The retail occupier market was already experiencing seismic structural shifts, with evolving consumer expectations and spending patterns shifting demand away from traditional retailers, the rise of online shopping changing the “role of the store” and supply chain, creating an oversupply and mismatch of retail space.
Early social-distancing measures for COVID-19 created a dislocation of “normal” consumption patterns, putting retail property at the sharp end of the immediate stresses and strains. While some retailers opted for voluntary shut down (Apple, New Look, H&M, Zara etc) the Government announcement that all non-essential retail is now closed, brings the impact in line across the industry.
The long-term trend to increasing expenditure on leisure and experiences has seen a huge growth in the number and diversity of leisure and food and beverage (F&B) operators. Whilst many commentators had already speculated that we had seen ‘peak F&B’, growth was still strong for uniquely differentiated offers or for those with strong brand loyalty.
Looking beyond the current period, a reversion to long-term trend of growth is likely as with the removal of social distancing people actively seek to reconnect with friends and family.
For retailers of fashion, homewares and general merchandise. This period will likely be the “straw that breaks the back” of those who had not adapted to the structural shifts. Whilst those with an effective online channel and a flexible cost base are more likely to weather the impact.
To many occupiers, the recent Government announcement that landlords cannot evict anyone within the next three months, will come as a welcome relief. For landlords, this leaves the question of how to manage leases in the interim, and they are taking a variety of approaches dependent on their retail asset, who their tenants are, and their own financial requirements.
One area of resilience will be the grocery and pharmacy operators, but these companies are experiencing a new strain on operations. Supply chains are built on a predictable product flow from manufacturers, through the logistics infrastructure, and into the stores or online channel, often operating “just in time” to save working capital of inventories.
Massive spikes in demand are not in supply forecast models, nor are workforce planning models set for such large replenishment requirements. The grocery retailers are all improvising and adapting normal operations with additional capacity for online orders, and notably, reducing the range of products they supply.
These measures, plus the newly granted ability to cooperate beyond normal competition rules, will hopefully ease supply chain challenges quickly.
How this plays out longer term is uncertain: high delivery fees and limited delivery windows mean online grocery penetration has languished at c.7% compared with c.40% experienced in other retail categories. The supermarket “weekly shop” has been in decline for some time, the rise of convenience formats, food to go, and food delivery services offering new ways of buying food; the COVID-19 environment may result in a permanent shift in channel shopping patterns.
The discounters have already convinced many consumers they can do a “weekly shop” in a store with c.4,000 product lines, as opposed to a traditional supermarket with closer to 30,000.
The standard argument is that this availability of “choice” has been a key supermarket differentiator but as we move (under duress) from a world of 27 types and sizes of pasta, to only a fraction of that to maintain supply chains and availability. In other retail categories, online has provided the “choice” proposition, and the in-store is focused on core product lines and service; could we be at the start of a similar shift in grocery…?
More important, is that grocery operators are providing an essential day-to-day service in our local communities to ensuring that we have affordable and available food.
As the panic buying subsides as we all adapt to this new environment, the grocers will respond effectively and efficiently – they are remarkable feats of supply chain engineering which are just needing a short period of adjustment. In the meantime, and particularly for the most vulnerable in society, I hope we can limit our self-oriented stock-piling, because if we return to more ‘normal’ purchasing behaviour, the grocers will be able to adjust more quickly and keep our shelves full to the benefit of everyone.
The likely impact of all this on lease terms and structures between landlord and occupier is not yet clear. The government has announced direct measures including business rates exemptions, wage support and VAT relief amongst the broader package of support available, and I expect that these measures will be kept under review to ensure that otherwise healthy retail businesses survive the pandemic. In the short term, individual arrangements between landlords and occupiers will require negotiation to find a financial compromise whilst premises are closed. I am encouraged that one of our collective focuses as a society is now on looking after the c.3 million retail employees who may be unable to work during this difficult period.