PatelMiller Retail Predictions 2019: What will this year bring? Instalment 2

Instalment 2

Welcome back to our Retail Predictions 2019. We have developed 6 predictions for 2019 with our market knowledge and we have had the chance to discuss them with retail leaders at our last round table. This instalment will focus on predictions 3 and 4.

Prediction 3: Physical retailing – Doing more with less

New figures show the national town centre vacancy rate was 9.9 per cent in January 2019, up from 8.9% the previous year. As the pressure on the high street continues, the market is splitting; some are struggling to keep afloat, whilst others are experiencing record profits. So, what are the winners doing differently with their remaining space and how are they changing it to attract footfall and drive sales?

Some, mainly the high-value end of retail, are investing heavily in human interaction and bespoke customer experiences. Burberry’s new flagship store boasts numerous sales assistants who approach customers armed with iPads. These keep a log of purchase history and preferences to augment their customer service offering. Similarly, Lush is combining this customer service led approach with a truly personalised experience. They offer ‘build your own bath bombs’, customisable products and individual diagnostics to understand what customers actually want. The net result is delighted customers and considerably higher sales.

At PatelMiller, we have seen an increase in demand for improved labour deployment models as retailers seek to better match staffing to footfall and drive a more individual and human experience.

Other, more commodity retailers are going to the other extreme; stripping out human contact and investing in technology to make the customer journey as quick and pain free as possible. Amazon Go have managed to remove all staff from equation and Tesco recently announced a reduction in counter services, one of the last remaining customer interaction and bespoke service points.

We are seeing a polarisation across the market of how retailers engage with customers and use their physical space. However, what is given, is that successful retailers are evaluating and evolving their remaining space to meet their customer needs. This trend will continue into 2019, with retailers investing heavily in a human interaction or technology to augment their customer journey and stand out from the crowd. To combat the outlay, we also expect retailers to ruthlessly streamline their non-customer value add operations. Success will ultimately come from being laser focussed on how and where to re-invest this back into the customer journey.

Prediction 4: Retailers and their Landlord – Friends or foes?

Over the past year we have witnessed more and more Company Voluntary Agreements in Retail (see our blog CVAs: Legitimate helping hand, or open to abuse?). It is no surprise that retailers are taking such extreme courses of action when they are tied into leases lasting 8 generations. Look at Marks and Spencer to see how extreme the situation has become. The Stockton high street store is set to earn its owners £33m in rent even if it stays empty for the next 235 years!!

Unfortunately, we do not expect this problem to go away. Indeed 2019 may bring it to ahead. Footfall is declining, yet some landlords, such as Intu are seeing an uptick in like-for-like rental incomes.

It is well known that the relationship between landlords and tenants is an uneasy one and the popularity of investment in high street locations has seen a sharp decline (figure 1). Some property owners such as British Land, who bought 23 freeholds and long leaseholds from Debenhams in 2005, have had enough. They are due to sell off their last 4 remaining freestanding Debenhams stores in a move to shift their estate away from the struggling high street.

There must be a better way for landlords and retailers to work together.

Next have paved the way in this matter, having included a CVA clause in its property contracts. The clause requires rent reductions equal to any given to neighbouring stores which have entered the CVA process. However, this is a very one-sided contingency plan that does not support both parties over the longer term.

Other retailers have started to use store closures as an indicator to their landlords that they are about to initiate widespread rent negotiations. Arguably this approach is better for landlords than the “take it or leave it” ultimatum of a CVA.

In 2019, we expect landlords and retailers to recognise the long-term nature of the contracts that they enter. They will take advantage of the opportunity to negotiate rent agreements that benefit both parties beyond the first few years of the contract’s life.

To continue reading Retail Predictions 2019, look out for instalment 3. If you haven’t already done so, do not miss instalment 1 where we discuss UK consumer confidence and retail restructuring