An odd thing seems to be happening on the other side of ‘the pond’.
After 40 years of retail expansion, 2010 seems to be the start of an ‘intentional’ contraction.
To quote Retail Wire:-
While mall-based apparel retailers in 2009 might have looked to outright close weaker stores, the current year is seeing many reducing the size of stores in a bid to improve store productivity. Is the trend toward smaller stores a positive or negative for mall-based apparel stores?
The CFO at Williams-Sonoma (The US largest home furnishing chain) announced that “they will continue to close additional stores in large multi-store markets. Our strategy for store closings is to optimize our cost per square foot. The goal is not closing stores per se.” They have found that closing stores causes customers to use other stores or, more often, use the internet. Over the next 3 years, 25% of their leases will be expiring. Williams-Sonoma sees that as an opportunity to re-negotiate leases, relocate, or simply close the store.
According to research by the International Council of Shopping Centers, at the end of 2008, there were over 14 billion square feet (SF) of total retail selling space in America, 7 billion of which is in over 102,000 shopping centers of various sizes. This translates into over 46 SF of total selling space and 23 SF of mall space for every man, woman, and child in America. To put these numbers in context, in Europe, the equivalent numbers range from 1.1 SF (Italy) to 2.5 SF (UK) to 3.3 SF (Sweden).
OK, perhaps we need to put this into perspective.
We are a long way behind having the space saturation as the US but then, the UK’s cost per square foot , salaries and taxes are far in excess of theirs.
I know of a major Kitchen/Bathroom ‘shed’ retailer that decided to close one of their West London stores last year as takings had dropped and the store desperately needed updating/refurbishing. After closing, they found that 80% of the store’s turnover was added to the 2 other West London stores significantly increasing profitability. Therefore, they only lost 20% of takings but saved 100% of the overheads. They are actively looking at whether this ‘trick’ can be repeated elsewhere in the UK.
Where does this leave the independent retailer?
The benefits may be that the smaller retailer could pick up some extra business, that there would be no upward pressure on rents. Perhaps cheaper or better quality sales staff could be available or local suppliers more keen for your business.
But overall, I feel that this could have a very negative effect of the traditional retailer. We’ve already seen many High Street shops boarded up and looking like ghost towns. Much as the large retailers are competition, they do draw customers into the shopping centres making them lively and inspiring customers to spend money. If the centres go the same way as the High Streets it doesn’t bode well.
What plans to you need to put in place?
Do your research and try to get as much advance notice if major retailers are looking to close. If you can, ensure that your lease(s) have break clauses so you are not stuck with a long lease that you can’t get out of. Keep flexible and don’t sign any long term contracts. Lastly, build up your internet presence. It’s going to take up an increasingly larger share of consumer’s purchases. Although a relative late entrant to the on-line world John Lewis’s internet sales already make it bigger than their Oxford Street branch (with 20% of the costs).
As always, the smaller retailers advantage is their flexibility so ‘stay on your toes’.
Tony Heywood – Gilcrest Services Ltd
Business Turnaround and Recovery