The pandemic has drastically changed the way people interact with retailers, writes Dan Sweeney of TLT. However, this does not necessarily mean a reduced focus on physical stores.
With many stores closed for long periods of time, there has been a significant increase in online shopping. The British Retail Consortium’s latest figures show sales rose by 0.9% in November, against a decline of 0.9% in November 2019, with online sales up 47.2%, against a growth of 0.3% in November 2019.
The pandemic is fast-tracking the trend we have seen previously of retailers re-thinking how they might use space to support the rest of their business, and that is going to have some interesting consequences for everyone in the retail ecosystem.
Our ongoing Retail Agility research has been charting the transformative trends influencing the retail sector for several years. In our latest instalment, we asked the UK’s top 100 retailers about the challenges and opportunities faced in the past year; how they are preparing for the post-pandemic environment; and the impact on their estates.
Enduring importance of stores
Even before the pandemic began causing huge amounts of disruption, the retail sector was being transformed by the shift towards online and multichannel retail experiences. Covid-19 has added some urgency to businesses looking to increase their online capabilities, but this does not mean stores will disappear.
Before the pandemic, 82% of retailers said stores were becoming just as, if not more, important to their business than before. When we asked them the same question in October 2020, their belief held true as 80% said the same.
Stores are, however, likely to change in several ways.
Time to think differently about location
As retailers move towards closer integration of their online and offline parts, stores are likely to become important marketing assets as well as sales hubs.
Our data shows 16% of retailers are planning to close some of their stores and an equal number of grocery (20%) and fashion (21%) retailers are choosing to repurpose some of their existing store space. These businesses are looking to make smarter use of the stores and assets they have, such as: bigger stores, hub and spoke distribution models, enhanced click & collect, and out of town locations with more space and parking.
While most retailers may not be planning to reduce their store portfolio, many are reconsidering where their physical outlets are located. With more people working from home, there is a lot of uncertainty about whether cities will ever fully recover and return to their pre-pandemic levels of activity.
Some 39% of the retailers we spoke to said they will need stores in different locations, rising to 47% for fashion retailers, who may have prioritised central locations over smaller high streets.
Tenant–landlord relationships under pressure
As retailers look to reposition their businesses for the post-pandemic environment, knowing the devastating impact that an event like this can have, many are looking at their leases.
Half of the fashion retailers we spoke to were looking to renegotiate their leases, along with 39% of lifestyle, 33% of home and 20% of grocery retailers. Turnover rents and shorter leases emerged as two prominent themes.
Pandemic relief clauses are also being explored and used, and the negotiating environment is heavily influenced by the impact of Company Voluntary Arrangements and administrations on previous leasing norms. The current moratoria on forfeiture and winding up are due to end in March 2021 and unless a further extension is enacted, retail negotiations will need to take place before that date.
In general, and not surprisingly, the tenant-landlord relationship is strained right now, with 34% of retailers now describing their relationship with their landlord as adversarial. This is a noticeable increase on the 28% in our research before the pandemic.
Can the government do more to help?
The majority of retailers wanted to see an extension to the moratorium on commercial tenant evictions, which has since been granted – but many also think there is scope for the government to do more.
Half would like financial support to be made available for commercial landlords to help them in case their tenants are unable to pay their rent. This would take the pressure off tenants that are currently struggling to meet their costs.
Covid-19 has been an unexpected test for the retail industry. As relationships with landlords come under strain, and many retailers look to make changes to their current portfolio of stores, it is likely the effects of this pandemic will be felt for years to come.
- Dan Sweeney is an experienced real estate lawyer and specialises in the retail andleisure sectors. You can contact him at firstname.lastname@example.org
- To read more insights about how the UK retail sector is dealing with the challenges and opportunities created by Covid-19, visit TLT’s Retail Agility webpage