The changing face of retail and the way we shop is having a huge impact on our high streets.
We are shopping more and more online. Consumers find it easier and cheaper than going to the shops and the online giants like Amazon and Ebay are playing a big part in changing our shopping habits. While overall retail sales growth remains weak, online sales continue to grow.
Paul Martin, head of UK retail at KPMG, says: “With the overall market not growing, it is all about market share, and 20% of that market is held by online players. If you don’t have the right online offering, again, you will struggle.”
That is pushing retailers to try to reinvent their stores, with the likes of John Lewis and Debenhams now holding more in-store events and “experiences” to lure shoppers in.
If shops fail to do either “value, convenience, or experience” well, they will struggle, Mr Martin says.
Only recently we saw the toy store chain Toys r Us go into administration along with the electronics retailer, Maplin. Restaurant chains Prezzo and Jamies’s Italian have announced closures and New Look, the fashion chain, and House of Fraser, department store group, are looking to shore up their finances. Experts are saying that retailers are battling a “perfect storm” of pressures and more closures are expected in 2018.
One of the major factors is the fall in discretionary spending, due to weak wage growth and rising shop prices. Since the Brexit vote the pound has fallen nearly 15% and inflation has risen to over 3%, which is well above the target of the Bank of England’s 2%. This has made imported goods more expensive and those costs have been passed to consumers. With wages also rising more slowly than inflation, consumers have less disposable income to spend in the stores and restaurants on our High Streets.
Retail sales, by volume, have continued to grow but at a much slower rate at 1.9% last year, falling from 4.7% in 2016.
“It has been a real issue for high street retailers and accelerated the decline of some,” says Samuel Tombs, chief UK economist at Pantheon Macroeconomics.
“The sector was already suffering from structural problems, such as the rise in online shopping and high business rates. But the burst in inflation since the EU referendum has squeezed incomes in real terms, leading to much weaker growth in sales than retailers had anticipated.”
Overheads too, have continued to rise for retailers. Inflation is only one of the pressures on costs that retailers face. With the national minimum wage and the new national living way for over 25s set to rise each year, payroll costs are also rising. Business rates are a burden too say the industry and these are set to rise again in April with retailers set to pay an additional £2bn over the next three years compared to the last three years.
“Business rates are deterring investment in local communities, causing shop closures and job losses in hard-pressed communities and preventing retailers from delivering what their customers want in an efficient and cost-effective way.” Said a spokesperson.
Retailers are also having to deal with our changing tastes. According to Simon Thomas of Moorfields Advisory, the toy chain’s administrators, Toys R Us fell short in all three areas,
He says it was “unlikely” the retailer can be saved because its business model “isn’t what consumers really want now”.
“We’ve got very large stores which are fairly impersonal. People are looking now to have a better shopping experience, and we were unable to deliver that.”
Mr Thomas adds: “On top of all that we have the online problem … people can go into our shop, look at something, then look at an alternative and buy it at a cheaper price.”
Some retailers just have too many stores. Stores are expensive to run, with rents, rates and staffing costs rising all the time. Add on the rising cost of imports and trading conditions start to become tight. Retailers just cannot afford to have underperforming outlets. And yet many companies over-expanded during the good years, leaving them dangerously exposed.
According to reports this week, New Look is set to close as many as 60 of its 600 UK stores as it continues to battle massive debts.
Burger chain Byron said last month it would close as many as 20 outlets as part of a rescue plan approved by its lenders and landlords.
At the time, boss Simon Cope said the firm wanted to focus on a smaller number of profitable restaurants.
Richard Perks, director of retail research at Mintel, says: “In business you either go forward or backwards – but how do you go forwards? The natural thing is to open stores. People convince themselves they need to and then it goes pear-shaped.
“But there’s a lot more to being a successful retailer than your store count – having too many stores wouldn’t kill you if you got everything else right.”
As a consequence of overexpansion, many retailers are shouldering “high debt burdens”, says KPMG’s Mr Martin.
Just before its collapse, Toys R Us UK faced a looming VAT debt payment deadline of £15m. It would have been unable to pay it without a cash injection from an outside investor.
Mr Martin says 2018 will continue to be difficult for retailers, but it’s not all doom and gloom.
“There will be winners and there will be losers. But if you’re not good at online, if you’re not really rigid about your cost structure, there will be more challenges to face going forward and no doubt we will see further casualties.”