Is UK Retail Over-Spaced?
It is widely believed that UK retailers have too much store space. Supermarkets are a big focus in this debate, which analysts claim have stocked up on property to meet historic customer demand for cavernous out-of-town stores. We suggest, however, the UK is not over-spaced versus other markets. In addition, our space is used relatively effectively. Perhaps the root cause of our issues is actually the cost of retail space, forcing retailers to focus on productivity and optimisation of stores in order to be profitable.
According to Euromonitor, the UK has 76.9 million sq m of retail space. GfK’s European Retail Study (2016) calculated space per head to be 1.10m2, which is relatively low versus other European markets and the European average of 1.14m2. Austria are the most over-spaced at 1.74m2 per head, followed by the Netherlands, Switzerland and Germany.
Figure 1 – Sales Area Provision And Productivity: Europe
Stepping out of Europe and looking at the top eight markets globally by retail sales, again, the UK has relatively low retail space per head. The USA has the most with 2.1m2 per head, followed by Italy (1.6m2) and Germany (1.4m2) (Euromonitor, 2016).
Added to the fact that the UK is not, in relative terms, as over-spaced as we are led to believe, it seems we are good at using retail space productively. As outlined in table 1, the UK has one of the highest sales per m2 in Europe, alongside Switzerland, Luxembourg and Norway. Globally, the UK again shows its effective use of space both in food and non-food retail, sitting in the mid to low range for space per head and leading the pack for sales per m2.
Figure 2 - Sales Area Provision And Productivity: Top 8 Global Markets By Retail Sales
Despite these macro findings, individual cases demonstrate that UK retailers are experiencing space-related challenges. We suggest that the root cause of these issues is not too much space, but high property costs forcing companies to think of ways to enhance already high levels of productivity. For instance, Sainsbury’s are seeking to make better use of their large stores, applying to turn 12,000 ft2 of their Preston Deepdale store into a gym in 2015. Meanwhile, Tesco are negotiating concession agreements with Arcadia and Holland and Barrett to make better use of their larger stores.
Taking Tesco and Morrisons as examples, it appears that UK property costs are so high they can have a severely negative impact on the business if things turn sour. The value of Tesco’s store estate was written down by £4.7bn in 2015 resulting in a loss of £6.4bn – one of the largest ever reported by a UK company. With regards to Morrisons, the chain took a £1.27bn property write down in 2015 with an associated £792m loss. These losses are significant and demonstrate how the value of store property can determine the profitability of our big retailers.
So, where do we go from here? We recognise that it’s vital to keep retail space as productive as it can be. However, we think this is in the context of high property costs and not too much space. As retailers assess their store layouts, perhaps they should be more willing to give space back to customers for service and experience in a bid to improve the customer journey and drive up conversion. Letting go of the assumption that we are over-spaced may open retailers’ minds to new and innovative possibilities.