UK retail sector faces fight to recover from coronavirus crisis
High street stores are set to welcome back customers after more than two months of lockdown, but experts have warned the coronavirus outbreak has accelerated the troubles many retailers already faced prior to the enforced closures.
Several well-known brands including Cath Kidston, Laura Ashley, Oasis and Warehouse have all collapsed since the virus forced UK retailers to shutter stores.
Shoe retailer Aldo was the latest to call in the administrators this week, and retail and restructuring specialists believe many more companies, and even the landlords who let their properties, will struggle to navigate the waters ahead.
“The high street wasn't quite meeting the challenge of a changing customer base before the global pandemic, so efforts will be needed to be doubled now,” said Rick Smith, managing director of business rescue and insolvency experts, Forbes Burton. “Many names have vanished in the past decade and a lot of recognisably successful chains teeter as they have done for several years.”
He said a large-scale recovery is unlikely “due to restrictions on opening, customer confidence and general frugality following a period of disquiet”.
Some of the UK’s largest retail complexes have reported significantly reduced incomes over the lockdown period. British Land has written down the value of its retail portfolio by more than a quarter, and the share price of shopping centre owner Intu has fallen by almost 90% in the last year. Intu told investors this week it expected rent collection to fall by £181m.
The battle ahead
“The government’s plan to get retail and leisure operators back up and running poses a significant challenge,” said Liz Cotton, partner at TLT law firm. “How can these businesses trade successfully whilst observing social distancing, safeguarding the health and safety of staff and visitors and protecting themselves against health and safety and employment law risks?”
Outdoor markets and car showrooms could open from 1 June, while high street shops and shopping centres will be able to reopen from 13 June only if they can adequately manage the risks. It is likely to involve a significant spend to refit many locations out, alongside investment in health and safety equipment, hand sanitizers, and even more staff to police the stores.
“Operators have a moral and legal obligation to keep staff and other people entering their premises safe from harm, and Covid-19 is a risk like nothing we have ever seen before,” Cotton said.
Given the limitations on customer numbers, and lingering anxiety about using public transport or congregating in crowds, some brands will have to restructure and rearrange business models to have any chance of survival, experts said.
"Customers may naturally be reluctant to return to the high street when they are unsure of their own safety,” Smith said. “It is also likely that supply chains may be disrupted for several months and so deliveries, stocks and general business operation may prove difficult as demand grows to pre-lockdown levels.”
Companies must look at several elements of their operations, he said, and consider pivoting to online or takeaway models, or even exiting markets entirely.
"Retailers will definitely need to reassess their locations too, is the high street or shopping centre really the best place for them right now?” he said. “Online sales may account for 20% of sales in total, but as technology has had to be adopted during recent measures, that will likely only rise.”
Research by Sage found the severe financial challenges are projected to continue for small and medium businesses (SMB) well into Q3 2020.
Sage’s quarterly survey of 500 SMBs revealed 61% are currently operating at a loss, and over 50% expect this to continue beyond the end of June. It reported sales at 39% of businesses have halved since the beginning of the pandemic, and most do not expect this to improve by July.
Despite the support provided by the government’s furlough scheme, 46% of businesses are considering redundancies over the next three months, Sage said.
“The outlook remains deeply concerning as we look towards Q3 and the relaxing of lockdown, with financial challenges continuing to bite for many,” said Sabby Gill, managing director of UK and Ireland at Sage.
There is also a significant and growing divide between the sectors as the crisis continues, he said. “As the retail and hospitality industries remain at a standstill, the financial fortunes of these businesses are diverging even further from those of the average SMB. They will also face a whole different set of operational challenges.”
“There is little doubt about the fall from grace of retail property companies,” said Professor Adrian Palmer of Henley Business School. “It is not just high streets that have been suffering, but the owners of the biggest out-of-town shopping centres have seen the value of their property valuations and share prices tumble.”
These trends were well-established pre-Covid-19, Professor Palmer said, as online shopping grew its share from about 7% to 17% by value of all retail expenditure between 2010 and 2019, according to the Office for National Statistics.
Intense competition between retailers put pressure on retailers’ margins, and many highly indebted retailers found themselves making Company Voluntary Arrangements (CVAs), he said. CVAs invariably include provisions for landlords to write off debt and to accept lower future rental payments.
“Covid-19 exacerbated cash-flow problems for retailers of non-essential products whose store-based sales came almost to a halt, while they still had to pay for arriving stock,” Professor Palmer said. “Consequently, the process of retailers closing stores and setting up CVAs has accelerated.”
The number of retailers deferring payment of their quarterly rent has also increased dramatically. Intu reported that it had received only 29% of the rent it was due in March 2020, down from 77% for the same period last year. It is reported that some retail property companies are now in breach of their banking covenants.
While physical retail store space has been languishing, however, warehouses have relatively been hot property, he said. The growing trend towards online retailing has “increased demand for warehouse space”, especially to organise final distribution to the customer.
“Retail property used to be considered a safe bet for investment, and many pension funds will be hit hard by the declining value and liquidity of property funds which include retail in their portfolio,” he said. “Warehouses may be dull, with none of the excitement of Mayfair on the Monopoly board, but may go just a little way to offset the current woes of the retail property sector.”