Sleeping with the enemy

    8 November 2014

    With its mix of charity shops, pound stores and boarded-up windows, the typical British high street could hardly look worse — or so you might imagine. Unfortunately, that just means you’re not looking hard enough. PriceWaterhouseCoopers reported last month that the rate at which shops were closing had risen by 50 per cent this year compared with 2013. Worse, the rot is spreading to the retail parks that now ring every city, with Tesco in deep trouble and other major supermarkets next in line. Napoleon famously described Britain as ‘a nation of shopkeepers’, but if the French tyrant wanted a put-down for us now, it might be ‘a nation of web-surfers and delivery men’.

    Traditional retailing is in full retreat from the same kind of structural challenges that manufacturing faced in the 1980s. It will probably suffer just as many casualties. That said, there will be survivors amid the wreckage. Some retailers have valuable real estate holdings; others work successfully with the internet; a few will branch into entertainment; others will showcase products sold elsewhere.

    Our once vibrant retail sector has hit a perfect storm that has left chains such as La Senza and Phones4U in administration. A huge chunk of sales has migrated online, especially in sectors such as books and music, but increasingly in other areas. Business rates have been pushed to extraordinarily high levels. Councils have hiked parking charges. Vast acres of retail space have been built out-of-town, creating more competition when it’s least needed. While the economy was booming and consumers were piling debt onto their store cards, none of this seemed to matter. When the borrowing stopped, and with real wages still under pressure, it’s hardly surprising retail fell into such trouble. It’s also hard to see how the sector can ever regain its once swaggering self-confidence. The internet won’t go away and councils won’t slash business rates. Even so, some retailers will still do well.

    The new breed of web-based retailers, such as AO, which sells white goods online, should continue to grow. So should discount chains such as recently floated Poundland — basically a reinvention of Woolworth’s. Elsewhere, investors need to think creatively. Many retailers are sitting on vast amounts of property that is valuable even if the shops no longer are. Tesco has started unlocking its land bank to build new homes; other supermarkets are building flats above stores. As planners allow declining retail space to be reclassified, retailers that are smart about redeveloping it could be surprisingly successful.

    Next, look at the likes of Argos, that have successfully developed click-and-collect models. Browsing online then picking purchases up at a store is surprisingly popular. Retailers that work with the web in this way will do better than those that fight it. And don’t forget companies that deliver — as we buy more online, we need companies like newly privatised Royal Mail more than ever.

    Some will reinvent themselves in other ways. My daughter recently had a great 12th birthday party at Lush, the snazzy soap retailer. Plenty of others could probably do something similar. La Senza could have done a good trade in stag nights, and Hotel Chocolat could pack in the hen parties. Shopping after all is entertainment — and that is still a big business.

    Finally, showcasing is huge. Among the most profitable stores in the world right now are Apple’s tech emporia. They exist mainly to tell the world how wonderful Apple is, even if you buy online. Lots of other primarily online companies will want to do the same thing. Even Amazon, that great destroyer of physical retailers, recently announced plans to open a shop in New York. Retailers who figure out how to sleep with the enemy to their own advantage will prosper.

    Good shopkeepers sense what customers want even before they know it themselves. The few that reinvent those skills in 21st century formats will be the ones for investors to watch.