Physical store profit margins more than halve in eight years

By

Barbara Santamaria

Published
Oct 23, 2019

A new study has found that 150 of the UK’s top retailers have 20% more store space than they need, as store-based profit margins plunge on the back of growing operating costs, inflexible leases and the rise of online shopping.

In fact, store margins for the top UK retailers have dropped from 8.8% in 2009/10 to 4.1% in 2017/18, according to new data published by global professional services firm Alvarez & Marsal (A&M), in partnership with Retail Economics.

The burden of the business rates system, consecutive wage increases, and the impact of the Apprenticeship Levy have placed increased pressure on retailers’ bottom line in the past year.

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This has led to a wave of store closures, and demand for UK retail space is at its lowest since 2007. Local shopping centres and high streets are experiencing the steepest declines in footfall, while national retail chains have been most affected by the closures.

But the report says retailers focused on the value, convenience and luxury segments remain generally resilient, compared to the struggles of mid-market operators, particularly fashion brands. And while store closures culminated in a net loss of 2,481 stores in 2018, bricks-and-mortar continues to be an important component of the shopping experience.

“Most of the U.K.’s biggest retail brands are in the midst of a fight for survival. We have already seen some high-profile casualties, and many more are on life support. But reports of the ‘death of the High Street’ have been greatly exaggerated,” said Richard Fleming, Managing Director and Head of Restructuring Europe, A&M.

“We’re entering a new era of retail, presenting opportunities for forward-thinking incumbents, entrepreneurs and investors. Those that collaborate with landlords and local authorities will be the big winners going into the next business cycle. 

“This needs to involve striking the right balance between retail and leisure through strategic partnerships, nimble pop-up schemes, agreeing temporary rent cuts that allow companies to reshape their debt and operational structure, or adopting turnover-based rents where retailers and landlords stand or fall together.”

NOT DEAD YET

Despite the challenges in the sector, UK retailers are being urged to continue to invest in their in-store shopping experience, as bricks-and-mortar shops are expected to account for 65% of retail sales over the next five years.

And while the rise of online shopping has threatened the future of in-store shopping, the study found that 25% of Millennials and Gen Z continue to visit a flagship shopping destination at least once a week - more than their older counterparts, with 45-54-year-olds saying they visit on average just once every six months.

But if they are to survive, stores must transition towards a new experience-led model, where consumes can be entertained and educations through experiential formats. Indeed, Gen Z and Millennials are twice as likely to note that they spent less on retail products and more on experiences (e.g. holidays and eating out) over the last 12 months than those in their 50s.

Fleming concluded: “Retailers now need to assess the value and purpose of physical stores as a media channel, not just a profit centre. This involves taking a more data-driven approach, closely associating store performance with ‘engagement’ and ‘impressions’ that enhance brand favourability and drive sales across the entire customer journey.”