Reading the papers, you’d be forgiven for thinking that it is all over for physical retail. Since 2014, 172 UK retailers have launched a CVA or entered administration, according to the Centre for Retail Research, impacting over 7,000 stores. It is clear that high street retail remains under pressure but look though the headlines and some retailers are still trading well. These pockets of resilience are focused on CVE: convenience, value or experience.
People may be visiting the high street less often but they still need to shop and they want to do so conveniently. One impact of the evolution in technology has been to increase consumer expectation of instant gratification. This has two implications for physical retail.
First, speed and ease of online fulfilment has become a major battleground for retailers. For many of them, physical stores in high footfall locations are forming part of an efficient distribution network to help to meet these challenges. Take M&S for example. It is rationalising stores but it will retain its network of Simply Food stores partly to serve as convenient collection points for online orders.
Second, in dense urban areas the convenience of physical retail will always trump online for the purchase of everyday items. The latest results from Tesco register a 5.9% rise in like-for-like sales at Tesco Express stores, for example, making them their fastest growing sales platform (Chart 1). Food and beverage operators like Greggs and Costa are also benefiting from this trend, reporting outperformance in units located in high footfall locations such as public transport nodes.
Chart 1 – Tesco like for like sales growth, Q2 18
Source: Tesco Interim Results 2018/19 (3 October 2018)
The last few years have seen strong store growth in retailers offering value. In the supermarket sector discounters have nearly doubled their market share since 2012 (Chart 2). If the proposed ASDA/ Sainsbury’s merger proceeds and new entrant Jacks achieves its ambitious rollout plans, the market share of discount supermarkets could grow much further.
Chart 2 – UK supermarket market share
Source: Statistia (November 2018)
This trend is evident in non-food retail too. Discount retail warehouse operators B&M and Home Bargains are aggressively expanding. Budget fashion retailer Primark is projecting 6% UK sales growth in 2018. What is driving this trend?
Value-for-money has always been important to shoppers. The ubiquity of the internet means they are more empowered than ever to check prices in real time. This highlights the cost proposition of value retailers who are difficult to compete against on price. In order to compete, discounters operate, leaner, more modern portfolios and they benefit from fewer legacy stores which weigh down traditional retailers. Value retailers tend to have little, if any, online presence but shoppers are willing to travel to them to access low prices.
Shoppers increasingly value experience over ownership. The ONS annual family spend surveys reveal that more is being spent on hotels, restaurants and recreation and less on goods. This is evidenced by the rise in mobility sharing platforms like Uber and Mobike.
In the physical world, stores which fuse retail with experiences attract footfall. Shoppers at Nike Town on Oxford Street are greeted by a live-DJ and can use the instore computers to customise trainers for home delivery. Ted Baker has branched out from fashion to encompass male ‘grooming rooms’. Pop-up retail and special events create unique experiences which cannot be replicated online.
Figure 1 - Retailer or coffee shop? An example of experiential retail
Source: Mayfair Capital
The evolution of physical retail
Technological change and new consumer tastes are challenging traditional retail. Change is not new to the sector and it has adapted before, the difference this time is its brutal pace. Recent CVA’s merely herald the next stage of its evolutionary cycle in which viable physical retailers must have a strong offer in convenience, value or experience.
At the end of this adjustment process the amount of occupied retail floorspace will have reduced and the way it is used will have changed, but it will still exist. The high street has survived dramatic change before. It will do so again but it needs to adapt and evolve to prosper.
Senior Analyst – Investment Strategy and Risk