Against this backdrop, James Pow, a senior adviser in our retail group, assesses the shockwaves that have hit the retail sector since the pandemic began and the outlook for the year ahead.
A tough start to 2021
The accumulated issues from months of closure, including the financial burden of rent arrears and battered cash flow, have set the scene for further hardship in 2021. Around three million people work in the retail sector, and a further 250,000 retail jobs could be lost this year, driven by lockdowns as well as tiered restrictions so far, and those yet to come.
The introduction of social distancing in 2020 meant fewer customers and COVID-19 accelerated the already visible decline in notable high-street brands such as BHS, Arcadia, Debenhams, and the Edinburgh Woollen Mill. Many other high-street stalwarts with previously robust balance sheets are struggling to rise from the ashes due to the even greater use of online retailing that is decimating the high street.
The digital divide
It has been evident during the last 10 years, and more starkly demonstrated in the last three, that the pandemic alone cannot be blamed for the shake-up and collapse of many household names on the high street. But it has significantly accelerated the shift to data-driven, online retailing.
And coronavirus has also exacerbated the divide between the already digitally savvy ‘pure play’ online retailers and the ’bricks and mortar’ retailers who had made insufficient progress with incorporating digital routes to market in their business models.
Online ‘giants’ such as Amazon, Alibaba, Hut Group and Asos will continue to grow exponentially. Other retailers will likely have to rebalance their online offer to closer to 65-75% of their previous annualised revenues. So, in general, most retail will become online based.
It is therefore imperative that any high-street retailers who have not already done so should switch focus to online performance. They will need to recreate their in-store experience online to attract and retain their customers post COVID-19.
There is also scope for retailers to carve out niche opportunities in areas and categories that are not yet completely suited to online trading, such as underwear, fragrances and other beauty products. As the data gets better and software capability continues to improve, it is inevitable that these categories will evolve for digital platforms.
Experiential retail is definitely not a thing of the past. But with a hugely reduced in-store footprint, it requires reconsideration by retailers. With a rebalance of revenue to online, reducing in-store revenue to 20-30% of annualised turnover, experiential retail will need to be focused, immediate and well-differentiated from that of competitors.
Brexit and other challenges
Due to Brexit, most retailers will have to reconsider their seasonality; the size and frequency of their drops and deliveries; and resultant phasing and reordering of stock and where it’s sourced from. But the full impact of Brexit will not be apparent until the second quarter of this year, when the supposedly limited tariff changes will become more apparent.
The removal of tax-free shopping for international travelers in the UK will have unwanted consequences for the retail sector too – whether airport-based or shops offering tax-refundable shopping to their customers. They will be losing revenues which they do not have the margins to discount, to retain sales.
Potential improvements ahead
Corporate businesses have in many cases switched to working from home, which has had an impact on retailers that relied on office workers in their annualised revenues. So, if we see these same corporates refilling as much as 60% of previously full offices, that will be a positive outcome.
The category of small and local retailers has a brighter outlook. Malls and their Arcadia lookalikes will disappear from rural towns. Boroughs and councils will have to think laterally and make huge sums of cash available to do what is 10 years overdue − significantly reducing the red tape around planning restrictions to allow previous commercial retail space to return to residential use. Effective repurposing of these retail outlets to residential use should lead to a ‘cleaning up’ of the high street.
It will also cut out the proliferation witnessed over the past 10 years or so of rent-free retailers moving along high streets as their negotiated rent-free periods expire. This will create a better retail environment generally and, with more people working from home, more money is being spent locally (as well as online), as people rediscover their local shops and changing high streets. This will, however, require retailers to have a far more agile response to their consumers and a far greater focus on exceptional customer service.
The impact of the vaccine roll-out
As consumers have discovered the ease of shopping digitally, it seems unlikely there will be a return to trade simply because of the vaccine roll-out. Unrealistically, the Government is suggesting a return to some form of normality after April this year. However, the roll-out will probably take until November or December this year at earliest, if not until sometime next year, and tested efficacy will be required, to give appropriate and required confidence to the public at large. Perhaps a more pragmatic review of when trading will get back to normality is required.
Simon Bonney, managing director and restructuring specialist, reflects on the financial impact on the retail sector following the pandemic. He also looks at where the ‘green shoots’ of growth might start to appear and the restructuring required to rebuild the sector.
Bringing the future forward
As James has highlighted, there is no doubt that the effects of the pandemic have brought forward the future of retail. While many businesses were already implementing a strategy to move online, or to increase their online presence, the pandemic has forced them to do so sooner. It has become clear with each successive lockdown that people have changed the way they buy or have increased their online buying. For instance, a lot more clothing has been sold online; not just because people have become more willing to buy, try it on and send it back if they don’t want it, but also because they’ve realised this is a genuine substitute for shopping in-store.
Clearly there is a real challenge for retail, particularly for those businesses which have historically had multiple physical sites, or even just one. They may well have already been suffering from the challenges of the high street generally, prior to the pandemic. This has since been exacerbated by the fact that people have been encouraged to – and in some cases have had to – go online to make their purchases.
James also pointed to a potential opportunity, especially for smaller retailers, presented by the shift in buying habits of local people. Those who offer a good selection of products may benefit over the longer term from people working from home and shopping locally. There may also be a slight reluctance on the part of the public to visit shopping centres where they can buy lots of products, but where they will also come into contact with a lot of people. There will be some who will prefer to only shop with smaller retailers where they perceive the environment is more controllable.
Out of cash and into debt – the financial challenges
The retail sector, more than others, has a debt bubble. This is going to present some serious challenges over the next months, and probably over the next two-three years, because retailers have been hit so hard by lockdown.
Lots of retailers have also built up rent arrears. While the Government has protected tenants through its temporary legislation, this obviously has to come to an end some time. And when it does, there needs to be a ‘meeting of minds’ between landlords and tenants about what action they’re going to take about rent arrears. Otherwise, it’s going to be very difficult for retailers to continue without some form of restructuring of their balance sheet.
Another challenge that has exacerbated things for retailers is the ‘stop-start’ nature of the economy during lockdown. They have opened up and had to make capital expenditure to do so, only to be closed down again. Each time this happens, it costs money and increases uncertainty. So, lots of retailers will have exhausted cash reserves, simply by trying to stay open when possible, and will perhaps have incurred more expenditure than if they had simply stayed closed, regardless of their revenue position.
Restructuring for the future
For those retailers that were clever about recognising how consumer habits have changed, and will continue to change, there is great opportunity. It’s about finding a niche that differentiates them from large retailers like Amazon, Asos and boohoo; they need a unique selling point (USP). There is also the potential for retailers to become resellers, in the likes of an Amazon marketplace, so they can compete in that virtual world without necessarily incurring the substantial start-up costs of a traditional, physical retailer.
The problem for a lot of businesses is having the capital available to convert from being a predominantly or exclusively physical business, to having an online presence and making the best of that online presence. We’ve seen with several businesses – Debenhams for example – that their lack of a USP was extremely detrimental to their ability to stay afloat.
We should also be under no illusions about the position of the retail industry before the pandemic hit. It was already an industry in some difficulty − a number of restructurings had already occurred and some had already failed. And there are more restructurings to come.
The recent purchase of Jaeger by Marks and Spencer demonstrates a change in the sector where businesses are recognising that they don’t want to acquire the historic infrastructure of another business – they already have their own infrastructure – what they want is another brand to add. A good example is the Hut Group, which has acquired aggressively and done so very successfully.
There is still a period of uncertainty ahead, in terms of how long it takes for lockdown to finish, and when retailers will be able to open again. However, the focus is not going to be on how they can repeat what they did before, but how they can evolve to become a post-COVID retailer.
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