will need to raise more money – either from online merchants, through some form of additional levy (which in due course would lead to price inflation); or from consumers, either through raising VAT (though this is vulnerable to corporate strategic avoidance) or by raising income tax.
The channel change is gradual, of course, but inexorable. We won’t end up buying everything online and nothing from physical shops, but there’s a lower-tax trend. Looking to the future, our Chancellor and his shadow could just carry on flicking each other with wet towels, but – in the absence of real economic growth (driven by eg significant job creation in other parts of the economy) – I hope there’s someone in the Treasury giving this longer-term structural change some serious thought.
I’ve been thinking about positive and negative legacies over the past few weeks, and my talk at the World E-Reading Congress tomorrow uses legacy challenges as one of its springboards. I’ll share a few more of those thoughts with you once the speech is unembargoed, but in the meantime, here’s my monthly column in The Bookseller, pondering the dead weight of real estate legacies that can damage or even destroy traditional retailers. (Plenty of recent examples available.)
It is stupidly neophiliac to treat any past achievement as a legacy to be denied and downgraded, of course. Last night I had a splendid time at The Bookseller’s Industry Awards night in London’s glittering West End. Several of the major awards went to long-standing organisations that are still closely associated with their founders – businesses that understand the value of what they’ve created, and can build imaginatively upon it. Congratulations to (in this instance) Usborne Books and Foyles; and indeed to all of last night’s prizewinners.
Housing Minister Grant Shapps has announced the government’s official response to the 2011 Portas Review. You can read the Communities & Local Government Office’s full text here.
It’s been quite a week for retailers, with the government promoting local shopping by manufacturing a petrol shortage which will ensure we’ll only be spending at shops we can walk to this weekend. Much more seriously, the impact of channel change on established and historically successful retailers is being felt across the world – Game Group’s administration, the collapse of leading Dutch bookseller Selexyz, famous for creating the “world’s most beautiful bookshop“, and today the announcement from Best Buy that (a) it’s closing 50 US stores and (b), short of slashing costs and talking hopefully about online opportunities, it’s a bit short on strategy.
So, back in Britain, there are plenty of feelgood elements to Grant Shapps’ announcement: market days and Town Teams were particularly eye-catching back in December, so they get full support, but there’s relatively little money forthcoming – around £12.8m, which will fund a few more Portas Pilots, but is a tiny sum of cash – it’s rather less than, say, Foyles in Charing Cross Road turns over in a year, or under a third of the estimated cost of the Leveson Enquiry.
Paradoxically, though, I’m not calling for loads more cash; I’d prefer to see more real local power and accountability, with councils mandated to create a successful business environment for the communities they serve. This will be the acid test of the programme, as there is much promised on revoking archaic bylaws and reforning planning – will local councils have the guts to go the whole way, and will the government be prepared to devolve real decision-making and – at council level – revenue raising powers? Step forward the first council that wants to tell Grant Shapps that, actually, we think a 5.4% increase in business rates is a little steep in the current environment, so here in Tomorrowtown, we’d like to do things a little differently.
Well, I can dream. But beware of short-term revitalisation and too great a focus on heritage and bringing back “the old high street”. There is, understandably, much hand-wringing about the number of vacant shops across the country – 14.6% of total stock across the country, it says here.
But hang on just a second – is that the number of empty premises, or the volume of empty space? Or, to turn the numbers around (without knowing the answer) what is the total volume of trading square footage in retail today, compared to ten or twenty years ago? I’m going to bet that the number has gone up, but that old stock has been allowed to rot on the vine.
As retail commentator HatmanPro has observed on Twitter, much of our empty retail space exists because newer space has superseded it. In too many town centres, successive new developments – blocks of stores, little shopping centres – have been dumped into vacant spaces, increasing the total volume of footage and laying waste to older shopping streets and districts, on the assumption that, as the population grows and we all become wealthier, more and more shops can prosper. Even without the internet, this is patent nonsense – I’d like to see new shopping centre openings accompanied by a structured reduction in dead space; a recognition that, with 10.7% of all retail spend now online (and that number will grow and grow), even the most Pollyannaish assumptions of future economic recovery will not merit the number of old shops cluttering up our old towns.
Will Town Teams and local councils have the ambition, the power and the cojones to repurpose spaces? Will they be able to do so, and maintain the variety of chains and independents, generalists and specialists, commodity sellers and boutiques, that a thriving town centre needs? I really hope so. But the “beating heart of the community” needs to be strong and vigorous, and must look beyond the reduction of street furniture and controls on levels of parking fines – if 15%, 20% of all retail spend is going online (because that’s what the consumer wants), then those high streets need to reflect tomorrow’s needs, rather than yesterday’s longings.
And having said all of that – if this comes off, when those first Town Teams cajole their councils into really making a change and doing things differently, this is going to be damned exciting. Retailing is one of the things we do best in the UK, and everyone who’s committed to a retail career wants to make it better.
Pictures: The Sun; bhbeat.com
There is, sadly, little sense of surprise in the news that Game Group has finally called in the administrators, as the chain’s poor Christmas was followed by the reluctance of the banks to prop up a struggling enterprise, and then the progressive withdrawal of support from its suppliers. However, what does shock is the speed at which a plc can go from success to failure, once the storm starts to rage. In 2009, Game Group posted pre-tax profits of £119m, up 75% in two years – here was a company that was beating the consumer recession – although this proved to be the last of the good news, as the absence of new platforms, lower pricing from online competitors, and the growth in downloaded content progressively reduced profitability and investor confidence.
Game themselves – slick and capable operators who’d innovated in many ways (eg by mainstreaming the second-hand market) – now had a brand that was too anodyne for the hardcore gamer. They should have repositioned their primary brand to better serve that market, rather than chasing the more family-friendly (and fickle) Wii market. Instead they sought to serve the hardcore through the rougher and readier Gamestation brand, having committed the Retail Deadly Sin of acquiring a parallel business in 2007 and then having to post-rationalise it (see Clintons/Birthdays, Mothercare/ELC, WH Smith/Waterstone’s and many more down the ages).
Their second Deadly Sin was to focus on international expansion at the expense of the home business, when they should have been replicating their physical dominance (a one-third market share at peak) in the online sphere. That’s a tough, going-on-impossible trick to pull off when the competition includes retailers like Amazon and developers like Zynga and Rovio, but it was where the market was going and it’s where Game should have gone, in a fair and equal world.
However, this world ain’t fair nor equal, and a retailer – any retailer – committed to decades-long leases in prime pitch locations at the most expensive malls is naturally going to be focused on how maximise those stores’ sustainable profitability, how to turn them around – in short, how to protect the legacy/millstone that they’ve inherited.
It’s this lack of flexibility than can kill even market leaders in the current consumer climate; their lease commitments are so onerous that they have to focus on hauling those locations back towards profitability, even though there are precious few examples of gone-bad retail locations miraculouly coming good again.
Game Group’s collapse is the worst, in terms of potential job losses, since Woolworth at the end of 2008, and it is to be fervently hoped that some jobs, stores and the brand can be saved. However, it once again throws the plight of the middle market into sharp relief, as a profitable core of Game stores won’t prosper unless the online/download/value challenges I instanced above can be resolved. (And any good news that all of this represents for HMV will be short-lived too.)
Meanwhile, the less attractive or affluent high streets and shopping centres are being hollowed-out by store closures. The Portas Review rightly promotes the conversion of retail premises to other uses, but what strategies, one wonders, are the shopping centre landlords contemplating? The biggest and best – the Westfields, the Meadowhalls – can thrive, but all those poky, low-ceilinged 80s developments with their shallow shop units, the natural home of Game and many other 2011-12 retail casualties – how will they be repurposed? Which major landlord is going to break ranks and announce a new strategic approach to asset management that isn’t built on the old assumption that everything will remain largely the same as it was before?
In February 2012, 10.7% of all UK retail sales – including food – were executed online. In February 2011, the figure stood at 8.3%. That’s a lift of £140m in a dull month, when overall retail sales were flattish at the very best. Factor in Christmas, and you’re looking at the thick end of £2 billion transferring from bricks and mortar to online over the course of 2012.
Despite all of this, I personally remain convinced that physical retail has a strong future but – as my headline suggests – bricks and mortar is trapped in a losing war at the moment. That war will end – a truce will be called, and a new equilibrium established – and it will be consumers en masse who end hostilities, once a new balance of online purchasing (for value and convenience) and physical retail (for the experience of the product, the face-to-face benefits, the “localness”) has been established.
Of course, online and physical will blur, as they already have for successful, robust businesses like John Lewis or Apple (this hoarding is just two doors down from Game in Kingston’s Bentall Centre). It’s proved to be very much easier for customers to evolve into multi-channel operators than it is for the retailers that serve them.
But the biggest and the best will survive and thrive, as will the smaller operators, who know their market, understand their customers and can move swiftly without too much legacy encumbrance. The mass, the middle market? That’s proving to be much more difficult.
Author’s note: My alma mater, Borders Group, of course committed more than a few Deadly Sins in its time; but the concession agreement we had with Game in the UK was highly successful for both brands during its all-too-brief existence.
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My eBook, A Year at Front of Store, is available in these Amazon Kindle territories –
This short piece was originally published earlier today by My Retail Media, in their “Insight” section. myretailmedia.com is a website dedicated to the Retail Sector, covering all the major retail categories, and offering finance news, videos, comment and insight. They also produce News at Nine, a free daily eNewsletter, and offer bespoke subscription services, aggregating retail news from over 4,000 sources, and tailored for individual subscribers.
As we enter 2012, we asked Philip Downer, the owner of retail consultancy Front of Store and former CEO of Borders UK to tell us where he thought the major trends and shifts for the year ahead would appear.
The retail industry enters 2012 in the throes of profound change driven by two factors:
- The continuing belt-tightening of Britain’s consumers, which will continue into the mid-decade, as cuts in government spending and the rebalancing of the global economy continue to change our working lives.
- Along with this, the channel shift from physical stores to online provision, in which the UK – according to Bain & Co – leads the world, with over 9 per cent of all retail transactions now taking place online. None of us can predict where or when retail behaviour will “settle” as technological change continues to accelerate.
Many established retailers found themselves in difficulties in December 2011, with profit warnings, administrations and rumours of collapse circulating across the industry. Here are some key pointers for 2012 – all equally applicable to major chains and to indies/start-ups:
First up, it’s no longer feasible for any retailer not to have an active online presence. And “active” doesn’t simply mean an online store; customers expect integrated online and instore browsing and purchasing. The rise of click-and-collect underlines this change.
Thanks to the power of web research, consumers are now often better informed than sales staff instore, both on product specification, price and value. Poorly trained or unmotivated sales staff are a greater liability in physical stores than ever – some retailers are recognising this, others still don’t “get it”.
What’s more it’s become a truism that a chain now only needs 50-80 stores to achieve national coverage – where 20 years ago they needed 300 or above. Understanding which centres or towns will be winners, and which are the also-rans, is going to be critical for retailers and for legislators. It’s telling that Grant Shapps, the new “Minister for Retail” – who has to deliver the Government’s response to the Portas report – is attached to Eric Pickles’ Communities and Local Government department, and not to the Department for Business, Innovation & Skills. High street revival is, perhaps rightly, viewed as a whole-community strategy, rather than simply a commercial challenge. This should at least mean that a holistic approach is taken to the many good points that Mary Portas raised.
Finally, things will get worse before they get better – but as the structure of the retail industry undergoes a once-in-a-generation change, the opportunities for entrepreneurs and visionaries to create retail success stores for next decade is wide open.
A couple of tables for you. The first is very straightforward – a schedule of Christmas Trading Statements, amassed during January 2011. I’ll be doing the same again in the weeks ahead:
With the benefit of 12 months hindsight, some of these results look almost benign. Here’s a rundown (appropriate phrase) of some of the bleaker announcements from December 2011:
There’s an interesting report in The Times today; if you have a Times subscription, I urge you to take a look behind the paywall. The purpose of the story is track sales growth online, and there is much additional data regarding online research, different online trends across luxury/premium/mass market products, and so on.
The data has been provided by Bain & Company, and I’ve reproduced the gist of two of the graphs below. Please note:
- the graphs merely mimic graphics from today’s Times
- copyright rests with Bain & Co
Just treat these charts as trend indicators:
1. Internet retail as a percentage of total retail:
No doubt about it, we are leading the world in Britain, which makes the repurposing of our high streets and an intelligent repsonse to the Portas Report all the more vital. The flatter growth in the US is surprising; the sudden take-off in China is no surprise at all.
And it looks as though we’ll be maintaining our UK lead in the future:
2. Online sales forecast as a percentage of total sales, by category:
Music and video close the decade with 95% of sales online, and books are at 75%; within these percentages a large (but unspecified) proportion of the whole will be digital downloads.
In physical products, electricals soar to just under 60%, and clothing/footwear and homewares grow significantly. Travel and food are more stable, but still likely to see growth.
Both charts show a percentage of spend, and are therefore not suggesting that total spending by category could rise. They simply illustrate channel shift, and spending might just as likely fall.
As the sector returns to work, we brace ourselves for the Christmas trading statements (which we’ll be following closely on this blog) and, of course, the progress of the administrations and restructurings that were being signalled in the run-up to Christmas. Consumers are making the most of clearance sales now, but the medium-term future for most retail categories is very challenging. Watch this space…
Under four weeks to go until Christmas, and the retail stories are falling thicker and faster than last year’s snow. And – like the snow – there’s precious little good news in most of them – but kudos to The Scotsman, which looks to the future and makes some strong points.
Although struggling/challenging stories have been running for many months (Comet, Black’s, Game etc), it took Philip Green’s (accidental?) candour to set the hares running across the weekend papers. Although Arcadia tried to play down the suggestion that 10-15% of their stores may close, tried to suggest that this was no more than robust landlord/tenant manoeuvring, if you were PG – well, of course, you’d be planning to close stores – lots of them.
Simon Laffin writes occasional columns for Retail Week that are always worth reading. This week, he reflects on the swing back to smaller stores, whereby those dreadful supermarket chains have revitalised high streets by opening convenience stores and small supermarkets that are greatly superior to the old local food offer. He also notes that, with changing work patterns and social structures, the big Saturday shop is no longer the routine it used to be.
Is there a contradiction here? I don’t think so. What Laffin’s article and Arcadia’s intentions underline is the extent to which the retail landscape is permanently changing. The shoppers of today and tomorrow are using the following channels with enthusiasm:
Big regional malls and centres: Westfield Stratford is hogging the seasonal headlines, but Bluewater, Meadowhall et al are all still going strong. Big cities that have wisely invested in their shopping environment – Liverpool, Manchester, Bristol, London’s Regent Street – are also enjoying strong footfall, and will eventually be the primary beneficiaries of the Christmas boom.
“Open A1” retail parks: The big out-of-town parks with open planning consent will continue to offer a regional, one-stop draw. At Fosse Park, Teesside or Fort Kinnaird, the shopping experience is safe, structured and functional, with intelligent tenant management ensuring the retail offer meets customers’ needs. Good parks can often be found outside cities where the retail offer has deteriorated, or where car access is poor.
Online: What proportion of Christmas gift shopping will be online this year – 12%? 15%? According to IBM, “Black Friday” retail sales in the US are up 24.3% against last year, and although a day is hardly a measure of a season, it’s one hell of a jump in a struggling economy. Online offers convenience, value, long tail and one-stop. There is much more growth to come.
Local: Per the Laffin article, local is getting better, but we’re talking about “real local” here – proper high streets that customers can walk to, where chains and indies can exist harmoniously, and where shopkeepers know their customers by name. Not Bedford Falls, but a regular feature of dense cities and suburbs, where a car is more of a hindrance than a help.
Three of these channels are Big – a reflection of the global market; one of these channels is Small. Which leaves the Squeezed Middle, the medium-sized offer that was good enough when we knew no better, but is not much good now.
Overall retail spending is falling, and more of it is going online. Furthermore, other high street users are suffering – Thomas Cook will be closing around 20% of their agency locations (more will follow), and any product or service that can be digitised has to adapt or die.
There isn’t going to room in the future for shops to hang on and hope. Of course, a quiet retail frontage might contain a global online business, but medium-sized shops and medium-sized town centres no longer offer great experiences, great value, or great convenience. In order for these centres to be sustainable, they will have to be shrunk and repurposed. That means fewer, better shops, easier access (public and private transport), more and better town centre residential (not just buy-to-let hutches), and rent deals that sustain, rather than drive out, commercial users.
Are councils carrying out this sort of long-term planning, or are their horizons no further than the next election? As a smug Londoner, I have easy access to world-class retail and great local shopping, but beyond the M25 there are millions of consumers whose spending is constrained by recession, and who see no incentive to spend (indeed, little incentive to hope) in their town centres. How many of Arcadia’s anticipated lease-ends are in these towns, and how will landlords/councils make streets, malls and open spaces work in the future? The current approach shown by some (hike up parking charges, close libraries, let parks go to ruin, cancel Christmas lights) is distinctly short-term.
At a time of constrained public spending (though with a promise of capital expenditure in tomorrow’s much-trailed Autumn Statement), councils would be open to criticism if they spent money on merely prettifying high streets. Strategic rethinking, though, is more important, more exciting, and ultimately more urgent. Can it be done?
Afterword: Wednesday November 30th:
My thanks to My Retail Media, who have republished this piece today in their “Insight” section. myretailmedia.com is a website dedicated to the Retail Sector, covering all the major retail categories, and offering finance news, videos, comment and insight. They also produce News at Nine, a free daily eNewsletter, and offer bespoke subscription services, aggregating retail news from over 4,000 sources, and tailored for individual subscribers.
If you’re in the UK and have any interest in books, publishing and digitisation, can I commend the Bookseller’s FutureBook Conference to you.
There’s a packed day of activity on Monday, 5th December, at the QEII Conference Centre in Westminster. There’ll be keynote addresses from Stephen Page, Dominique Raccah and Evan Schnittman, and about 40 of the sharpest minds associated with the trade participating in discussion sessions throughout the day. Sessions will be covering digitisation, start-ups, gamification (no, me neither), and international opportunities.
You can read a full programme here – I understand some tickets are still available, but hurry.
I am chairing a discussion on the theme of “The new retail landscape”, with an excellent panel:
Jeremy Brinton, publishing consultant and former CEO of Dubai-based booksellers Magrudy’s
Robert Clark, Senior Partner at Retail Week’s Retail Knowledge Bank
Cameron Drew, head of Vendor Relations at international eReader developers Kobo
Julie Howkins, Commercial Director at Gardners distributors, responsible for the launch of the Hive
Alan Treadgold, Head of Retail Strategy at global creative agency Leo Burnett
It should be an excellent session. Hope to see you there.