Showing posts with label Retail space. Show all posts
Showing posts with label Retail space. Show all posts

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…