Opportunity knocks

With the retail industry and the general public both fascinated by the future of physical retail and what it means for our town and city centres, there are a wide range of potential metrics being produced, assessed and seized upon as indicators of the future.

One element in providing a robust assessment of the future health of and future demand for physical space is to understand who can make a profit from physical space, given both the various business models employed by occupiers and local supply and demand dynamics. In carrying out such analysis, an understanding of the factors shaping current physical provision are made clear and an indication of who can and can't make town centre locations work can be gleaned.

Volume and margin
Beyond the sea of independents, services, charity shops and vacant units that currently dominate most town centres, provision is largely focussed around two types of provider: those providing high volumes of typically lower priced goods, in merchandise categories and/or at price points that have suffered less of an impact from online; secondly, those selling products at a high margin that allows for a greater degree of resilience in the face of a downturn in performance.

Examples of the former include Card Factory and Wilko, whose online sales represent a small fraction of their total sales and B&M, whose online site is non-transactional, acting only as a tool to drive in-store sales. With a ceiling price for many goods beyond which a consumer will not go, these value-led propositions demand comparatively limited spend on store fit-out, promotion and staffing costs, and aim to achieve profitability of gross margins between 30-40% on typically low priced items.

With such a tight operating model, there is little opportunity for the added back of house and logistical costs that a fully integrated omni-channel proposition requires which suggests physical stores will remain a key channel for such operators, with locations dictated by the availability of audience and footfall. The store size and range of goods provided by occupiers such as B&M and Wilko typically generate strong footfall themselves; for smaller occupiers, it will be important to leverage the footfall generated by others.

Examples of the latter, who generate resilience based on improved margin, include Goldsmiths, Lush and Pandora. Online sales for these occupiers are typically less than 10%. In addition to being the dominant sales channel, stores play an important role in creating a brand and experience for the consumer to engage with, allowing for increased margin to be built. Due to the added value this interaction generates, stores remain a key part of these occupier's approach. With a gross margin of c.65%+, these occupiers are better placed to withstand the impact of a short-term downturn in footfall.

Future viability
In the short-term, furlough and business rates holidays are propping up both business models but, as lockdown and support measures ease, the surplus of retail space presents opportunities. The roll out of Flannels stores, in tandem with Sports Direct, is an intriguing prospect given the disparity in the business model of each brand (margin vs. value respectively). However, with cheap space available (particularly large spaces that are expensive to sub-divide) and a healthy gross margin, Flannels require only a comparatively small market of key customers to generate a healthy return, suggesting strong opportunities for the brand.

With online share of sales expected to continue to grow across all merchandise categories and town centres so far unable to reverse a trend of declining footfall and audience share, the value proposition that currently anchors so many town centres may soon prove challenged, particularly if out of town parks continue to provide an attractive alternative via establishment of a more robust, high spending audience.

The availability of cheap space town centre space should encourage others to think about utilising space for brand building and margin creation, something that is increasingly difficult to do in the competitive online space. Such strategies will only prove appealing to occupiers if town centres can re-establish their relevance and create an audience brands wish to engage with.


Andrew McVicker