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Comment: Who wants to change the game?

Last year was a rollercoaster year for the retail industry. Concern continued due to ongoing macro trends such as rising inflation, stalling wage growth, and the migration to online, and we also saw the return of big ticket M&A transactions in the sector.

For 2018, we expect retail businesses with large footprints to struggle, especially those with long unexpired lease terms and large format stores. We anticipate that inefficiencies in merchandising and lack of clarity around the proposition will create increasing pressure, and so we’ll see a number companies in the retail and leisure industries launching CVAs (Company Voluntary Arrangements) to give management a fresh opportunity to transform the business.

There will be more consolidation and M&A activity over the next twelve months, driven by the amount of investment capital in the marketplace, coupled with robust turnaround and roll-out plans. We predict that we will see a few UK brands extend their global footprint this year, and do so successfully. 

Two additional themes we believe will be interesting to watch this year are the continuing decline of certain out of town commercial centres and continued efforts to regenerate the urban environment and urban retail.

Continuing decline of out of town commercial centres

The changing habits of consumers as they continue to favour shopping online rather than in store is a leading factor in the decline in out of town commercial centres. However, sitting alongside this factor is the reality that some retailers have not maintained an attractive enough proposition in the competitive environment to warrant a visit to their stores.

Customers are still attracted to out-of-town comparison goods venues when the retail and leisure mix ticks enough boxes to incite a visit, but if the retailer or retail venue is not up to scratch, consumers have demonstrated that they will shop elsewhere. Unfortunately, there are many venues that are not able to deliver to the experience that shoppers are looking for today, and these, regardless of convenience, will suffer.

Early signs of the regeneration of the urban environment and urban retail

The second trend to watch this year will encompass large scale retail assets in city centres, which are becoming less and less practical. However we are starting to see department stores being more proactive and innovative as they look for increased efficiency with their floor space. But the issue is not limited to department stores. The most efficient high street retailers minimise back office space as much as possible to drive the most efficiency in high rent areas.

As legacy holders of inefficient space release it to the urban market, we expect regeneration in high streets to occur by entrepreneurial businesses taking space in innovative ways that not only creates employment and usage density in urban locations, but also drives further footfall to the accompanying retail offer.

These trends are intrinsically linked and symptomatic of the complexity and challenge in the sector. They are also fundamentally tied to the changing behaviours of consumers.  Addressing these challenges will clearly benefit both businesses and the local population but it will require collaboration between retailers, location strategists, agent managers, and planners to devise appropriate and lasting solutions.

In 2018 we predict that many property companies will continue to proactively shift their asset mix to reduce the amount of retail-only properties, and increase their portfolio of mixed-use assets. This will be a critical theme in asset management that will drive regeneration.  However, if asset managers are slow to move and miss out on shifting consumer patterns, they too will suffer.

Conclusion

The next few years will see a dramatic shift in the retail landscape.  Mid-tier out-of-town operators will come under ever increasing pressure, and large-scale retail assets in city centres are crying out to be redeveloped, and critically, re-imagined. For those forward-thinking retailers, asset owners and planners prepared to innovate and develop their offering, this is how we change the game.

Erin Brookes is head of retail at Alvarez & Marsal.

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