Retail: fine margins
Rent relief
Return to sender
Not a week goes by where a new headline doesn’t question what’s next for the ‘high street’. In an increasingly digital retail landscape – and faced with soaring costs in areas like energy – many brands have taken steps to consolidate or adapt their bricks and mortar presence. Last year, nearly 50 stores closed every day 1 . There will be more consolidation of physical premises – including retailers’ offices – ahead. From our research, one in six of the brands we spoke to plan to close stores or offices (both 15%) in the next six months. But the high street hasn’t been entirely cut from retailers’ plans. For many brands, the focus will be on ensuring that their bricks and mortar estate is aligned with their long-term strategy, and as cost-effective as possible. Managing rents will be a critical part of this. Just over a fifth (21%) of retailers we spoke to told us they had already renegotiated rents with landlords in a move to improve their cash position, while almost the same proportion (20%) plan to do the same in the next six months. Half (49%) want to switch some or all agreements to fixed rents, while a similar number (47%) favour turnover-based rents – highlighting divergence in the market. A third (33%) will be asking landlords to agree to a rental holiday or defer rental payments. On the ground, we’re seeing some tenants resist turnover- based rents as they seek to protect detailed financial information as well as avoid it costing them more in the long run. There’s also an administrative burden that landlords would rather avoid. Indeed, many landlords will have bundled their portfolio and used it as a securitised loan package, for example, where they have a set yield to pay. Having a fixed income is therefore more attractive to them than a variable one. While we can see the appeal of turnover rents, it’s for these reasons that we’d expect straight discounts to be a more common outcome in rent negotiations during 2023. For any retailer looking to negotiate rents, there are some essential principles to keep in mind. When it comes to negotiation, being open and transparent is key. Tenants’ requests for concessions need to be realistic, grounded in facts and not threaten the landlord’s solvency. It is important for tenants to give landlords options where possible. Offering a menu of acceptable potential solutions such as downsizing or extended leases rather than trying to second-guess the landlords’ intentions is fertile ground for sustainable compromises. Having a robust cashflow forecast and detailed analysis of financials is also key. If a brand is needing to reduce rents due to financial distress, these evidence why concessions should be made by the landlord. If a new deal is being negotiated, they demonstrate that a brand can meet its commitments. We expect to see the use of Restructuring Plans in the retail space as a super-charged alternative to the well-used Company Voluntary Arrangement as retailers seek to reshape their store portfolios quickly and with more certainty.
Alongside the rise in e-commerce has come a ‘tsunami’ of returns. More than half (56%) of the retailers we surveyed said they had seen an increase in customer return volumes over the past six months. While free returns are incredibly popular with consumers, in some cases this is a service that many brands can no longer support. Shipping and processing returned items is a hugely costly process – estimated to run up a bill to the tune of £7 billion every year 2 . Around four in five (79%) of the retailers we surveyed are planning to change their approach to product returns in the next six months as brands act to try to manage and recoup this cost. How? Close to half (45%) plan to introduce customer fees for returns for the first time, or for the first time on certain products, while more than a third (36%) will hike existing fees. One in six (15%) are going to change their policy so that returns can only be made in store. The fact that we’ve seen some of the bigger players in retail withdraw or change their free returns policies has certainly made it easier for others to follow in their wake. The cost of returns has been a bugbear for retailers for some time, but no one wanted to move first as consumers were so wedded to the concept. However, it will still be a decision that brands need to consider carefully. It is still enough of a competitive advantage that some will continue to make free returns a central part of their offering for some time to come. Where relevant, brands should consider where they can direct customers into stores to make returns. This increases in- store footfall, and simultaneously unlocks cross-selling and up-selling opportunities.
Have you seen an increase in customer return volumes over the last six months?
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