FSP Retail Blog

Sustainable Investment – Trading Risk

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With schemes in the hands of administrators, debt driven ‘fire sales’, the high cost of filling voids, continuing deterioration in the financial health of occupiers and worries about the future of the UK economy, beleaguered investors can be forgiven for feeling unenthusiastic about retail property.

Given the right knowledge however, it is still very possible to acquire assets with growth potential and to create conditions which will stimulate sustainable income growth.  This Product Focus is the second in a series of three, covering Corporate Risk, Trading Risk and Income Growth.  The series is intended to illustrate how appropriate pre acquisition research and good asset management can have a positive influence on income growth and potential exit yields.

If Corporate Risk is the risk to specific shops which arises through the overall financial performance of the retail chain, Trading Risk (sometimes known as Unit Risk) is the risk which arises through the performance of individual outlets within a specific asset.  This most commonly occurs where the trading performance of a particular store is such that the level of rent which can be sustained by its turnover is less than the passing rent on the unit. 

While some healthy multiples may be able to support this situation for a number of years (either in the hope that the situation improves or because it is important to maintain market presence), Trading Risk becomes particularly important when Corporate Risk is high.  The spate of pre pack administrations between 2008 and 2010 saw huge numbers of unprofitable stores closed, with towns such as Blackpool, Coventry and Bradford becoming top targets for the accountant’s axe.

Whilst these closures may have felt inevitable, it is possible for asset managers to understand the specific trading risk within assets and minimise potential for store closures by taking steps to ensure that sustainable rents are on balance higher than passing rents.  For potential investors, knowing the scale of trading risk and understanding how much growth is required to improve turnover to sustainable levels should be an essential element of pre acquisition due diligence.

Understanding Trading Risk

The key to understanding Trading Risk at an asset is understanding turnover.  A small number of locations collect occupier turnover statistics however, for those less information rich, the most common approach is to undertake an audit to estimate selling floor space and turnover.  From detailed analysis of individual occupier’s accounts, FSP project typical rent to sales ratios and these are used to estimate the sustainable rent for each unit in the asset.  When compared with passing rents, the degree of variation in the sustainable rent indicates whether a retailer is ‘vulnerable’, ‘viable’ or ‘thriving’ in terms of Trading Risk.  Results are then plotted on a scheme plan to visually indicate the location of specific units and potential problem malls.

The diagram below from a project in the Republic of Ireland illustrates how assessments of each individual unit in a tenancy schedule can be aggregated to indicate the proportion of total scheme rental income subject to Trading Risk.  In FSP’s experience, typically about one third of shopping centre rental income is currently Vulnerable (i.e. sustainable rents are 25% below passing rents) suggesting that the particular scheme might expect increasing vacancy difficulties in the near future.  However, the analysis also shows that a 12% increase in turnover would be sufficient to return the scheme to a more ‘average’ level of risk.

There have been many occasions where strong performing stores have been closed as a result of failures elsewhere in a chain and it is therefore important that assets are considered in terms of both Trading Risk and Corporate Risk.  FSP uses a Viability Matrix to show the combined impact of Corporate and Trading Risk on scheme rental income.  On the Viability Matrix below, Corporate Risk is shown along the vertical axis and Trading (or Unit) Risk is shown along the horizontal axis, with the ideal balance of rental income (indicated by the Percentage figures) being located in the bottom right hand corner of the matrix.  Asset Management activity can then be focussed upon the those occupiers who account for the 23% of rental income who fall within the Head above Water & Vulnerable, Healthy & Vulnerable and Very Worrying & Viable cells.

The combined assessment of Trading and Corporate Risk is a tested and successful approach which locates retail risk within assets and establishes the scale of improvements required to successfully ameliorate unsustainable occupiers.  Deployment of the methodology has achieved notable success including the reduction of rental risk from 43% to 7% at one prime asset, the migration of sustainable rents from 20% below passing rents to 10% above and a 76% growth in rental income over 4 years. 

The final Product Focus in this series will discuss the main techniques used to identify opportunities and achieve this Income Growth.  More information can be provided through FSP’s consultants

Sustainable Investment - Corporate Risk

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With schemes in the hands of administrators, debt driven ‘fire sales’, the high cost of filling voids, continuing deterioration in the financial health of occupiers and worries about the future of the UK economy, beleaguered investors can be forgiven for feeling unenthusiastic about retail property.

Given the right knowledge however, it is still very possible to acquire assets with growth potential and to create conditions which will stimulate sustainable income growth.  This Product Focus is the first of a series of three, covering Corporate Risk, Trading Risk and Income Growth.  These will illustrate how appropriate pre acquisition research and good asset management can have a positive influence on income growth and potential exit yields. 

Path to Failure

Corporate Risk is the risk to specific shops which arises through the overall financial performance of the retail chain.  The spate of administrations between 2008 and 2010 saw a number of good performing local stores closed as a result of corporate failures such as Woolworths, Bay Trading, Barratts and Faith.  However, as the chart above demonstrates, the financial trajectory of the majority of larger organisations is known and analysis can therefore be quickly undertaken by FSP to assess the threat of corporate risk to rental income for any retail asset.

Positive Stories

Although corporate failures have produced many headlines, the retail industry is not all doom and gloom.  As well as those flat or downward financial health trajectories shown for Barratts, Faith etc., a significant number of retailers are healthy or have an upward trend.  These include LK Bennett, Iceland and Urban Outfitters, shown by the above chart.  Clearly, understanding where the balance falls between those stronger and weaker retailers is an essential step in assessing the financial position of individual assets.  A key part of FSP’s service is therefore to quickly link corporate health to passing rents in order to pinpoint potential income risks.

Stronger Assets?

FSP has matched Corporate Health to key occupiers in order to illustrate the current position for major retail asset classes.  The chart shows the financial health of the top 100 occupiers (by number of outlets), present in major shopping centres, retail parks and factory outlets.  For all three classes, the proportion of Very Worrying retailers is below FSP’s retailer average while the proportion of Healthy retailers is above average.  Although the balance will be different according to the particular tenant line up in individual schemes (which must therefore be carefully scrutinised), this indicates that there is less risk and stronger income growth prospects in these asset classes than elsewhere on the high street.

Although this is a relatively sunny picture, about one third of retailers currently fall into the Head Above Water category and higher concentrations can be seen for the three asset classes than for FSP’s database of monitored retailers.  It is therefore very important to understand direction of travel and assess the Trading Risk of specific stores.  For example, amongst Retail Parks, Head Above Water occupiers tend to be traditional bulky goods occupiers whilst Healthier occupiers tend to serve the more profitable fashion, personal goods and grocery markets. 

Where turnover supports a lower Sustainable Rent than Passing Rent, unprofitable stores may become targets for future closure, particularly where urgent corporate restructuring is required to alleviate Head Above Water health.  To reduce this ‘Trading Risk’, turnover growth is essential and FSP will develop the concept of combining Corporate and Trading Risk with Asset Strategy in a following Focus review.

The classification of individual retailers by Corporate Risk is available through FSP’s SnapShop on-line directory or through FSP consultancy projects.  For more information, please

Clas Ohlson - Watford Store Opening

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I’ll be honest with you, when I joked that I could take Technical Director Ken Gunn’s place at the Clas Ohlson store opening in Watford, I didn’t actually think that might happen. Ken has worked closely with Clas Ohlson on their UK expansion strategy, and as such attends as many store openings as possible. Today, however, he was required elsewhere, so along I went to see what all the fuss was about…and here is my first official FSP store review! Enjoy!

The Watford store is the 5th in the UK for the Swedish household accessories/ electricals/DIY retailer Clas Ohlson, and its 116th worldwide. It is located in a former Zavvi store in the Harlequin Shopping Centre – the main shopping destination in the town – and presents a slightly different layout to its other UK locations, which fill vacant Woolworths units and as such have a larger, more open feel than this one. That’s not to be taken as a negative, though; many of you will remember the multi-level layout that most Virgin Megastores – and therefore Zavvi stores - used to have. I think it’s fair to say this format typically utilised larger first/second floor selling areas and mezzanines to create a more accessible, less overwhelming trading space, which works well in shopping centres and for Clas. Had the former Woolworths store on Watford High Street been available of course, perhaps Clas would’ve stuck with the formulae – as it is, Watford Borough Council bought the store in June of this year in relation to the redevelopment of Charter Place, which is adjacent to the old store. The result of this deviation from the norm makes for an interesting visit…

 

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The ground floor level of the store was reserved primarily for seasonal products – both gifts and decorations – with the majority of stock located upstairs in the large first and mezzanine levels, accessible via stairs, lifts and escalators. A clear store layout with ample signage means that particular products are easily located, though the beauty of the store is the opportunity it provides to get lost! Think Ikea marketplace, only tidier with better merchandising and no feeling that you must follow the crowd around a pre-determined route! And probably with less arguments, since there truly is something for everyone at Clas; if we’re going to be stereotypical, there’s homewares for the girls, hardware for the boys and multimedia for the kids. Enough to keep you happy for a good few hours. It was multimedia that drew the crowds this morning, with a particular offer on a portable DVD player the main attraction. Apparently there were 400+ hopefuls queuing around the organised barriers system waiting to get in when the store opened to the public to a great fanfare (literally. There was horn blowing) and those of us already in the store made sure to make scarce once the hordes began pouring in!

A special mention also has to be given to the style of opening ceremony that Clas Ohlson adhere to. The traditional Swedish ribbon cutting ceremony itself provides great entertainment for guests, but the best part about the whole thing is the honours that are dished out and the passion with which the management speak. I know most feel obliged to attend such things, but both Klas Balkow (CEO) and Mark Gregory (UK Managing Director) conveyed a genuine sense of achievement and thanks during their speeches, and it was great to see individual members of staff mentioned by both. It must provide a great sense of inclusion to those involved in the projects, and that in turn is great motivation for the staff – the importance of which is lost on many retailers of today. And of course, showmanship and hype for the customers is never a bad thing.

So in short, I like Clas Ohlson – and not just because I have to! It has a warm, welcoming feel – important for a girl in a DIY shop (and a stark contrast to my visits to Robert Dyas), the pricing is just right and the wide variety of merchandise actually isn’t a negative as it can be for some. Hopefully the UK will welcome this unique concept with open arms, and some sense of variety can be injected back into the high street.

What's in a name?

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We at FSP endeavour to identify the registered company behind all the lovely retailers we feature on SnapShop (our online retail intelligence service).  Piece of cake you might think.  One fascia, one retailer, one name, one company.  If only!!

Firstly, there are the groups.  Does a fascia have its own registered company or not?  Even within the groups they can’t seem to decide!  Topshop, the flagship fascia in the Arcadia Group, does not, Wallis – same group, different fascia – does.  Want to know how Wallis is trading – easy, we can see the accounts.  Same for Topshop?  Not likely! 

Then there are the takeovers (in my opinion these should be banned for the simple purpose of making my life easier!).  Gadget Shop now belongs to The Entertainer, D&A to Boots, MK One has a chequered history having been owned by everyone (Philip Green, Baugur, Hilco, Internacionale) and Perfect Pizza and Papa John’s have an intricately involved history.

But if you’re stuck for a name, there’s always Hamsard.  Over one hundred current or recently dissolved Hamsard companies are registered with Companies House.  Style Menswear did belong to Hamsard 3032.  Neither now seem particularly functional, with all the Style trade now through Envy, but my life would surely have been a whole lot easier if Mr Kinnaird had called his company something a little more meaningful!

Registered companies with eponymous fascias are few and far between.  A small request for more of those is very high on my Christmas list, but no amount of finger crossing or Christmas pudding stirring is likely to bring that to fruition.  So battle on I will in the struggle to see just who is trading as what.  However, if you’re listening Santa, more in the style of Next Retail please!

P.S. The Next Retail link above will show you what SnapShop has to offer.  To find out more, call FSP on 01494 474740

 

Don't Panic Captain Mainwaring!

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There have been several hysteria-inducing reports released in the press over the last few weeks. About certain high streets being at risk of demise, sales feeling the pinch because of swine flu (!!) and discounting reaching dangerous levels. Most of this is old news and the rest hyperbole, so a bit of real perspective should be applied to make sense of it all.

Several industry journals have been quoting a recent report by PricewaterhouseCooper, claiming that 90% of retailers are currently ‘on sale’. While this may be true, it is not enough to simply use this figure as a shock tactic, for in actual fact, the proportion of retailers “on sale” compared to those trading at full price remains mostly unchanged from last year.

Using Global Retail’s Compshop trading stance trend figures, it is clear that although levels are slightly ahead of 2007 and 2008, the number of retailers currently discounting is by no means anymore ‘dangerous’ than in previous years. (See fig 1).  

Moreover, it is clear that retailing plays to seasonal trends, and that although long-term discounting can do more harm than good, it is natural for retailers to clear stock with end of season sales – as traditionally seen throughout July (see fig 2).

Whether heavy discounting will continue unbroken through to 2010 remains to be seen, however there is little to be gained from speculation – especially when past trends suggest the opposite. So let’s wait and see what happens before running to our panic stations; we may be pleasantly surprised.

Fig 1

Fig 2

Back to Bricks

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Reserve, Collect and Spend a Little More

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More Reasons . . .

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Many Happy Returns

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Lots of birthdays going on at the moment – or should I say birth-years - as many retailers seem to be celebrating the fact that they’ve been around for significantly more than the average person (even the cosseted and therefore presumably well-preserved MPs!)

Marks & Spencer are celebrating 125 years, as are Jaeger, whilst Sainsbury’s has clocked up a whopping 140 years!  We at FSP can barely compete; what we had considered a reasonably mature 30 years, seems barely pubescent in comparison!

A look at the FSP database of retail information shows that the three grandfathers of retail mentioned above are not alone.  The award for amazing durability goes to Ede & Ravenscroft, tailors of distinction.  Their timeless offer and niche service offering mean that 320 years on they still have a loyal following and a place in a select market.

The league table of oldest retailers is most definitely dominated by high end exclusivity.  You won’t be surprised to hear that retailers older than 200 years include Fortnum & Mason, Villeroy & Boch, Wedgwood, Hamleys, Mappin & Webb, Asprey and Gieves & Hawkes.

The durability of these retailers is undoubtedly a reflection of their ability to afford investment in customer service, along with providing their superior product.

Using FSP’s price classification, retailers identified with an offering any lower than middle were founded much later, although M&Co did made an appearance in 1834 and DE Shoes, Greenwoods and Peacocks were established in the late 19th century. 

It will be interesting to see who, out of Primark (founded in 1969 with a Value price stance), Next (founded in 1982 with a Middle price stance) or Mulberry (founded in 1974 with a Premium price stance), will still be around in the 22nd century!

Supermarket Sweep

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