A cross party group of MPs is to investigate England’s High Streets. It seems that their conclusions are established before the investigation as high streets are already described as “ailing” and the root cause of the problem is said to be “online.”

So we need to consider –

  • Are our high streets really in decline?

  • Why have we seen so many retailers with problems?

  • What is the future for online and how will the online – stores dynamic actually play out in the longer term.

Are the high streets in decline?

It’s true that vacancy rates have been edging up through 2017 (according to LDC) and one of the reasons for the rise has been the number of major retail failures over the last year, but we’ll come back to that later.

Data from the ONS shows that in recent years store based retailers have continued to see sales growth. The following data is for 2017, but it is typical. And it is worth bearing in mind that 2016 and 2017 saw an acceleration in online growth. The majority, though not all, of the non-store retailers are the internet pure players.

The non-food and food retailers shown in the chart are all store based retailers, though the sales figures include any online sales that those retailers make.

Figure 1: Major sectors growth in 2017
[graphic: image 1]
Source: Office for National Statistics/Mintel

And to put these numbers in perspective, it’s worth pointing out just how small the non-store retailers actually are. But again, some perspective is necessary. Non-store retailers had been in decline for many years before online shopping began to take off. Their low point was in 2003 when they accounted for just 4.5% of all retail sales.

These non-store retailers are almost entirely non-food retailers. Ocado (sales £1.3 billion ex VAT) is the biggest exception by far. We think that only 5% of non-store sales are by food retailers.

Figure 2: Major sectors share of all retail sales, 2017
[graphic: image 2]
Source: Office for National Statistics/Mintel

So the evidence for a decline in our high streets is far from clear cut. It is true that as one walks around there appear to be more empty units than usual, but the actual data paints a rather different picture.

But what about all these retail failures?

It is true that there has been an unprecedented number of retail failures in the last 6 months. The first major one was Toys R Us and since then we have had news of one retailer after another failing or reporting serious trouble.

First of all, not all of these retailers were high street operators. Toys R Us and Carpetright were/are out of town retailers. Maplin tended to trade from tertiary or out-of-town sites.

In some cases competition from online retailers was a significant factor, especially for the likes of Maplin because electronic goods are ideally suited to being sold online. But that is not always the case.

Toys R Us – A great success in the 1970s, but competition from the grocery superstores and from Argos had hurt and then the development of online with Amazon was the last straw.

Kleeneze – a format that was out-of-date before online retailing came along.

Warren Evans and MultiYork – furniture retailing has always seen a rapid turnover of retailers because it is so hard to develop a USP in the sector when the vast majority of items are made to order. Online was not a factor here.

Carpetright – hit by new competition which new management seems unable to counter.

Conviviality – Too many, far too large acquisitions.

Bunnings – Homebase – Not so much that the Bunnings concept was wrong, but that Homebase was neglected when the conversions started.

Discounters – Poundworld/Poundstretcher / The Original Factory Shop. None of these, we should say, have called in administrators, but all have either lost some of their supplier insurance cover or are thinking of a CVA. Again, online was not an issue here. The discounter sector is overshopped and was ripe for some rationalisation (See Food and Non-food Discounters - UK, September 2017).

Fashion – Rabbits in the headlights

The classic behaviour of a rabbit in the headlights is first stunned shock and then a lurch in what too often happens to be the wrong direction. That is why the analogy with so many fashion retailers seems right. And not just fashion retailers – the demise of Comet followed a similar pattern.

Some of the highest profile retailers with problems have been in fashion. Commentators are quick to point to the success of ASOS, boohoo and Missguided, but there is so much more to it than that. A quick look at the recent Christmas trading statements makes that clear – Seasalt, Fat Face, Quiz, Joules, Ted Baker, Superdry all reported excellent figures and they are all high street retailers. They show that store based retailers are just as capable of growing strongly as online retailers.

The trouble was that it was the biggest retailers in the sector that were underperforming – M&S, Next and Arcadia as well as major players such as New Look. None of those have actually called in administrators (or are likely to do so), though New Look has negotiated a CVA. East and Jacques Vert have both failed. East has been struggling for some time – the market for its oriental-look clothes just does not seem to have been big enough. Jacques Vert failed to respond the changing tastes of the 50-60 year old woman.

We think that the underlying problem here is the way these retailers have reacted to the online competition. Top Shop, which used to be the leading retailer in young fashion has gone risk averse. It is no longer the place to look for edgy fast fashion. The same might be said for New Look, but it has lost focus, seeking to counter competition by introducing new ranges from maternity to outsize, with the result it’s no longer clear what it stands for and customers are drifting away. M&S has also chosen the risk averse option.

The trouble is that this was completely the wrong way to go. Customers these days can and do check their mobile when out shopping. There is no need to make do with what is on offer because they can find exactly what they want online.

So we think that online fashion retailers are performing much better than they should be, mainly because of the poor response of the major high street players.

What do we mean by online?

Online sales accounted for 16.6% of all retail sales in 2017. But that’s a misleading statistic. Almost half of that (48%) was sales through the websites of store based retailers. 52% was through online pure players (ie those that don’t operate stores, such as Amazon, Very and ASOS). 8.6% is still a large proportion especially as the vast majority is through non-food retailers. But that it why we started this analysis by showing that in spite for this pure player growth, non-food store based retailers have continued to see sales growth.

Where next for online?

Online is still growing. In part that is because in Amazon we have one of the most dynamic visionary retailers of the modern era. It has young management with a clear idea of how lifestyles are changing and how customers need to be served.

It is also prepared to make mistakes. Too many retailers are so frightened of making mistakes that they are not prepared to innovate at all.

But that does not mean that online will keep growing forever, though given the performance of the high street retailers it is likely to do so for longer than it would have done had the high street competition had been stronger.

In the longer term, when we reach a state of equilibrium, the high street retailers will focus on what stores do best – great display, great service (from knowledgeable staff) and making the most of the advantage that being able to see and try on goods brings. Online retailers will offer a great breadth of range, the convenience of being able to buy when and where you want and great service, in the sense of delivery.

The point about that is that those strengths are complementary and that is why we think that the retailer that can offer both – the multi-channel retailer – will be the one that wins out in the longer term.

Two examples are worth quoting here – books and electricals.

Book shops

Books was the sector first focussed on by Amazon and its strength in the sector was reinforced through the development of the eBook (a classic example of Amazon’s ability to innovate), yet the online share of the book trade seems to have peaked. Customers are rediscovering the attractions of a book shop and they are fighting back.

Electricals

Dixons Carphone has staged an impressive comeback with great stores, great service and a format which focusses on connectivity and looks to how the electricals sector will develop. The group is performing well, but not well enough for online electricals retailers to have stopped gaining share. And we think that that is because electricals are very well suited to being sold online. They are usually sold on brand and specification and it is not so important to be able to try them out first.

And so what about the high street?

Reports of its demise are an exaggeration. It is not in such trouble as some would suggest. In fact the figures above suggest that it is not in decline at all.

But there is certainly cause for concern and the high streets of the future would benefit from some help if they are to have a strong healthy future.

High streets are changing. They are no longer places just to buy stuff. They should also become the centre for leisure activities with pubs, cafes and restaurants as well as shops, if only collection points, food shops and fast food outlets.

Unfortunately, too often they are treated as a cash cow by local authorities with high business rates and punitive car parking charges and inadequate public transport. The parliamentary commission will get plenty of representations pleading for a level playing field against online retailers.

Consumers rule

What worries us about the present enquiry is that it will set out with the wrong aim. It needs to be about how best to serve consumers and not about how to hold down online. Retailing is free market economics in action. Ultimately consumers choose where retailing is going – they shop at the outlets, physical or online, which suit them best at the time.

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