It has been a gloomy start to 2018 across the UK retail landscape. We recently heard the news that electronics retailer, Maplin, and international toy retailer, Toys R Us, had both fallen into administration following a struggle to keep up with a changing retail environment. What has happened for such a dramatic U-turn to take place and what should retailers be on the lookout for?
In the grip of change
Post-recession, consumer confidence grew. Interest rates remained low, so there was more disposable income for leisure and luxury spends. However, recent statistics, particularly over the past 12 months, have seen growing uncertainty, fuelled by an interest rate rise, inflationary pressure and squeezed wage growth. In addition, a fall in the value of Sterling has increased the cost of goods, further contributing to price rises on the shelf.
This environment has driven change in the sector. Customers are using multi-level retailing as they shop around for best prices both on and offline. Technology has played a major role in the way we shop across the board, but particularly at the supermarkets. In fact, several job cuts were announced at Asda, Tesco and Sainsbury’s, so that they can concentrate on their technology offering – but this is just an example of radical decisions that need to be made in order to futureproof their businesses.
What went wrong?
Toys R Us and Maplin revealed a couple of common themes that were attributed to their demise. A huge pension bill and outmoded offering were two reasons for the collapse of Toys R Us. Maplin apparently was saddled with a giant loan from its private equity owner with interest running at a whopping 15%. Both suffered from poor Christmas trading.
The deficit in pension schemes is a common theme running through other recent high profile failures and is a serious problem for many large companies. The Government needs to do more to provide manageable solutions to close unaffordable pension schemes. It is great that the Pension Protection Fund exists to protect pensioners but at what cost to the pensioner?
Bricks vs clicks
Toys R Us also failed to keep up with its competitors and online counterparts. There is no doubt that property costs are a huge burden for physical stores. The old, outdated business rates system, which leaves physical premises at a significant disadvantage over those operating online, is long overdue for reform. There are staff costs, which are usually higher in a bricks and mortar store, simply because more staff are required on physical premises. More staff comes with associated costs and obligatory pay increases (see the National Minimum and Living wage legislation) which must happen even if business is slow.
Then there are the rents themselves that are seemingly becoming unaffordable. Retailers are under pressure to keep their prices low but this is problematic with ever-increasing rents and associated costs. A high rent bill was another stated reason for Toys R Us’ demise, and another retailer has publicised issues with rent – department store, House of Fraser, has been asking for rent reductions according to recent press.
Knock on effects
This causes problems for landlords though, because if a business enters a Company Voluntary Arrangement (CVA), then deals are forced upon landlords that could end up leaving them out of pocket. Furthermore, retailers with multi-site premises are more likely to be slower at implementing crucial changes that could make all the difference – that is why it is important to adopt any changes as early on in the process as possible.
In a spiral
As property leases get more expensive, it is no wonder that more retailers are thinking about other options. However, breaking property lease agreements can be difficult and expensive. Other restructuring costs, particularly staff redundancies, can also be high, so simply closing under-performing units is not an easy option.
Despite the world of online shopping constantly growing, we still need bricks and mortar retailers. Customers use them to try out products, get a feel for their quality before they make a purchase. Physical retailers can also offer the “want it now” option, much more easily – customers can pay and take their purchase away the same day – although you can sit at home and sometimes get your product delivered within the same hour. We also need to consider the knock on effect to the commercial property market if we were to do away with physical stores. Many high streets are already dominated by charity shops, which don’t pay business rates, and coffee shops and now it seems retail parks are beginning to suffer as well.
Why retailers need adapt their offering
However, retailers need to make sure they are adding real value to their physical premises and changing to adapt to the new culture of the market. If a customer has taken the trouble to visit your high street store, how can you add value to their shopping experience? Better trained frontline colleagues or a sense of theatre and experience for the shopper, are some of the options available.
A well thought out and adaptable strategy can help you grow as a retailer – how many of our SME retailers are instigating robust forecasting and cashflow models coupled with regular and close conversations with their suppliers. Would you be able to analyse what is selling well, and, more importantly, what is selling profitably? Would you be able to recognise the warning signs of any danger to your business?
For more information or any advice relating to any aspect of this article, contact the Wilkins Kennedy Retail and Wholesale team to see how we can help.