Stores are far from a waste of space

Space is big, as The Hitchhiker’s Guide to the Galaxy accurately noted. And with 22 per cent of non-food sales having moved online and the typical store experiencing negative like-for-likes of two to three per cent each year, the retail industry is realising how vastly, hugely, mind-bogglingly big it is.

But for many retailers, there has never been a better time to open space.

First let’s first take the “legacy” retailer, that laid down most of its estate before 2009. It typically finds itself locked into leases up to 25 years, on upwards-only rent reviews.  It may have a tail of stores in declining locations such as bulky goods retail parks, in-town shopping centres or secondary high streets. It has probably taken a write-down to exit some, but continues to be dogged by the longest, most costly leases.

Much of this space should be converted to alternatives uses such as leisure or residential development, but planning regulation and property financing rarely permit it. These are the “neutron leases”, where the occupant is destroyed but the building is left standing.

By contrast, a retailer who has grown since 2009 typically enjoys a cheaper rental base, with shorter and more flexible leases in a mix of locations suiting today’s shopper.

Of course, the demise of Woolworths or BHS owed much to their failure to reflect the needs of a changing customer. But compared to B&M, Home Bargains, The Range, Flying Tiger Copenhagen or Primark, the old dinosaurs suffered the considerable handicap of uncompetitive property costs.  Evolution has produced a new generation of better operators who also benefit from lower rents and shorter leases.

How should established retailers manage their estate? Ironically some of the weakest can use administration or Company Voluntary Arrangements to leap free in one bound. But for most there is no easy route.  They should be ruthless in exiting tail stores, taking a realistic view of the prospect for continued footfall decline.

However retailers should avoid over-shrinking their store portfolio and ending up an inferior Amazon. With perhaps a quarter of store sales being web-enabled (pre-browsed or checked online) and a third of web sales being store-enabled (showroomed or clicked and collected), stores are still multichannel retailers’ best advantage.

But as well as shrinking, established retailers should consider expanding into new locations. The space might be 20 to 40 per cent cheaper. There is the opportunity to follow the customer into areas such as leisure parks. The lease might be as short as ten years. So although like-for-like sales will still decline, the returns on capital can be much more attractive than the current store base. Furthermore, expanding will narrow the disadvantage to newer, cheaper competitors.

The board and shareholders might need to be convinced about adding space in an industry which is over-spaced. But Holland and Barrett, Next, DFS, Pets at Home, Cardfactory, Snappy Snaps and others are doing exactly this. As the Hitchhiker’s Guide would say, ‘Don’t panic’.

This article first appeared in Retail Week, 4th November 2016

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