Retailers may be jeopardising their survival because they are too attached to having more shops than they need in a world in which the influence of online sales is growing fast.
Internet sales already represent the equivalent of 60m sq ft in retail space, a new Deloitte report, Rightsizing the Retail Estate, argues, and at a time when the number of retail administrations is rising, those with over-large high street store portfolios are especially likely to feel the pressure. Too many retailers are suffering a ‘barnacle effect’ in which they cling on to absolute store numbers at the expense of profitability. “The old adage ‘turnover is vanity and profit is sanity’ is returning to haunt many retailers as the downturn tightens its grip and online and ecommerce exposes margins to extreme competitive pressure,” said the report.
But rather than simply closing stores whose leases are due to expire, retailers should develop a strategy that defines their ideal retail footprint, the report's authors argue.
“The death of the high street is far from being a reality, yet stores are now just one part of a larger, more connected customer experience and many retailers are struggling to define the relevance and future contribution of their physical space,” said Hugo Clark, director in Deloitte’s real estate team and author of the report.
“Shops now represent a potentially clumsy, fixed point in an increasingly mobile world. In many cases, they are slow and costly to adapt, expensive to operate and difficult to relinquish once surplus to requirement.”
He says that while it can be costly to reduce portfolios, well-funded businesses should think about investing spare cash into negotiating the surrender of their poorest performing stores. “While this is unlikely to be cheap, it may prove to be a good long-term investment,” he said. “Many retailers who don’t manage this approach proactively only consider consolidating their store portfolio under the shadow of a refinancing negotiation.”
Some 72% of non-food retail transactions are ‘store-only’, taking part in stores and not researched online, said the Deloitte report. Shops will remain critical in the multichannel world, it said, but the flexibility of retail space and its “ability to adapt to changing retail models should be paramount”.
Clark said: “Given the rapidly changing retail environment and the speed with which new technologies are emerging and impacting on the use of physical space, the biggest challenge facing retailers is to continually test and challenge the size, shape and purpose of their store portfolios. This is likely to be a constant but critical process of evolution for retailers seeking not just to survive but to flourish.”
Adam Stewart, marketing director at online entertainment retailer Play.com, owned by the Rakuten group, welcomed the report, saying he looked forward to a debate about the importance of online versus offline retailing. “Until recent years, ecommerce has been a nice income-generator, but not the main focus of most retail businesses,” he said. “Rather than debating whether shops should sell online or offline, in our experience of working with retailers both small and large, the answer is almost always both.
“What is interesting however, is the split between the two. While some companies will always sell more from physical stores, many retailers could actually make more money through selling online, for very little extra investment comparatively. Ideally, online and offline retailing should support each other, rather than competing between each other for the same sale.”
Rightsizing the Retail Estate is the second in a series of reports from Deloitte that consider future trends in retailing and their real estate implications.
Our view: Deloitte's is an interesting contribution to a debate that has become ever more relevant and urgent in recent years: just what will our future high streets look like? One interpretation is that high streets could indeed be very different, moving away from the 'clone town' image that has been so derided in recent years. Back in 2010 the New Economics Foundation calculated that 41% of UK towns were clone towns, dependant on big chains and out-of-town stores. A further 26% were on the verge.
For town centre managers the idea that these chains could close many doors as they look to achieve their 'ideal' footprint could be a worry. But if that results in a future in which more and diverse retailers open stores in the towns and cities that work for them, wouldn't that be more interesting? Already, we've seen online brands move into their own stores just as predominantly high street brands are reducing their total outlets. Plus size fashion brand Simply Be, for example, has moved into stores in the North West, while store-based retailers including Arcadia Group and Carpetright are reducing their shop numbers.
So a future high street could be a locally responsive one, featuring those brands, both online and offline, that know they have a local audience. This almost takes behavioural marketing to the next level, with the analysis of data informing store openings as well as email campaigns, could produce some very interesting answers - and high streets - in the future.