FSP Retail Blog

Future of town centres hinges on planning policy

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Managing Director Geoff Nicholson comments in Retail Weeks' Letters To The Editor on an article from issue 12th March 2010. Link unavailable.

The recession was triggered by failure to control market trends, which are driven by often short-term investor interests, not by consideration of longer-term social benefits. So Catherine Tobiasinsky’s plea (RW, last week) that planning policy should not subvert market trends in breathtakingly short-sighted.
Yes, in-town retailing has been under pressure from out-of-town locations. But the economic and social costs of allowing town centres to die are incalculable. The Preston Tithebarn issue is nothing to do with its in-town location and everything to do with its potential impact on neighbouring towns.
It is the charge of the planning system to reconcile the demands of the market and social need. It makes sense, for the interests of society, to flavour in-town development. This is not to claim out-of-town schemes are never appropriate: the two are not mutually exclusive.
The bleak outlook for in-town retailing reflects the historic failures of planning policy. But to advocate its abolition is to remove all hope for a better future for town centres.

Geoff Nicholson
Managing Director
FSP Retail

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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

Turnover Rents - A New Partnership

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Sharing turnover information has always been a sensitive subject for retailers, and as a result landlords are often unable to measure the effectiveness of their shopping centre or retail park by the most obvious means – sales. Entrant numbers are produced as a Key Performance Indicator but if an increase doesn’t convert to sales it is largely meaningless.

With new challenges come new opportunities. As market forces increasingly popularise turnover linked rents there is an opportunity to develop a new relationship between landlords and tenants based on real turnover performance.

However turnover rents have their complications. The argument that a rent linked to turnover shares the risk is a sound one, but only if both parties are fully conversant with the possible returns such an arrangement might provide. How to know what a specific shop will take and what is an appropriate turnover %? How to ensure that after adapting to the bad times, future success is also shared? The key data required are the likely turnover, the appropriate turnover % to be applied and the rent this is likely to generate. A retailer’s own sales estimate may be entirely genuine but does it take into account all of the catchment, spending and competitive information (hopefully) at the landlord’s disposal? Finally, what is to be done with the information derived from turnover deals which provide such a wealth of data? Often not enough. Turnover information is highly valuable in evaluating real centre or retail park performance and providing management with a means of looking hard at tenant mix and marketing strategies to ensure that they reflect current needs.

FSP has an extensive retailer database that includes accounts analysis to determine sustainable rents and sales information to assist with turnover estimates. By understanding the individual retailer model FSP can estimate potential turnovers by retailer for specific units and also advise on sustainable turnover %. FSP also works extensively with landlords to assist asset management in interpreting data and applying the knowledge gained to improve overall performance.

Turnover rents can link retailer and landlord in the quest for success and income, and may prove a powerful lever in building a fully functioning partnership. However, and with apologies to George Orwell, “all landlord/tenant turnover negotiations are equal but some are more equal than others”. FSP can help achieve the balance.

Home, Clone or Ghost Town

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The BRC this week issued their report, 21st Century High Streets: A Vision for our Town Centres, which, in its introduction states “Good retailing is all about great products supported by great people giving great service. It’s down to retailers to provide all of that for their customers. It’s something British retailers, large and small, excel in. But to trade profitably we need customers, drawn in by a pleasant, safe and accessible High Street offer”.  Sensible.  Indeed the whole report is essentially common sense, but someone needs to drive the message home.

It’s something FSP has been banging on about for some time.  Regular readers of Geoff’s View in SnapShop Monthly (repeated as a news item here), will know that FSP would like to see town centres having their own identity, based around the needs and expectations of their catchment population.  Indeed, a year ago, Geoff said “the prospect for town centre retailing is not for a difficult period, but for a sea-change. There will be a permanent diminution of its market share unless the offering in town centres is made more attractive to shoppers”. Indeed, we want towns to feel like home, not a clone of every other one up and down the country.  We expect the government to do their bit, as Geoff argues in A Paradigm Shift for Town Centre Retailing, and we agree with the BRC in assigning responsibilities to Local Authorities, Regional Development Agencies and the Retailers themselves, but what about the property owners, whether institutional, private or local authority?  The relationship between the in-town Shopping Centre and the High Street is inevitably competiitve but the competition can either be healthy and constuctive or destructive when the legitimacy of the other’s role is denied.

Curiously the BRC’s 20 key recommendations fail to mention landlords, except in connection with “The retail mix must complement the public perception of the High Street’s identity”.  This is indeed a challenge for landlords whose chief concern is their bottom line.  Too often the time horizon is short term and a global overview of the state of the local town centre is not something that is often considered relevant.  For the long term health of their investment, it should be a consideration as should be their involvement in the other 19 key recommendations.

Calling the tune in shopping centres

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The prospects for retail property in 2008 range from a disaster scenario, much loved by journalists in search of a good story, to an expectation that the bottom of the market will be established.  What is certain is that active asset management will once more be prized.

The conventional shopping centre economic model is that the interests of tenants and advertisers predominate.  After all, they provide the income.  However, in essence they are agents, willing to pay to have access to their target customers.  In this light, it is the shoppers who need to be attracted and delighted.

Therefore, active asset management involves understanding the needs and aspirations of the particular groups of shoppers who use or might use the centre.  While not entirely predictable, since shoppers are human, shopper behaviour is fortunately not random.  It is possible to discover what actual and potential shoppers want.  All too often, the mere identification and enumeration of shoppers is thought to provide sufficient insight.  But knowing the number and demographic profile of shoppers is not an adequate basis to predict the kind of shopping centre they want.

As the choice of retail venues increases shoppers will gravitate towards the shopping experience that most clearly fits their needs.  Identifying and understanding the role for a particular centre in the shopper repertoire is essential.   It is a particular skill that can be developed and honed and improved with experience.  It is also a skill that FSP uses a lot and we would be delighted to use it on your behalf to address the real issues in your centres.

Perhaps 2008 will be the year when the old saying, “He who pays the piper calls the tune” will be widely applied across the shopping centre industry.

A Paradigm Shift for Town Centre Retailing

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“Proposed Revisions to PPS6” is not a headline to set the blood racing. However, the latest offering from Hazel Blears, the Communities Secretary, should provoke outrage from all who care for the viability of UK town centres.

The continued well-being of town centres is in free-fall. The Government, the only body with the power and incentive to remedy the situation, has utterly failed either to grasp the urgency of the issue or to take decisive action.

The proposed revisions to Planning Policy Statement 6: “Planning for Town Centres” (2005) include the replacement of the “needs test” by an “impact test”. Guidance on conducting an “impact test” is yet to be published but the whole approach misses the point.

There is already over-capacity on the High Street. Retail sales in town centres have been growing, and are forecast to grow, more slowly than sales through other channels. By 2018, the majority of sales of Comparison Goods will be outside town centres.

Any retail development outside town centres, other than for convenience shopping, will hasten the demise of town centre retailing. It is already in decline, under the assault of edge-of-town supermarkets, selling an increasing proportion of non-foods, and the internet.

The current retail difficulties for town centre retailing are not simply “a difficult patch” but reflect a whole new retail environment – a new paradigm. Without vigorous and well-directed action by the Government, the future of town centre retailing, and therefore of town centres themselves, will continue to decline.

Apart from government, there is no one to speak for town centres. The representative bodies of both property and retail companies are heavily compromised by members with out-of-town interests. The dysfunctional planning system makes town centre development slow, complex and expensive.

Town centres are central to our communities, as Hazel Blears said, but not to our shopping. To have viable futures, town centres and their shopping both need to be imaginatively re-invented to enhance the users’ experience. Town centre retailing can offer its shoppers something valuable that cannot be matched out-of-town or on the internet. But to do this, each town needs to reflect its own character and the particular aspirations of its own citizens. It has to be Home Town, not Clone Town.

Calling the tune in shopping centres

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The prospects for retail property in 2008 range from a disaster scenario, much loved by journalists in search of a good story, to an expectation that the bottom of the market will be established. What is certain is that active asset management will once more be prized.

The conventional shopping centre economic model is that the interests of tenants and advertisers predominate. After all, they provide the income. However, in essence they are agents, willing to pay to have access to their target customers. In this light, it is the shoppers who need to be attracted and delighted.

Therefore, active asset management involves understanding the needs and aspirations of the particular groups of shoppers who use or might use the centre. While not entirely predictable, since shoppers are human, shopper behaviour is fortunately not random. It is possible to discover what actual and potential shoppers want. All too often, the mere identification and enumeration of shoppers is thought to provide sufficient insight. But knowing the number and demographic profile of shoppers is not an adequate basis to predict the kind of shopping centre they want.

As the choice of retail venues increases shoppers will gravitate towards the shopping experience that most clearly fits their needs. Identifying and understanding the role for a particular centre in the shopper repertoire is essential. It is a particular skill that can be developed and honed and improved with experience. It is also a skill that FSP uses a lot and we would be delighted to use it on your behalf to address the real issues in your centres.

Perhaps 2008 will be the year when the old saying, “He who pays the piper calls the tune” will be widely applied across the shopping centre industry.

With kind regards

Geoff

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