With inflation easing, business rates rebased and retailers looking ahead with restored confidence in UK plc, Neil Hockin of Lunson Mitchenall asks what UK retail could look like come Summer 2023.
Recent economic forecasts paint a more optimistic picture for Q3 and Q4 than they did only a few months ago. Forward looking interest rate curves suggest they have virtually peaked and are projected to fall by Q4. For consumers fatigued from months of caution and cutting back, this news should come as a relief; there is now good reason to expect the paring back of spending will wane. This all compounds to mean there’s reason to be optimistic about retail again. That said, following a string of closures and with several underperforming retailers, what will high streets look like come summer and beyond?
To gauge what the makeup of our high streets might be, we can look to those that have weathered the storm of recent years. Next is the bell weather of the retail market and, with profits up by 5.7% to £870m, they are a massive UK success story. Next entered the online retail world with a head start; back in the ‘pre-internet’ days, the Next Directory, a 350 page catalogue costing £5 a copy, that sat on most middle-class coffee tables. Lord Wolfson’s new 6-point plan includes a “total platform” using a best-in-class logistics and site portfolio to maximise sales across its increasingly broad, but none the less complementary, range of brands. A 24% growth in city centre store turnovers (compared to declines of -7% and -3% for regional shopping centres and retail parks respectively) demonstrate that consumers still enjoy a day out if the offer is compelling.
Another market-leading example is Zara (and the Inditex group more widely). Having overtaken H&M as the world’s largest retailer, Inditex has posted some staggering statistics; net profits were up 27 per cent to €4.1 billion in the year to January 31 and revenue rose by 18 per cent to €32.6 billion against the previous 12-month period. The Inditex group sets the bar for what other retailers should strive to achieve – in terms of performance but also how to retail. Zara’s range is always on point and store fit outs are innovative and appeal to its customer base, while their unique business model undeniably slick.
We’ve now started to see other European operators, like Mango, undertake expansion strategies in the UK. With an increasingly steady economic outlook and well-established legal framework, the UK market provides a stable alternative for retailers pulling out of Eastern Europe and countries tied to the region economically, such as Germany, following the outbreak of war in Ukraine.
Plenty of new occupiers will be taking up space formerly occupied by traditional retailers that have floundered. These range from international names such as Nike, Mango and Under Armour to leisure boxes by Ninja Warrior, Gravity and Level X. It’s no secret that before the pandemic, retail pitches were struggling, but with confidence rebounding and a diverse and revitalised occupier mix, there are blue skies ahead for bricks and mortar.
While the novelty of new brands will draw footfall initially, a longer-term strategy is vital to maintain interest. Newly fitted out stores, like H&M’s London flagship, integrate omnichannel strategies and innovative technology designed to draw people in and generate spend. UNIQLO has always been at the forefront and its 5,000 square metre Tokyo flagship offers customers multilingual customer support, in-store tax-free service, MY UNIQLO (allowing customers to create original UNIQLO products with custom design) and AIRism, which displays the technology and materials behind products.
Glossier is another brand with an innovative approach that spotlights bestselling products, offers makeup and skincare tutorials, “unboxings”, colour swatching and creates in-depth behind-the-scenes videos, allowing employees to become advocates and further reinforce brand values.
Immersive shopping experiences and integrated technology chime particularly well with Gen Z. While it would be easy to assume digital natives prefer clicks to bricks, in fact, when you look at the numbers, the reverse is true. A major pan-European research project by The Grocer revealed that Gen Z enjoys in-store shopping more than any other age group and is most likely to look for in-store experiences that merge with a store’s online presence.
While attracting members of Gen Z is great for now, it also helps future proof our high streets. As their spending power grows and they enter the workforce, creative and adaptive retail spaces will become increasingly important to the overall health of retail in the UK. Gen Z does not just look for a shopping experience, the offer needs to be broader, more exciting and ever changing. The recent Charity Supermarket at Brent Cross is a great example. The brainchild of Wayne Hemmingway, this operation appeals to the social needs of a socially savvy retail generation who understand the need to reuse and upcycle. The store hits corporate landlord’s ESG agendas, drives footfall, has enormous social media benefits and even offers rates relief – what’s not to like!
While the high street’s fortunes are looking up and retail parks remain buoyant, the shopping centre market is arguably most affected by ongoing headwinds. Remaining competitive, appealing to new customers and reconfiguring buildings that were designed specifically for retail to alternative uses can be a challenge. Viability is often difficult to prove in the context of the commercial terms occupiers are seeking. Occupational demand is still polarised towards regional venues. However, all is not lost, and the recent openings of Edinburgh St James and The Battersea Power Station set a new benchmark of mixed-use development which others will follow.
We also seeing renewed investor interest for good assets at the right price, particularly at the lower end of pricing, and a deeper senior debt market would widen the pool of buyers for the larger lot sizes. We are witnessing greater tenant traction with occupancy rates increasing and our clients are adapting well to deals that historically would have been difficult to sanction. Even the total occupancy deals we have agreed are becoming more accretive as rates and energy costs reduce to help drive NOI shift which is now a key metric.
A lot of retail, leisure and F&B is about confidence and strong results from Zara, Next, JD Sports and H&M will help. Hopefully a full year, not beset with major political and Covid-related events will see operators reporting sales and profit growth. With pricing at current levels, the sector looks more attractive, and this should encourage UK and international investors and banks to find compelling reasons to invest. The retail and leisure sectors are evolving quicker than ever; shopping centres and high streets need to adapt faster and provide a compelling reason for consumers to visit town and city centres. Each destination needs tailored curation, long term investment and a joined-up approach in order to keep up.