FSP Retail Blog

Retail Data, Research and Consultancy

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In business, the only reason to spend money is to increase profit.  The expenditure is either to reduce costs or to improve revenues.  The most successful FSP work yields returns that are many multiples of its cost.  Internal FSP analysis shows a clear and direct link between client returns and the depth of FSP involvement, the strength of the client relationship.

There is a distinction between data, research and consultancy.  The difference can be illustrated by analogy.  Data can be compared with the soil, research with the seeds that grow from the soil and consultancy with nurturing the seedlings from germination into healthy plants.  Consultancy is therefore a service that cannot be done in isolation.  The provision of a service immediately creates relationship.  Continuing the analogy, both in specifying the seeds to be planted and in creating the environment within which the seedlings can grow, there needs to be liaison with the landowner or his manager.

Running a business is a team effort.  New members need a time of induction and familiarisation.  Why should it be different for external service suppliers?  Since few of us have experience of working with a gardener, perhaps another analogy would be helpful.  Most people prefer to have their hair cut and styled by a specific person with whom they have an on-going relationship. 

As I write these words, a colleague is holding her monthly drop-in “surgery” in the offices of a client.  As part of the service, FSP makes time available to answer questions and contribute ideas on topics raised by members of the client team.  It’s a great way to build relationship to the mutual benefit of both parties.  It allows the FSP input to be more fully explored and more widely applied when there is a strong and on-going relationship.  It is no coincidence that the FSP work for this client is worked harder and has thus yielded returns that are amongst the highest.

Geoffs View - The Retailing Outlook

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Unless landlords take the initiative, town centre retailing will die out within a generation in a large number of middle sized UK towns.

The migration of shopping away from town centres is accelerating. It is going to the more efficient and convenient supermarkets, to out-of-town retailing and to the internet. Without action, the UK will follow the United States into suburbanisation with largely lifeless town centres. To be vibrant and viable, town centres need to find a new role providing an enjoyable experience that cannot be matched on-line or by the grocers. In towns that fail to do so, retail rents will continue to decline.

Meanwhile, the grocers are expanding aggressively. Tesco plans to add 2.4m sq ft, 26 additional Tesco Extras and 181 Tesco Express. Asda hopes to add 3.75m sq ft of non-food space in 150 new Asda Living stores. Not much of this additional 6m sq ft will be in town centres.

The internet is getting more powerful. In the UK, according to FSP research, more than 50% of shoppers already make some use of the internet in their shopping. In the US, more than 40% of US retail sales are influenced by the internet. This is expected to reach 50% by next year.

A recent survey of comparative high street and internet prices emphasises the web’s cost advantage. On a basket of 10 fast-moving consumer goods, including an i-Pod, trainers, a watch, coffee maker and a TV set, the average cost in 11 town centres, that included Manchester, Nottingham, Sheffield, London and Bristol, was 31% higher than the lowest on-line price. Not a very balanced comparison but in price conscious times, the difference is striking.

Retailers meanwhile are under the pressure of an uncertain outlook for consumer expenditure. The common response has been to move towards a multi-channel offer, exemplified by John Lewis and Next. The Partnership has made the Commercial Director responsible for both store expansion and the multi-channel offer. Next has announced that its further expansion overseas will be solely via the internet, not through stores.

The current focus for most retailers is to cut operating costs. The opportunities to enhance gross margin through the globalisation of the supply chain are largely exhausted. Staff and occupancy costs are their two largest operational costs. With excellent customer service the key advantage over on-line retailers and grocers, training and retaining good shop staff is essential. It is therefore no surprise that the pressure to contain occupancy costs is immense. The shedding of uneconomic stores through pre-pack administrations and CVAs is an alternative way to reduce operating costs.

With retailers having no overwhelming need to trade from town centres, landlords and the local authority have the responsibility to maintain town centre vitality and vibrancy. A new environment calls for a new form of response and perhaps the BIDs vehicle will be sufficient. Let’s hope so.

Secondary Shopping Centres – The elephant in the room

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To the Royal Institution, founded in 1799, to witness the retail property industry discussing secondary shopping centres in a suitably historic setting. There was much to marvel at, not least that the group on whom shopping centres depend was entirely unrecognised. Shoppers, who ultimately pay the rent, were effectively ignored.

Ray Morgan, Chief Executive of Woking Borough Council, implored shopping centre developers to consult “the local community”. Since this appears to be code for talking to the local authority, this does not qualify as taking shopper views into account. Richard Akers, Chief Executive of Land Securities Retail, and BCSC President-Elect, was the sole exception. He acknowledged that as landlord, Land Securities carries out substantial consumer research which could be, but generally is not, shared with tenants.

The useful question to be answered is not, “Why does the property industry ignore consumers?” but rather “How can the property industry take consumer preferences and behaviour into account?” Viewed in isolation, research is expensive; viewed within the context of the decisions based on research results, the return on research investment can be multi-fold. Of course FSP has a vested interest but can show solid evidence that consumer research is justifiable, even necessary, in maximising ROI on many retail property assets.

What matters in considering the cost of research, as for most goods and services, is not the initial outlay but the cost per use. The FSP experience is that broadening the application of research results in a dramatic reduction to the cost per use. This requires an ability to take a strategic view – standing back far enough to comprehend that it is an elephant.

Locking the Stable Door

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The proportion of UK multiple retailers trading unsustainably has increased from around 23% last year to 28% this year. Furthermore, the location of the stores of “at risk” retailers, and the reasons for their financial stress, are now different. Retailers are categorised as “at risk” if the ratio of gross profit on sales to the cost of labour and depreciation is below parity.

Last year, a disproportionate number of shops of “at risk” retailers were in medium to large industrial towns, mainly in the north of England. The stores belonged principally to traditional retailers, such as Woolworths, whose store locations had been determined by historic shopping patterns. Many of these stores have, as anticipated, now closed and the towns are experiencing high rates of vacancy. This has attracted much attention, not least from BCSC, but in truth, the horse has bolted. These towns need to develop a new, viable retail strategy built around their surviving retailers. Amongst these retailers, the proportion now “at risk” is lower than the national average. There is, after all, still a role for these towns within the retail hierarchy.

Currently, the proportion of “at risk” stores is higher than the national average in some prime retail locations scattered right across the UK. The likely explanation is that less experienced retailers have taken on inappropriate stores in otherwise sound retail locations. Identifying such traders and developing contingency plans is a significant asset management task. With credit difficult to secure, and banks looking to reduce outstanding loans, retailers that have expanded aggressively from an unsound base or taken on high levels of debt are amongst those most at risk.

Given the continuing high proportion of “at risk” retailers, FSP anticipates that retailer failures will continue in smaller numbers throughout the year. However, the profile may change with a lower proportion of “traditional” retailers and more that are over-extended or debt-driven. As always, forewarned is forearmed.

A bird in the hand is worth two in the bush...

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…but are they all of equal value? In shopping centres and retail parks, recruiting particular tenants within an explicit retail mix strategy creates a more robust rent roll than simply taking the highest, or any, bidder. Without a tenant mix policy, the retail composition of the centre or park is determined by the judgements and vagaries of individual retailers.

Rent is paid from turnover and the lower its proportion the better. The proportion can be reduced either by agreeing a lower rent or by increasing turnover. Other things being equal, retailers whose customer profile matches the visitor profile will increase turnover more easily than mismatched retailers. Furthermore, several retailers with similar customer profiles outperform a ragbag of differently targeted shops. Historically, retailers in the same trade tended to group together in the same area of town.

There are five broad objections to shopping centres and retail parks having an explicit tenant mix strategy:

1. Retailers know their own business best, so don’t second guess them.

   This over-estimates the resources of retailers and their agents to know the potential of your particular location. In FSP experience, the vast majority of retailers welcome solid evidence of the scale of the business opportunity represented by your centre or retail park

2. We’ve managed successfully so far without a retail mix strategy.

   This omits the role of shoppers in making a retail location successful. FSP can demonstrate that happy shoppers visit more often and spend more per visit so that annually they are worth two or three times more than an unhappy shopper. Creating more happy shoppers increases sales, makes the retailers more profitable and therefore willing to pay more for their space. Establishing the identity of the happy shopper is therefore a fundamental step

3. It’ll only tell me what I already know.

   In Made to Stick, Chip and Dan Heath describe the Curse of Knowledge which prevents experts from being able to see the issue from the perspective of the uninitiated. A tenant mix strategy gives a different emphasis to what is already known and thereby effectively communicates the potential of the location to retailers

4. It’s a sledgehammer to crack a nut.

   On an established scheme, units come up one at a time, so the expense of developing a retail mix strategy is not justified. While more centres now have multiple vacancies, this may be a valid objection if the task is simply to fill it and flog it. However, FSP has been involved in a number of pre-acquisition due diligence investigations where such a policy has cut no ice with the potential purchaser

5. A different skill set is required to present the business case to retailers when it flows from an evidence-based retail mix strategy.

   It can be difficult for letting agents dealing with many different schemes fully to understand the potential of each one for each target retailer. Much of the responsibility for this lack of understanding lies with the research providers who don’t make the evidence very accessible. Naturally FSP pleads not guilty to this charge but only because it is a high priority to work with the client and letting teams to translate the research into practical actions.

I now look forward to a flood of enquiries for help in developing tenant mix strategies!!

With kind regards,

Geoff Nicholson

Christmas Trading Update

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Christmas 2009 sales are relevant to the past, not the future. Sales over the Christmas period, as so far reported, seem to be the last act of consumer defiance of the economic circumstance. The first reports of Christmas sales performance show like-for-like sales increases that average between 5% and 10% across all merchandise categories. Such a performance does not mean the good times are back but relief that last year was not worse. The outlook for the coming year is at best anaemic.

All the money the Government has spent, on bank bail-outs, tax relief, cash for clunkers, quantitative easing and so on, prevented complete economic melt-down in 2009 but at the cost of future growth. Recent measures of consumer confidence show the steepest drop in more than a year. While the household savings ratio has been positive for 6 quarters, household debt to income remains above 150%. It has a long way to go to match the levels of the early 1990’s, when it was about 100%. The prospect of higher taxes, unemployment and interest rates will encourage consumers to embark on the long trail back to balance, through increasing the proportion of disposable income allocated to reducing debt and to savings. The spending growth of the last decade and more, driven by massive reliance on borrowing, seems unlikely to return in the near future.

Within this low growth environment, retailers will still need to expand, to spread their fixed costs over a wider range of stores. However, the economic case for each additional store will need more than ever to be firmly based on credible evidence. Costly errors have long been unacceptable. What will now be career-threatening will be to take on marginal stores. Forward thinking landlords will continue to 'de-risk' deals. This is achieved through better understanding of individual retailers, their value to particular schemes, likely trading performance and the most effective types of assistance required to turn marginal deals into sustainable opportunities

The SnapShop Christmas Sales Report is available to Members of the SnapShop website, and to FreeZone registrants within their 3 month trial period. To sign up for FreeZone and to get access to the full report, visit www.snap-shop.co.uk/freezone

The Golden Rule

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“Do as you would be done by” is an ethical code that has its roots in a wide range of world cultures, present in the philosophies of ancient India, Greece, Judea and China.  It is based on the understanding of the human condition expressed by John Donne as, “No man is an island, entire of itself …- any man's death diminishes me, because I am involved in mankind; and therefore never send to know for whom the bell tolls; it tolls for thee."  We are indeed social animals.

There is a view that the current economic situation was precipitated and is perpetuated by a failure within society in general and particularly in the financial community, to maintain the Golden Rule.  For those who are not retailers, the upcoming break from normal routine may provide space to reflect on whether the ethic of reciprocity is really still relevant to our society.  If it is, is there a personal responsibility to reflect it in the way I conduct my life and business?  None of this is easy but as Edmund Burke reminds us, "All that is necessary for the triumph of evil is that good men do nothing."

With these merry thoughts ringing in my head, I wish you a happy holiday and a prosperous New Year

Geoff Nicholson

 

 

Making Silk Purses from Sow’s Ears

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Do retail Like-for-Like (LfL) figures include or exclude internet sales? Not a trick question but a matter of some importance to understanding what is happening in UK retail.

Most retailers, who reasonably consider the internet just another channel to market, include sales through the web in their LfL figures. To put the best gloss on their figures, they are incentivised to include the most rapidly growing sales channel. However, to understand the health of the High Street, internet sales should be excluded. As of course should sales through Out-of-Town stores.

And this provides the clue – the problem of definition. In the same way that in practice the exact definition of Out-of-Town (OOT) is ultimately arbitrary, many internet sales straddle the physical and digital divide. The dominance of bricks-and-clicks retailers on the internet testifies to the advantages of having a physical presence.

The current situation is further complicated by changes to VAT rates. FSP again plans to be first to summarise Christmas sales figures but the raw figures will include sales at a lower rate of VAT than last year. Perhaps of greater significance is how widely retailers used the cut as an opportunity to raise margins and the effect of the cut on consumer spending. The economists believe it created real benefit, retailers seem much less certain. The prospect of the restoration of the VAT rate in January is less divisive. All are agreed it will not of itself stimulate consumer demand. The prospect may help sales in December but not in January.

As a group of retail analysts, FSP benefits from this lack of clarity in reported retail sales figures. FSP expends time and effort on systems to collect and analyse sales data which then inform its advice and recommendations. Nevertheless, FSP would welcome the restoration of the late, and widely lamented by those who still remember it, Retail Sales Enquiry. This provided a more detailed and geographic analysis of retail sales. It was abolished by the Thatcher Government in one of its least effective cost savings. However, while death and taxes are the only two certainties in life, I think the restoration of the Retail Sales Enquiry any time soon might fairly rank alongside them.

The Retail Outlook

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Opinion about the financial outlook for UK retailers is divided. The evidence however is more unanimous:

• The Red Flag early warning from business restructuring specialists Begbies Traynor shows that 125 retailers encountered “critical problems” in September, matching the level of a year ago. A significant proportion of these will begin insolvency procedures within 12 months

• Global Retail Network tracks the windows of around 250 UK retailers each weekend and records the offer in one of three categories - a full-blown Sale, a promotional offer or regular trading

The chart below shows the percentage of monitored UK retailers on Sale or with a promotional offer in the 20 weeks from June to the third week of October for the last 3 years.

While the Summer Sales were little different in 2009 from the previous two years, the on-going level of discounting is significantly higher and in October is exceeding the crisis levels of last year.
In this environment, an increasing number of retail property owners and managers are turning to FSP for advice about the financial health and performance of retailers. As turnover rent becomes mainstream, knowing the likely sales and sustainable rent of a prospective tenant is invaluable for business planning.

FSP advice is based both on extensive databases of information and analysis and on experience and feedback. The more you do, the better you become.

The times they are a-changin’ – Threats and Opportunities

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In a period of change, the vital task is, amongst the threats and opportunities, to distinguish the important from the transitory. Is the abolition of the Needs Test really the most important issue in urban regeneration? Perhaps leadership rather than facilitation is what is needed. If performance is king, the evidence suggests that the UK already has too much retail space. Retailers generally are not over-trading. FSP research indicates that the greatest opportunities lie in remodelling and making better use of existing space, not in creating yet more.

Change is not a choice but our response is. Many of the current changes revolve around the realisation that the world is finite, it has limits. Similarly, consumer expenditure cannot expand indefinitely. In these circumstances, making best use of what is already available is an understandable response. It can be seen in climate change concerns leading to the phasing out of non-directional incandescent light bulbs. Even politicians talk about using less, with the focus on areas of public expenditure to be cut. Consumer attitudes have changed, so John Lewis has published an updated version of the wartime pamphlet, Make Do and Mend.

Retail property development is changing too. Can it really work by better satisfying existing shoppers, rather than by attracting additional new shoppers? Research by FSP demonstrates that over a calendar year, satisfied shoppers on average spend over 70% more than unhappy shoppers. In marketing, it has long been known that it is more effective to get more from existing customers than to recruit new ones. The challenge to developers is not how to increase the number of shoppers but how to create satisfied customers.

Satisfying customers is not a one-off job, it is a continuing process. This takes us back to the start – the times they are a-changin’ and it’s a permanent state.

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