Retailers re-open. But is it too little, too late?
From 15 June, the UK government permitted “non-essential” retailers to re-open their doors to customers. However, early evidence from the Office of National Statistics (ONS) suggests that the sector is unlikely to recover soon.
Despite the media coverage of queues of eager shoppers outside Primark and JD Sports, the ONS says that total footfall is substantially down from typical levels at this time of year. Some stores are now worrying that they will not be able to meet their rent obligations and may have to dip into reserves.
The UK went into lockdown on 23 March, forcing a sudden and unanticipated decline in sales across the retail sector. All non-essential stores, including clothing and homeware shops, had to shutter and wait for permission from the government to reopen. The subsequent collapse in revenues over the last quarter means that some businesses – many of whom were already struggling – may face insolvency in the coming weeks.
Firms with cash reserves should survive June’s “quarter day” when rents fall due. However, they will not be able to keep up the shortfall indefinitely. Either they will have to renegotiate terms with landlords, or they will shut their doors for good.
Figures paint a bleak picture of activity in brick-and-mortar retail operations since March. Online sales rose from 30.8 per cent of total sales in April to more than 33.4 per cent in May, underscoring the impact of shut down on the high street. At the same time, physical retail volumes plunged more than 18.1 per cent, reflecting the fact that many were unable to sell inventory through their regular channels.
The ONS points out that retail was already in trouble in February before the pandemic hit. Data show that like-for-like sales had already fallen by more than 13.1 per cent compared to the same time the year before, indicating that the UK may have already been in a consumer spending lull.
The trouble in the retail sector mirrors the dire figures released for the rest of the economy. ONS data show that the UK experienced its largest-ever GDP contraction in April with output falling by a record 20.4 per cent. Retail bosses worry that the recession will mean further pain for their businesses going forward, even if the economy snaps back later in the year. The sector depends heavily on the willingness of consumers to spend their income. If wages fall, that could mean depressed trading conditions for several months yet, and perhaps longer.
The ONS says that the UK should still brace itself for a deep recession in 2020, with recovery likely in 2021 or 2022, barring a second wave of COVID-19 infections.
Casualties from lockdown are already emerging, despite the plethora of emergency economic support measures in place. Oasis and Warehouse Group fell into administration in mid-April, following shortly afterwards by decades-old brand, Laura Ashley.
The fashion sector is also seeing an explosion in insolvencies. Volumes plunged by more than 50.2 per cent in April, reflecting a combination of store closures and the unwillingness of consumers to purchase clothes while in isolation. Monsoon, Quiz, Victoria’s Secret and Aldo all fell into administration.
The rise of e-commerce meant that the high street retail industry was already in trouble in the run-up to the pandemic. Asset management group Fidelity predicted in 2019 that the rise of online shopping could see high street shopping centre rent fall by as much as 40 per cent. The recent upheaval is compounding existing problems. The sector could crumble further, putting an estimated 1.6 million jobs at risk – more than any other industry.
Worryingly, adverse conditions may not abate even as the government lifts restrictions and lockdowns. Investment in the sector will likely fall as people look to put their capital into businesses that do not rely on physical proximity. Also, consumer shopping behaviours could change long-term as people try to limit their risk of becoming infected.
Retailers, however, are hitting back, trying to inspire confidence. Social distancing stickers now adorn the floors of stores and car parks across the UK, helping to ensure people maintain a two-metre gap while shopping and queuing. Some shops are also including special shopping times and zones for at-risk groups, such as the elderly.
Whether these innovations will assuage public concerns is not yet known. According to data from Bazaarvoice Network, around 41 per cent of consumers said that they were already shopping for things online that they would buy in-store as early as March 2020. Business and industrial, toys and games, and office supplies all saw double-digit gains online while high street options floundered.
The scale of the current crisis is substantial. The British Property Federation says that it expects retailers to meet only around a quarter of their total rent obligation for the quarter. Such a dismal figure, the non-profit says, will likely have knock-on effects on investors, landlords, and the amount of money available in pension funds.
Asset managers are closely monitoring collection data as it becomes available through the end of June and start of July. Courts and creditors may force retailers who cannot pay their bills to file for insolvency and receivership, even if their long-term operations are viable.
Emerging from the crisis
Commentators are now asking how the retail sector might emerge from the current crisis in one piece. The priority, according to Peter Williams, chairman of multiple major retail brands such as Superdrug, will be to manage both stock and cash flow. Retailers, he says, will need to ensure that they maintain healthy levels of liquidity. He also notes that they will need to find alternative channels for shifting time-sensitive products, either online, or in flash sales, once shops reopen.
Brands will also have to think more carefully about their store portfolios and whether they should move more of their operations online. Marginally profitable locations will likely need to be abandoned to offset the increased risk posed by a second pandemic.
Long-term rental contracts mean that physical stores are a significant commitment for retailers. Maintaining them means committing to a local market for at least two years, possibly more. In light of the coronavirus pandemic, bosses will now wonder whether it is worth agreeing to such contracts when the chances of them paying off are so low. Many brands have already gone in this direction, applying a “less is more” philosophy.
The market, however, is dynamic. Shopping centres and landlords will undoubtedly respond by slashing rents and offering shorter-term deals, trying to entice tenants to stay. For many, though, the writing is on the wall: brick-and-mortar retail needs to contract. Maximum expansion is no longer a viable business model.
Williams also believes that the recovery of the UK retail sector will be uneven. He sees high streets returning faster than malls because of the shift to buying more goods locally during the lockdown. People are less willing to travel to regional centres than they were before the pandemic, offering hope for traditional market towns. In the very short-term, therefore, the conventional high street could experience recovery at the expense of out-of-town facilities.
Brick-and-mortar’s road to recovery will rely heavily on the actions of in-store staff, according to industry commentators. Customers will want to see that cashiers and shelf replenishment operatives are taking decisive action to prevent the spread of the disease. Consumers will inevitably feel nervous about returning to busy, public venues, like stores. They will need reassurance from retail brands that they are doing everything they can to keep them safe. Staff, therefore, will have to make it clear that they are putting the welfare of their patrons above financial gain.
Before the crisis hit, many retailers had been investing heavily in new infrastructure to overhaul the in-store experience. The addition of in-store coffee vendors and leisure activities was helping to drive up numbers and get people through the door. Now, though, the industry is looking at a full reversal of that trend to maintain social distancing protocols and prevent the spread of infection. Some brands have already indicated that they will be limiting the amount that customers are allowed to touch products before taking them to the checkout. Others are hiring legions of staff who will disinfect products before the next customer interacts with them.
How the practicalities of these new systems will evolve remains a matter for debate. Some see the sector inevitably failing to keep up high standards. The decision of the government to relax the two-meter rule and replace it with a “one-meter-plus” provision is an indication of this reality. Others view changes as a new normal. Coronavirus is likely to remain a significant issue for the sector until the development of an effective treatment or vaccine.
The crisis has already claimed several victims in the sector – brands that would probably have folded anyway had 2020 been normal for the industry. But brands considered by investors as secure could now follow suit if revenues prevent them from paying their quarterly rental payments this summer. And that could lead to a lasting scar on the highstreet.