Freefall retail?

Shop to letWelcome to my new blog.   For my first post I thought I’d jump right in the deep end!

Evidence from the Local Data Company and Price Waterhouse Coopers yesterday highlighted the unprecedented number of store closures that have been seen in the last 12 months.  This was driven mainly by the gathering pace of large retail chains turning up their toes and other struggling companies letting leases lapse when they come to an end.

It’s hardly surprising to most of us out there at the sharp end of retail that the status quo can’t continue unabashed in the way that most property investors and some analysts seem to think it can.

Only last year I was embroiled in something of an online spat with the author of a report from CBRE who in my opinion was whistling in the dark over the idea that chain retailers would continue to open stores at the same rate they always had.  The whistling later achieved deafening proportions as the idea that the internet had not had any major impact on the high streets was laboured in this lengthy tome.  Given the opportunity,  I think it may have gone on to prove that black was white and that dogs could do basic arithmetic, but they probably needed to get the report out before reality overtook the theory.

Killer catalogues

The fact is the internet is having a pervasive effect on all aspects of the high street.  It’s been eating away like concrete cancer at the foundations of what we’ve all came to know and love as shop keepers, and we’re only now starting to see the cracks on the surface.

CataloguesIt’s effect was probably underestimated in the early years as we all continued to ride a wave of unbridled consumerism within traditional channels.  The idea that the internet could take over from ‘real’ shops was treated with the same disdain as the unfulfilled predictions from the 60s and 70s that catalogue shopping would prove an overall category killer.

But what wasn’t factored into these assessments was the ease by which technology would  pervade all aspects of our lives.  Even that wouldn’t have been enough on it’s own, but what really started to incubate the disease was what was happening to the real world property model and just how quickly that was going push things beyond the tipping point.

In previous retail revolutions there had been no viable alternative to shops.  Now there was.  As consumers embraced online, more retailers, new and old, saw it as an opportunity.  This in turn facilitated more choice and more ease of use for consumers which in turn encouraged more people online.  It became self fuelling.

Meanwhile at the other end of the fulcrum, property costs were starting to look like a burden you didn’t need to be carrying.  If all these pure-play retailers were making a killing online, what was the point in paying eye-watering rent and rates?  In fact as these costs continued to go up, the internet was forcing margins to become slimmer with the retailer squeezed in the middle.   Something that the catalogue revolution didn’t have going for it back in the days of brothel creepers and Beatlemania was the effect that these unrealistic property values would have on the whole DNA of retail.

Property Bonanza

The plain fact is that the costs of running shops is now too high.   Business rates are the current hobby horse, being as we’re coming up to the time of the year when the chancellor traditionally tells retailers to sod off when they ask him to consider a rates reduction or freeze in his next budget.   This year his two fingered salute will be amid our pleading on a collective bended knee for him to take his foot off our neck and maybe, just maybe, take a look at the real world from behind that rictus grin that he seems to be afflicted with at most public engagements.

But rents are the root cause of these problems, responsible in the first place for the level of rates we pay due to their effect on property valuations.  The cost of stores has been ratcheting up over the past 20 years like some sort of medieval torture device.  Landlords and property developers knew a good thing when they saw it and they capitalised on the rush to the high street.  Not really something any of us could really blame them for doing, bearing in mind that all us business folk are money grabbing, capitalist toe-rags at heart.

And I don’t really blame them, well not entirely anyway.  They wouldn’t have got away with it if there hadn’t been a veritable swarm of  eager fresh faced retailers, thrusting fistfulls of easy-come cash into the air, desperate to stake out another corner of a foreign concept shopping mall that will forever be Clinton Cards or Blacks or LaSenza or Jessops et al, without a thought for how long the retail bubble could last.  Of course we all now know how long it lasted for them, and it was quite a bit less than forever.

For sale signsIn turn these snow-blinded captains of industry were having their pockets lined by investors, venture capitalists and banks who were convinced they’d discovered the secret to alchemy.  In league with eagerly complicit surveyors they could make any deal, no matter how stupid, look good on a paper.  Right before they’d make a toy aeroplane out of it to carry them all off to bonus heaven.  Based on this sort of economic fairy story, valuers pretty much doubled the number they first thought of and used that as the basis of equity to debt deals that would have made even the most brazen ponzi scheme look like a charitable foundation for orphaned kittens.

Now with shopping centres and retailers being funded by roughly the same financial institutions, we’re all hurtling down the mountain side together waiting for either a tree branch to slap us in the face or the sheer drop to open up beneath us.   I say all, not because everyone has bought into the madness, I know many haven’t, but because we will all feel the impact when those that have hit the rocks below.

The only way is up

Despite claims to the contrary, landlords are still locked into forcing up rents at every opportunity.  Often with huge debts to service, they have no choice but to look on the current situation as a temporary blip.  They spin the crisis while convincing themselves and the markets that ideas like pop-up stores are a great new innovation, even though when they were simply called temporary lets they were regarded as far less desirable.  Self delusion has become an artform.  Accepting the new reality is just too terrifying for them and their financial backers to contemplate.  Whilst government is apparently still convinced that they can continue to enthusiastically milk the retail cash cow, even if it does have BSE and an advanced case of mastitis

All the while customers are becoming ever more savvy at negotiating the new retail seascape, and in the most part they’re looking for the shallow waters.  Price is king on the internet, quality too, but price usually trumps quality if you chuck in a nice over-used euphemism like ‘Value’ wherever possible.  And we all know how well ‘Value’ beefburgers have worked out recently don’t we?

These customers don’t care if your shop is going under, why should they?  They care about where they can get the best deal, and now more than ever that’s on the internet.  Why?  Because those traditional retailers stuck on the high street are locked into a death struggle with recalcitrant landlords and ignorant politicians and can’t afford to match the razor thin margins of pure-play online retailers.

Where will it all end?  That’s something I hope to be around long enough to find out.  There are some perhaps positive glimmers on the horizon, but right now it’s not possible to know if that’s the new day breaking or the sun exploding on the other side of the world.

Will we need sun cream or a nuclear bunker?  Stick around, I think I can hear the dawn chorus.

sunrise_from_space_2560x1600

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