Monday 21 September 2015

UK mults maxed out on space, losing 1m sq ft, a first cut in a decade

According to Financial Mail On Sunday, this represents a 1% space reduction, a long over-due combination of close-downs and sell-offs, in response to structural changes in the market.

Eight years of falling profits and flatline sales, combined with increased online efficiencies and consumer insights, have caused major retailers to re-assess their assortments. They have realised that, whilst overlap and duplication can be tolerable sources of back margin in good times, these surpluses become liabilities in a persistent downturn…leading to major range re-sets such as Tesco’s 30% SKU cull, in turn revealing that in large stores, upwards of 20% of retail space can be surplus to requirements….

The same navel-gazing by major mults has revealed that 80% of sales are made by 20% of the range, with ‘20% of SKUs selling but one pack per week’ in some cases.

Why the hesitation in making the cuts?
‘Normal’ businesses faced with these excess space issues would quickly sell-off unprofitable stores, but UK retail is special. As you know, the price of prime retail space is driven by sales/sq. ft. but no other business (except global Apple @ £4k/sq. ft./annum) can sell £1,000/sq. ft./annum.

Moreover, by applying a 2% depreciation rate per annum to their stores, retailers are saying that their assets have a 50 year lifespan - a 50yr lock-in - all leading to the fact that any sell-off of spare space could be at a loss, or drive down property values…

Whilst in good times, assumptions of 50 years of unchanging market conditions was understandable and even re-assuring, with the benefit of 20/20 hindsight, the structural changes resulting from closer, smaller, faster and more frequent shopping can be seen as inevitable, fundamental, and permanent… (in City terms, anything longer than a year is ‘permanent’ i.e. see long term debtors in the balance sheet..).

Limited options for B&M retailers
Thus it can be seen that Bricks & Mortar retailers have limited options available in attempting to restore historic levels of profitability, making online development - a major and compelling route back to profitability for the mults - even more appealing. And besides,online, space is not an issue, a place where long tails are irrelevant, and selling 1SKU a week, even a month, is still ok…

All that matters is exceeding consumer expectations 24/7 in terms of availability, speed, accuracy and contents of the tin…

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