While the impact of a loss of footfall and sales on bricks-and-mortar businesses was already apparent – with vacancy rates in UK towns and cities up to 10.6 per cent last year from 10 per cent in 2019 – the 1.9% drop in the volume of retail sales in 2020, the largest year-on-year fall since records began in 1997, forced many retailers to make some difficult decisions.
Although there were some success stories, as the UK’s retail crisis deepened shop vacancy rates jumped to 13.7% during the last quarter of 2020. In a period blighted with major high street casualties, from the likes of Topman and Burton sliding into administration, to the demise of Debenhams, brands have had to explore the breadth of options available to manage their store portfolios.
Although there are transformational considerations and options for retailers – as we outlined in our first article in January – for some, the pressure of the global health crisis, the unpredictability of buyer behaviours and an inability to get ahead of the shift online means store closures are one of the inevitable outcomes.
When the decision has been made to undertake closures, having stakeholder relationships in place will play a significant part in ensuring a smooth and cost-effective transition. It is important that brands liaise with the administrator, landlord and the retailer in such circumstances.
For those businesses that simply cannot afford to continue trading due to debt and/or the inability to generate or borrow more cash quickly enough, entering administration may be the only option. As part of the process, it is essential that brands engage with the administrator to understand the value of the business. By doing so brands can leverage their assets, inventory and business to repay creditors and try to safeguard the continuity of the business. There will also need to be valuations prepared for the purposes of effecting a turnaround or going concern sale.
Whether this is through a restructure or sale of part of the business, partial store closures or even sales or stock clearances, brands can effectively and efficiently consider options keep the business a viable option. While, by understanding the realisable value of their inventory, retailers can have valuations prepared for the purposes of effecting a turnaround or going concern sale.
Retailers may need to engage their administrators to consider the in-store devices, information systems, equipment, decor and fittings that are licensed (or otherwise made available) to the retailer, and whether they are capable of being withdrawn in the event of financial distress.
Should insolvency proceedings commence, it is vital to deliberate whether systems such as payment services devices, card readers or electronic points of sale solutions – often secured through ongoing contracts with suppliers – will have a detrimental impact on the continuation of the business.
Amid one of the largest global health crises of the 21st century, it’s likely that the relationship between landlords and their tenants will have to change into more of a partnership as landlords find they need to work harder to keep their buildings occupied. The publication of a Code of Practice for commercial landlords and tenants, for instance – a code designed to encourage both parties to act ‘reasonably and responsibly’ – encourages landlords to provide support to businesses if they are able to do so to protect viable businesses.
A close relationship and continuing engagement can help during any transitional period. Whether planning store closures or exploring alternative options such as multi-occupancy or multi-purpose facilities, the period leading up to the closure and the closure itself are two critical times during which the landlord should be brought into the conversation.
Should an agreement be reached that a store, or stores, will close, retail brands will need to engage in discussions about how these will transition back to the landlord and in what state. In these circumstances, the original tenancy is often used as a guide.
An experienced landlord can assist not just in store closure/s, but with the wider scope of works. Whether that is rent reductions, either proactively or as part of a CVA (company voluntary agreement), terminating leases, or even maximising the realisable assets in a physical store ready to transform the interior ready for its next purpose – be that another retail store, an office, community building or even conversion to residential property.
During a particularly tempestuous time for retailers, store closures or administration, property portfolio rationalisation and store transformation are just some of the possible options that brands may need to consider.
For those agile enough to respond to shifting consumer behaviours and effectively redefine the experience and omnichannel service they deliver for shoppers, there are significant opportunities to remain profitable as the high street recovers.
On a smaller scale this may mean integrating cafes or restaurants into retail stores for a broader shopping experience, but we are also beginning to see more retailers selling parts of their store portfolios in order to create more flexible commercial spaces. For instance, John Lewis was recently given the green light to convert almost half of its London flagship store on Oxford Street into office space, as it scurries to return the business to profitability.
Of course, achieving such a level of transformation is not always feasible and often more undesirable options must be considered. Where store closure or repurposing is being explored, there are numerous opportunities available and it is often imperative that early action is taken should it seem unlikely that a business will be sustainable in the future.
Closing part of a store portfolio and transferring stock to the remining stores as part of a rescue strategy is one of the most common options available to retailers. While selling part of all of the business as a going concern, or placing the business into insolvency as part of a closure strategy may need to be contemplated should circumstances dictate.
The future of retail
The issue of vacant stores, particularly in the high street, is a subject of much discussion with varying opinions on what would be the most sustainable solution. From conversion to residential through to creating mixed use community buildings, there are many views on the best way forward.
In the short-term however, with the economy struggling in the wake of the Covid-19 pandemic, it’s likely that many empty stores will, for now, remain empty.
Regardless of the option taken, having the backing of a knowledgeable and experienced expert in store closures, such as Sigma, can provide a smooth, professional and cost-effective support on store estate re-balances.
For more information, visit: www.sigmagrp.co.uk