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When will UK retailers stop closing stores?

Are Arcadia’s struggles indicative of retail’s downsizing movement?

By Ben Sillitoe

Arcadia’s toils raise further questions about when the decline in UK retail shop numbers will plateau.

The fashion group’ s creditors approval of its seven company voluntary arrangements (CVAs) on 12 June may have stopped hundreds of stores closing in the UK, but the tide of chain shops shuttering is ongoing.

The form of insolvency was passed after a turbulent round of negotiations between Arcadia stakeholders, and the outcome will see the Topshop, Dorothy Perkins and Miss Selfridge owner shutting around 50 stores, but not enter administration.

As part of the deal, Arcadia will receive rent reductions, and the family of chairman Sir Philip Green will inject £135 million into the business to revamp operations.

There is no guarantee, however, that additional stores run by Arcadia – which also operates Burton, Evans, Outfit, and Wallis – will not close. And it comes against a backdrop of several other high-profile store closure programmes.

Marks & Spencer, Debenhams, and Boots, for example, are closing hundreds of stores between them, and that follows a raft of CVAs since 2017 from the likes of Carpetright, Mothercare and New Look, that property group Colliers estimates have directly led to 954 shops shutting.

Helen Dickinson, CEO of the British Retail Consortium (BRC), describes the restructuring of retail as “a perfect storm of technology fundamentally changing the way people shop, and rising costs to retail businesses”, including business rates and the rising National Living Wage.

Boulevard of broken dreams

Local Data Company (LDC), a retail market research group, says the number of store openings in 2018 slowed to a five-year low of 43,278. The highest ever rate of closures, 50,828, occurred in the same period, resulting in a net loss of 7,550 occupied units.

LDC tallies the total number of vacant units demolished, split, merged or converted for another use in 2018 at 3,577 – up from 2,706 in 2017 and 2,646 one year before.

Government data analysed by Altus Group shows 20,143 UK shops have disappeared between 2010 and 2019, resulting in a net loss of 5,289 shops.

One retailer that has gone through its own downsizing over the last decade is tea retailer Whittard of Chelsea. The 135-store chain was bought out of administration in 2008 by private equity house Epic, and now has approximately 50 shops.

Whittard’s finance officer Nathan Smith calls store estate management a continual refinement process. At software company Cegid’s Connections event in May, he said: “We [recently] opened in the O2 and in Bracknell, but Portsmouth closed. Some get tired, some don’t work, some close at the end of rent deals.”

It was ever thus for retailers, but the Whittard example is indicative of a shift to smaller estates. Whittard is also among the retailers starting to offer different experiences in its stores, placing tea bars in some of its establishments.

Retailers that want a future realise they need to change, and use their stores for fresh experiences. John Lewis is ramping up its DIY services, for example, while Superdrug continues rolling out in-store beauty studios, and Neal’s Yard hosts special events.

Joules, meanwhile, now opens shops largely based on the impact they will have on online sales. It also formats stores differently, with financial director Marc Dench saying Joules has evolved processes to cater for 15-20% of ecommerce sales via click & collect.

“It used to be that a sales assistant saw [click & collect] as a pain in the neck because it was something stuck away in a box and the customer would come in at lunchtime and they’d have to go to storeroom to find it,” he told delegates at Etail Europe in June.

“We’re now ‘green-laning’ our products. When it arrives in store we take it directly to a pick-up point to make the sales assistant journey really easy but it also makes the customer experience a good one.”

The sky is broken

The growing tension between landlords and retail tenants, exemplified by the Arcadia CVA, suggests the economic model for leasing commercial property needs fixing.

Sir Philip Green’s company received the 75% of creditor approval required to secure CVA status, but some landlords – most vocally, Intu – were against it, mainly because it considered Arcadia rental allowances unfair on other tenants. Indeed, the property industry is concerned about what precedent the raft of CVAs may be setting.

Andrew McVicker, director for retail property at Pragma Consultancy, argues there has always been an adversarial relationship between landlords and occupiers.

“Whenever the boot is on one foot or the other, they don’t miss the opportunity to give each other a good old kicking,” muses McVicker.

“At the minute the boot is firmly on the foot of the occupiers and they are citing years of rising rents and competitive demand for space where they have ended up paying large rents. In their world, landlords now need to now take a hit.”

He cites better relationship between asset managers and occupiers in outlet retail, where he says there is more shared visibility around tenant performance and lease flexibility.

“In an ideal world, there’d be more relationships like that,” McVicker notes.

Dickinson adds: “It’s all about how quickly the property and retail industries can coalesce around a common version of what the future will be in order to make the economics work for both sides.”

Offering signs of compromise, she says: “Two years ago, it was a small minority giving [shorter leases and shared risk] as a scenario, but now it’s more widespread.”

Born of a broken man

Retail futurist and former Fitch design director Howard Saunders talks regularly of the process of “Brooklynisation” in UK retail. In short, it is defined by artisan and local operators wielding more influence on communities replacing a long-standing economic model.

If supported by market-influenced lower rents and rates – and crucially, more flexible leasing terms – a new era of retail can rise from the ashes of the store closures and empty town centre properties existing today, Saunders predicts.

“We have to see the demise of mediocracy, we have to see those chain stores we originally thought were around forever disappear, so we can reboot the high street and see small, young entrepreneurs come back,” he argues, adding that the ideal scenario is a “mixed picture” of authentic and inventive chains alongside creative independents.

Paula Nickolds, managing director of John Lewis, says it is up to today’s retailers to teach their staff new ways of serving customers to help maintain relevancy.

“It’s going to be much more about being an ambassador, be it product experts, coaches, or mini marketeers creating deeper, ongoing relationships with customers,” she noted at a BRC Future Leaders event in January.

Such a shift in thinking is leading to changes in store design, be it flexible till space, or additional departments dedicated to customer consultancy. EE, Nike, and Schuh have recently redesigned stores to provide compelling examples of these trends.

Even Sir Philip Green and his Arcadia empire is prepared for change, judging by the retail magnate’s BBC interview the morning after the CVAs were secured.

Talking to Radio 4’s Today programme, he acknowledged that retail dynamics have shifted.

“Now we’ve got to get to work, grasp this new marketplace and get on with the job,” he explained, adding the marketplace Arcadia operates in has “fundamentally changed forever”.

This month, Arcadia started selling Topman and Topshop lines via online fashion house Asos, which represents a major shift in its digital strategy. Now attention turns to how the group’s hundreds of stores evolve to serve the “new marketplace” Green describes.