The future of the high street

There’s been a stream of news over the last month suggesting that the high street is in trouble. We think that such comments may be in part misguided, but we think they are worth looking at more closely.

  • An organisation called “Save the High Street” wants to help small retailers with technology tools and skills to improve their online offer.

  • Vacancy rates have risen again.

  • The BRC reported a fall in retail employment.

  • Oxford Street plans to be completely pedestrianised by 2020.

  • And in the last few months we have seen some significant failures – Austin Reed, Bhs and, less significant, but quite high profile, My Local.

A little perspective

Any discussion about the high street requires a step back to put the major underlying trends in perspective, because we think there is over-reaction to some elements of what is going on while other major factors are being overlooked.

Short term – a poor year

There’s no doubt that retail sales have been weak so far this year. We think there are two main reasons for that – unseasonal weather and low rates of inflation. We discuss this in the Retail Sales section of this report, but it does not seem to us that there has been a significant underlying slowdown in demand.

Early indications after the referendum vote are that there has been no significant impact on retail sales, though if the housing market has slowed then that will have a knock-on impact on household goods sectors.

Online

Online is important and it is growing, but it is easy to get it out of perspective. Sales by pureplayers account for just under half of all online sales and took just over 6% of all retail sales in 2015. That is not much more than home shopping used to take in the pre-internet era. The sales mix has changed radically, with electricals sales moving online and clothing being more store-focussed.

The other half of online sales are through the websites of store-based retailers and these rely on the support of the store presence. For a store-based retailer, online has become an integral part of the retail proposition.

This is where the “Save the High Street” initiative comes into play. Store-based retailers need an online proposition to maximise their potential and trading online requires different skills. But that is where the marketplace activities of Amazon and eBay come into play. They provide a substantial support to small retailers. Do they really need more support? It is not clear and trading online can be a substantial addition to the cost base of any retailer.

Structural changes

There is a major structural change taking place – as highlighted in Mintel Trend, Rebirth of Cities. There has bene a shift in population back into inner cities, much of it in rented accommodation. The proportion of households that rent their home has risen by seven percentage points in the last ten years. That is exceptionally fast for what would normally be a very slow moving indicator.

People who rent their homes in inner cities have a different lifestyle – as Mintel’s consumer research shows, they eat out more, they use takeaways more and they shop more on an as-needs basis. That is one of the main reasons behind the decline of the food superstores and the growth of both food and non-food discounters.

Discounters

Aldi and Lidl have led the way in transforming the image of discounters. They have widened their range, improved the fresh and premium offer and in doing so have substantially increased their appeal. But they are able to maintain their price competitive offer because they have not increased their cost base too much. The fundamental concept of a limited range, focussed buying and an ultra low cost base is still very much in place. Non-food retailers, such as B&M and Home Bargains, have applied the concept to niche non-food areas and have been very successful in doing so (see our forthcoming report Food and Non-food Discounters – UK, October 2016).

It is true that Aldi and Lidl have taken share from the food superstores, but they are also major high street, or edge of high street players. Along with the non-food discounters they have changed the nature of high street shopping. They have brought a price competitive offer back on to the high street and in doing so have taken the initiative away from the food superstores.

Not all good news

So if all these factors are working in favour of the high street – how is it that vacancy rates have been rising and employment falling?

There are two factors here. The BRC highlights the problems of the food retailers in the fall in employment levels, though we suspect that some retailers may have cut too far.

Vacancy rates need to be treated with some caution. High streets are constantly changing – some are contracting, some expanding. Some tertiary sites may never attract retail again, but they count as empty until the site can be redeveloped. The failure of retailers, such as Austin Reed, Bhs and MyLocal, will result in empty units that are in attractive locations so likely to be re-let fairly soon.

Free market economics in action

In one sense, the failure of Bhs shows that the high street is working well. No-one owes a retailer business, it is up to the retailer to earn it and Bhs and some others are just not doing so. Their departure makes room for new ideas and formats and the high street will be a healthier place for it. The biggest beneficiaries of the departure of Woolworths were new retailers such as B&M and Poundland, which are doing what Woolworths should have been doing, providing low-priced merchandise offering great value for money, and have been highly successful, driving far higher sales out of the space that Woolworths occupied.

Where next for high streets?

Successful high streets respond to the needs of consumers. For those benefiting from the shift in population to rented accommodation, that means combining leisure with retailing and making them a focus for leisure activities as well as being the place to buy goods.

Other high streets should take note of these trends as well. Consumers want to spend more on leisure – that is one of the key findings of Mintel’s tracker research. High streets need to invest to make sure that they can take their share of that leisure spending.

That’s where the pedestrianisation of Oxford Street comes in. The country’s leading shopping centre has been slow to move in that direction (for understandable reasons) but it will at least be leading the way. Other high streets should take note.

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