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The end of the high street?

Following years of decline, the bell is tolling for traditional shops on British high streets
January 25, 2018

The approach of the end of January means that the bulk of British retailers have reported Christmas sales figures. And there’s a clear theme: the future of the UK high street is under threat. This might not sound like news, its demise has been predicted since the 1980s, but recent trading patterns show traditional retail assailed on several fronts, above and beyond the threat posed by the growing popularity of online shopping. With price inflation at record highs in certain sub-sectors, and flat real wage growth across the country, discretionary incomes (and consumer spending) are under enormous pressure. Customers are tightening their belts, and delaying purchases. Even Marks and Spencer’s (MKS) food department – a hitherto safe haven – had to slash prices to convince customers to spring for festive treats in time for the big day. What’s more, recent data from the British Retail Consortium (BRC) showed that year-on-year December footfall numbers decreased sharply by 3.5 per cent – the biggest decline since March 2013, when it dropped by 5.2 per cent.

 

The pain department

The squeeze on consumer budgets is likely to result in several large casualties in the sector this year, and the traditional department store model might be the first to break. Debenhams (DEB) was an early faller this year, after it announced a 35 per cent profit downgrade just four days into the new year. Over Christmas, group like-for-like sales fell 1.3 per cent, with the weeks either side of Christmas faring terribly. That forced the chain into heavy discounting – a modern-day death knell for retailers – which put further downward pressure on margins. However, look at Debenhams' website figures and the story is altogether different: over the same period, online sales grew by a solid 10 per cent. 

The shift to online is a clear challenge for department stores, but the imminent introduction of a new accounting standard, IFRS 16, will only add to their pain. The new regulation will force companies to shine a spotlight on their leasing arrangements, giving investors a clearer look at how tied up these businesses are with ageing store estates in increasingly unattractive locations. It’s thought Debenhams has around 250 lease arrangements, many of which are long-term (25 or so years). It's a huge – not to mention expensive – albatross around management’s neck, particularly as more customers eschew weekend trips to shop on the high street. (The proliferation of non-profit and lower margin enterprises attest to this).

There are rumblings in the private sector too. House of Fraser has asked landlords for rent reductions as it struggles to contain costs. The Chinese-owned group reported a 2.9 per cent reduction in Christmas sales this year, although Black Friday did push sales up by 0.8 per cent over the promotional period. Even worse, House of Fraser isn’t doing well online. E-commerce revenue fell by nearly 8 per cent over the Christmas trading period, although Black Friday trading did mitigate this to an extent.

 

 

High-street bright spots?

Other high-street shockers over Christmas included funeral provider Dignity (DTY), floorings specialist Carpetright (CPR) and mum-and-baby products retailer Mothercare (MTC). All issued profit warnings and all lost a significant chunk of their market value. But were there any bright spots? And, if so, what do they tell us?

Total sales at John Lewis rose by 2.5 per cent over Christmas, with strong sales across its own-brand fashion range, home technology products and Waitrose. The group also hit record sales during Black Friday, including its busiest ever hour for online trading. But sales across the home department fell as customers delayed larger-ticket purchases. Customers weren’t flooding into stores either, preferring to take advantage of the group’s £30 minimum for click and collect orders (distribution is aided via its Waitrose network) and easy-to-navigate website.

Christmas results from high-street stalwart Next (NXT) were equally encouraging. Customers are apparently still willing to pay full price for the group’s products (something of a rarity nowadays), which has helped to protect margins. The level of discounting, particularly in the clothing market, has proliferated during the past few years as traditional chains fight to keep up with competition from fast-fashion e-tailers such as Asos (ASC) and Boohoo.com (BOO). But Next has done well to harness its ‘Directory’ distribution network and make its products appeal to customers once again.

 

 

The future of physical retailing

The reality is this: the high street of old is going to disappear. Decrepit shops with poorly maintained fascia and loaded with discounted stock isn’t a sustainable model in the digital era. But that doesn’t mean modern-day shoppers aren’t going to visit real shops. It’s not unusual for online shopping to fail: items aren’t as described, pictures only show so much and delivery can still cause inconvenience for those in full-time work. What will change is the number of stores, and the experience customers have once inside. Take, for instance, Amazon’s (US:AMZ) decision to open supermarkets without traditional checkout lines. The online behemoth first stepped into the British food market via its ‘Fresh’ delivery service, aimed at competing with online deliveries from the likes of Tesco (TSCO) and Sainsbury’s (SBRY).

But the US group doesn’t just want to dominate the online space. It wants to pursue bricks and mortar retailing, albeit in the most modern way possible. A trial food store in Seattle will allow customers who have the Amazon Go app to enter the store and choose products from the shelves while being monitored by cameras. Once they leave, their Amazon accounts will be billed automatically without items being scanned. Between the cameras and Amazon’s own technology, it claims to know what customers have picked to charge them correctly.

Perhaps the group wants to install the same concept in Whole Foods, the upmarket, health-conscious supermarket chain it bought last year for £10bn. The benefit of this new concept is that customers can shop at their convenience (the shop is open 8am-9pm) and avoid long checkout queues or interacting with error-loaded ‘self-scan’ checkouts.

Amazon already has 13 physical bookstores too. Customers are encouraged to download the Amazon Shopping App on mobile devices and navigate to Amazon Books under ‘Programs & Features’. They select a local store to search product availability, see Prime pricing, and use their Amazon account to pay – all before stepping through the door. The shops themselves can act like glorified click and collect depots where customers can find what they are looking for, but also enjoy casual browsing. Amazon says Amazon Books integrates “the benefits of offline and online shopping”, while stock is selected based on Amazon.com customer ratings, pre-orders, sales, popularity on the reading app Goodreads, and curators’ assessments. Even if customers find a book in the store, they are free to purchase the e-book download there and then instead.