Retail Industry Analysis - The Highstreet And The Superhighway
A Fleet Street Letter Special Report
Glynn Davis
Rewind to 1999 and almost every retail analyst and research house was predicting the demise of the high street, and retailing as we know it, at the hands of a new communications channel called the Internet.
Despite the fact that the majority of online stores at the time were attracting embarrassingly low levels of business, the expectation was that things would soon take-off. This was pushing valuations of fledgling internet stores through the roof.
I can recall attending a meeting at the time between a venture capital firm and an online health products store pitching for funding ahead of pencilling in a float. It was all going well, until it became apparent that its turnover was less than a corner shop in a tiny village. And this was not unusual at the time.
Fast forward to today, and the internet has undoubtedly delivered on its early promise to change the world - online sales have managed to match some of the predictions of the late 1990s. But forecasts of the death of the high street stores were a tad overblown, as they are still alive and kicking in 2008.
The reality is that online sales have continued to grow, but this has been in tandem with increasing sales from physical stores on the high street and in out-of-town shopping centres and retail parks. Let’s take a look at some hard numbers: online sales have grown from representing less than 1% of total UK retail sales in 2000 to 3.6% at the end of 2006. And this is predicted to increase further to 10.7% by 2015, according to figures from Verdict Research.
Retail Industry Analysis - Small market
share but holds great sway
Although this has required phenomenal year-on-year rates of growth, which clearly cannot be matched by physical retail stores, the fact is that total retail sales in the UK of non-perishable goods over the past decade have achieved an impressive average annual increase of 7.4%.
That this is much greater than the 40-year average annual growth rate of 4.9% shows just how strong a performance high street retailers have put in during these internet days. Because online sales account for only a fraction of total retail sales, they only contribute marginally to overall sales. The rest of the growth has been provided by traditional outlets.
However, despite its still relatively small share of total retail sales the internet continues to have a massive impact on the industry. So great in fact, that DSG International took the radical decision to make the Dixons brand online-only and re-badge its stores as Curry.digital.
This move reflects the effect the internet has had on electricals and technology retailers as the category has become increasingly price-driven. The more cost-efficient online model is proving best suited to delivering on such a proposition.
Although the Dixons move is an exception, it is fair to say that every half-decent retailer in the UK now operates a transactional website. And they have been doing rather well. During October traditional bricks and mortar high street retailers received over half of all UK internet visits to online retailers that make up the top 50 high street and pure-play internet retailers.
Retail Industry Analysis - The high
street moves online
Historically, high street retailers have received fewer customer online visits than their online-only rivals (except during Christmas), but this reversed in September, and the trend is now towards high street websites widening that gap.
The top 50 list now includes more high street retailers than pure-play brands for the first time, with five new names moving into the list to take the high street contingent to 27 retailers. Arguably the most successful multi-channel retailer, positioned at number three in the table (behind Amazon and Play.com), is Home Retail Group, operator of Argos.
Its relatively early decision to base its business on an integrated catalogue, phone and store-based model is proving especially popular, and is helping it to hold its ground against the pure online merchants.
Beyond the internet, where the vast bulk of Argos’ and other multi-channel retailers’ sales are derived, much work has been done to stay relevant and achieve increased sales. They have had to work hard to react to the changing retail marketplace and make their offers interesting and attractive in what is now a truly multi-channel shopping world.
Retail Industry Analysis - Broadening
ranges: the coffee phenomena
A noticeable trend that has emerged is the broadening of ranges by many retailers. This is probably as much a reaction to the continued moves by the supermarkets into non-food categories as it is to the effect of the internet, but it is indicative of how retailers are battling it out on a number of fronts to grab market share.
The result of this is that pretty much all the mainstream operators now sell non-core items. So expect to find a ‘pick n mix’ combination of things like greetings cards, books, gift items, gift cards and confectionery in almost all the major high street stores. Some retailers including WH Smith, Boots and Woolworths have been finding it difficult to work out exactly what this combination should be in order to achieve maximum sales per square foot.
The conclusion from this is that everybody in retail now wants a share of everybody else’s pie. Nowhere is this more evident than in the areas of ‘food to go’ and snacks, with most retailers now giving over some of their shelf space to stocking food and drink items.
The demand for ‘eating-out-of-home’ venues has not only fuelled this drive into food by general retailers, but has led to the coffee shop phenomenon, which has resulted in the likes of Starbucks, Costa Coffee and Caffé Nero becoming almost ubiquitous in town centres and shopping malls around the UK.
And don’t expect the froth to be blown off this growth any time soon, all the main players argue that there is still plenty of room for further expansion around the UK. This is because many secondary towns throughout the country still remain largely untouched by the branded coffee chain phenomenon.
Book shops and department stores have also fully embraced the eating out trend with many now incorporating branded coffee shops. And department stores throughout the country have also upgraded their restaurant/café areas that have now become de rigueur for retailers looking to retain customers as long as possible in their stores. John Lewis, Selfridges and Marks & Spencer have all been investing heavily in this part of their business, with each one now also experimenting with operating restaurants that are open beyond the trading hours of the store.
Capital spending is key
Such moves take high levels of investment and the need to pump in money to make the shopping environment more attractive has been crucial. This requirement has made it particularly hard for the likes of Debenhams, a company that has found the bulk of its capital expenditure largely tied up in paying down its debt (taken on by its former private equity owners), and expanding its store estate. Refurbishments and the addition of upgraded restaurants and café offerings have not been the number one priority for the company.
It is not really surprising that the food and drink element of the retail industry is doing particularly well, since it is clearly not replicable online. Such initiatives also highlight just how much retail is continuing to push further into the leisure category. It is probably not a coincidence that shopping as a leisure activity has really come of age at the same time as the internet has emerged.
The high street also remains the main method for brands to build their presence in the market. This is part of the reason why mobile phone retailers have been among the most aggressive acquirers of retail square footage. In fact, such has been their appetite for space that many landlords and mall owners have been reluctant to allow any more stores from the likes of 3, Vodafone and T-Mobile and other phone specialist retailers such as Carphone Warehouse and Phones 4u onto the high street and into shopping malls.
To counter this phone retailers have developed formats specifically tailored to the mall environment. This has included adding more comfortable seating areas, adopting a more female-friendly look and feel to the fit-out, and putting less of a technology focus on mobile phones. A sensible move, given that as much as 80% of a typical mall’s customers between the hours of 11am and 3pm on weekdays are female.
Strength in differentiation
What these malls and high streets have been increasingly looking for is some added interest to their propositions that will enable them to stand out from the bulk of shopping environments that suffer from the identikit syndrome. This is why developments such as that at St Pancras station in London have sought to attract independent operators who might only operate from one or two stores.
More enlightened landlords are proving increasingly willing to relax the demands on new tenants in order to encourage young and vibrant retailers to make the move into developments with a reduced level of risk. We believe such action needs to be adopted more widely across the country if shoppers are not to become bored with the retail offerings in their local mall and high street.
Marylebone High Street in London is the best example of how attractive such a policy can be. It has become an extremely popular retail destination following the decision by landlord Howard de Walden Estates to be very selective in its tenants in order to create a mixture of established and new retail names — with a strong focus on food.
Massive retail space expansion
Such action will be necessary if the mammoth 7.84m sq m of new retail space that is in the pipeline to open across the UK between 2006 and 2015 is to avoid being a financial disaster for retailers, commercial property developers and the pension funds that frequently invest in shopping developments alike.
The property industry argues that there is a need for 6.1m sq m of new space (based on Experian calculations), which works out as being very close to the 7.84m sq m coming on-stream, considering that 2.2m sq m of this space will replace existing retail trading space as part of shopping centre redevelopments in town centres.
Unsustainable growth?
However, while the property industry is unsurprisingly gung-ho about adding space, their natural exuberance should be tempered with the weak forecasts for the retail industry. The predicted annual growth rate of 4.3% for sales of non-perishable goods between 2006 and 2015 represents a steep fall from the 7.4% enjoyed over the past ten years.
What makes the situation even stickier is that when internet sales are stripped out of the equation, then the growth from physical stores drops to a lowly 3.6%. This certainly represents a challenge, as it falls significantly below the 40-year average growth rate of 4.9%.
Our conclusion for the sector is that although retailers have generally proved successful at reacting to the seismic effects of the internet there is certainly no room for complacency. Not only will they have to continue to contend with the growth of online sales in the future but also dealing with the forecasted downturn in retail sales growth and the sizeable amount of new shopping space coming on-stream will prove a real challenge.
Retail therefore is a sector where much caution is needed. But in such a tough market there is the advantage for investors that the real quality players will shine through. We believe that once Christmas and the New Year sale period is over then it should become a little easier to select the likely long-term winners from the also-rans.
Glyn Davis
A former fund management and venture capital specialist in the City, Glynn Davis is a regular correspondent for the Grocer Magazine , The Guardian, Financial Times and RetailWeek .
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First published on December 22th 2007