What is going to happen to our High Streets?

The British High Street has always been susceptible to the vagaries of the economic cycle. It has survived wars, recessions and the rise of out-of-town retail parks. But the internet may pose one threat too many. Can our High Streets survive — and what will they have to become to do so?

Graham Waddell, Investment Director, Rathbones, Glasgow (Graham recently joined us with Speirs & Jeffrey)

The Centre for Retail Research (CRR) keeps a running tally of the major retailers entering some form of insolvency in Britain each year. It makes grim reading. Last year 43 shut up shop, including famous names like HMV, Greenwoods, Evans Cycles, House of Fraser, Poundworld, Henri Lloyd, Maplin and Toys ‘R’ Us. Some, like House of Fraser, were resurrected — but only following deep cuts.

Reasons consumers shop online

This chain-store massacre resulted in the loss of 2,594 shops and over 46,000 jobs, but the true picture is much bloodier. Other big names have had to take drastic steps to survive. Carpetright announced it was to close 92 of its 400 branches, Mothercare 50 of 137, Debenhams 50 and New Look 85. Smaller businesses are closing each day without media ceremony. The CRR estimates that overall nearly one in five stores has closed on our High Streets since 2012.

A number of factors are held to blame, including weak consumer demand since the 2008/2009 crisis, intensive price competition and our growing preference to spend on ‘experiences’ — like travel and eating out — rather than ‘things’. But the biggest threat is the internet. Latest figures from the Office for National Statistics show that online spending now represents around 18% of all retail in the UK — the equivalent of £61.4 billion. It is almost double what it was just five years ago and is expected to rise to nearly 23% by 2022.

Surveys suggest that lots of factors drive us online. The ability to shop at any time from your sofa, the ability to compare prices and products, the ability to see reviews from fellow shoppers — all make shopping on the internet a much better experience for many. And then, of course, there is price.

Level taxation

One of the biggest advantages e-tailers have over bricks-and-mortar stores is lower costs — lower rents and lower rates mean they can charge lower prices. Inevitably, the starting point for many when seeking to rescue what is left of the High Street is to find a way to level the playing field. For most this means addressing the archaic model of business rates — a pre-internet property-based tax that raises £29 billion a year, an undue proportion of which is squeezed out of beleaguered retailers. The retail sector accounts for 5% of gross domestic product yet pays 25% of business rates.

The Parliamentary Housing, Communities and Local Government Committee recently published a report, High Streets and Town Centres in 2030. It found that Amazon UK’s business rates amounted to just 0.7% of its UK turnover, while High Street retailers were paying up to 6.5%. It welcomed the new 2% digital services tax that large online businesses will start paying from next April, but it warned that this does not go far enough in addressing the tax imbalance between online and High Street retailers.

Mike Ashley, the pugnacious chief executive of the Sports Direct Group, was one of those called to give evidence to the inquiry. He told the Committee: “The vast majority of the mainstream High Street has already died... It’s in the bottom of the swimming pool — dead… [The rest] is flat-lining. The only thing you can do is give it a massive electric shock.”

His cure was a 20:20 internet sales tax for businesses — a 20% tax on all companies that make more than 20% of their revenue from the internet. This would affect not just companies like Amazon but also many High Street stores, including his own. He said it would incentivise retailers to keep 80% of revenues going through the High Street, stalling store closures and encouraging cross-subsidisation and click-and-collect. In return, councils would need to offer free parking for shoppers. He complained: “You still get some towns that charge for parking. Therefore, you have negated the whole free click-and-collect voucher, because they have to pay it all away on parking fees.”

Ashley said that such a tax would have to be accompanied by business rate reductions — in return for retailers committing to invest in High Street stores — and cuts in rents. The Committee failed to back his idea but urged the government to assess other online sales tax ideas, including “green taxes” on deliveries and packaging.

The Committee also recommended that any such taxes should be used to subsidise a cut in business rates for retailers and to add to the government’s £675 million Future High Streets Fund — a pot of money that towns can bid for to help fund town-centre regeneration projects.

But a healthy High Street may need more than a level playing field for taxing retailers. Think-tank Centre for Cities says too much attention has been paid to the plight of shops and not enough to the wider economic factors that contribute towards a healthy city centre.

Paul Swinney, an economist at the Centre, says: “Our research shows that sluggish retail is the symptom of an underperforming city centre, not the cause of it. If a city centre lacks jobs, residents and leisure amenities, which are the primary functions of city centres, then this will shrink the size of the market that a secondary activity such as retail can serve.”

Swinney points to contradictory local government strategies that have incentivised the building of business parks and Enterprise Zones on the outskirts of communities rather than at their heart, taking jobs out of city centres. These are often poorly served by public transport and in retail wildernesses that offer little to workers.

Centre for Cities argues that there is a clear correlation between city and town centres that have a strong nine-to-five working week population and those with thriving shops, restaurants and cafes. These workers provide custom from Monday to Friday; shoppers on Saturday and Sunday.

Repurposing

Others are increasingly recognising that the challenge is no longer merely to keep alive shops but to keep alive town centres themselves. This means finding positive uses for some of Britain’s 50,000 empty shops.

Creating high-quality office space is one solution. Many favour another — turning superfluous retail space into housing. Mike Ashley had suggested converting the top floors of Birmingham's 500,000 sq ft House of Fraser store into flats. Others see opportunities to create social housing and specialist residential facilities for an ageing population. Each would instantly generate an increased footfall.

Phil Prentice, chief officer of Scotland’s Towns Partnership, which supports town-centre regeneration, wants communities to think creatively as well. In Edinburgh, Diageo is blending the retail and entertainment experience by  opening a Johnnie Walker visitor centre on Princes Street. That may not work generally but Prentice asks: “What about libraries, galleries, art centres, health centres, nurseries, crèche facilities, playzones, business incubators, hatcheries and co-working spaces and gyms? Let’s bring in farmers’ markets, events and activities, better food-and-drink offerings, concerts, boutique cinema and performance.”

Prentice also wants a blurring of the lines between what has been described as ‘bricks and clicks’. He wants High Street stores to have a strong web presence and more customer-friendly opening hours, so encouraging click-and-collect. And he wants to encourage the emerging trend of digital traders developing a showroom presence on the High Street.

That is already beginning to happen — popular online retailer Boden, after nearly 30 years of trading online, now has three physical shops. Meanwhile Ikea has just launched small stores on Tottenham Court Road and in Bromley, where shoppers can order home delivery on items and plan kitchen and bathroom refits. Prentice and other specialists argue that each town or city has to develop a solution that taps into its distinct heritage and that is appropriate for its community. One example is Motherwell. Better partnerships between the council, transport providers, community groups and businesses and the hosting of community events and festivals have helped create a cleaner, greener and more attractive, family-friendly environment. This in turn has enabled the town to attract new tenants, including Costa, PureGym and Warren James. Footfall has increased, while vacancies have been slashed.

Stockton-on-Tees is another role model for communities that have managed to reverse the trend of High Street decline. Its award-winning £38 million regeneration project included the creation of an attractive water feature and open-air theatre space in the centre of town. This has allowed the town to host specialist markets and cultural activities, including a cycling festival, street theatre and fireworks, and has put the centre at the heart of the community.

Cathy Hart, a senior lecturer in retailing at Loughborough University School of Business and Economics, says: “The future doesn’t have to be one of dereliction and decay. There’s no single answer to the High Street problem, but fundamental to any approach is ensuring that people enjoy the town-centre experience and have a reason to revisit, whether for shopping, social or experiential purposes. People still like the human interaction of shopping with family and friends and communicating with service staff. They still want to see and feel what they’re buying, and they want choice. Town-centre management will have to work hard to retain big-name ‘anchor’ stores but also to ensure there’s a diversity of shops on the High Street. Centres need to embrace and integrate digital technology, offering free wi-fi and dedicated apps to ensure that the internet supports rather than supplants the town-centre experience.

“A healthy community needs a healthy hub. By putting homes, work and healthcare facilities in centres you immediately create an ecosystem that can sustain more shops, as well as cafes, cinemas and leisure facilities. By investing in good transport, access and a welcoming environment you make town and city centres places we want to congregate in. By resolving the business rates issue and creating more flexible retail spaces you nurture independent businesses. This becomes a virtuous circle.”

High Streets and Town Centres in 2030 reached a similar conclusion. Its authors said: “We are convinced that High Streets and town centres will survive — and thrive — in 2030 if they adapt, becoming activity-based community gathering places where retail is a smaller part of a wider range of uses and activities. Green space, leisure, arts and culture and health and social care services must combine with housing to create a space that is the ‘intersection of human life and activity’, based primarily on social interactions rather than financial transactions.”

But the report also issued a bleak warning that many town centres could die completely, fracturing the communities on which they depend. The task of revitalising town centres requires coordinated action between central and local government, retailers, landlords and local communities. And it needs it soon.

If the High Street is to survive it needs to attract the millennial generation. Money blogger Bronni Hughes offers suggestions for change.

The High Street is no longer the cheapest or most convenient place to shop and the selection of goods is almost guaranteed to be wider on the internet. But online shopping has its pitfalls — you have to wait for delivery, you cannot see the item before you buy and returns can be awkward to post.

Connect online: Retailers could make more effort to connect their online presence with their bricks-and-mortar shops to offer the best of both worlds. Allow us to check in-store stock levels easily online, encourage click-and-collectors to unpack and try their order out and return items that are unsuitable while in the building.

Improve your hours: Commutes are getting longer and traditional opening hours do not work. A millennial customer might prefer shops to be open 12-8 instead of 9-5 on weekdays (and longer on Sundays too).

Stay central: Fewer young people drive nowadays, so out-of-town shopping is impractical. It is no coincidence that many stores going into administration tend to be retail park staples.

Offer something different: Shopping in-store has become less of a necessity to young people — it is something we choose to do as a social activity. There is almost too much choice online, so shops should aim for a boutique feel, with new merchandise that is not something you could buy in a hundred other places. Hold less stock and instead refresh shelves with exciting new items more frequently, to make talking points for people shopping with their friends and to encourage them to return to see what is new.

Focus on experience: Millennials have become known for saving up for experiences rather than things, and retailers should take note. You cannot buy anything in Made.com’s central London showroom — it is there simply to let you look. There are no pushy salespeople and it is a pleasant place to browse, sit on a sofa and chat — the antithesis of a cluttered old-fashioned High Street shop with harsh fluorescent lighting.

Be social: When your shop and stock look good, share it. Being beautiful on Instagram works for cafes, and retailers should not ignore it — more than half of millennials say their purchases are influenced by social media.

Investment impact

Retailer share prices reflect the struggles facing the sector, but this is not the only area of the market to be challenged by the digital shopping revolution. As retailers have shut up shop, property owners have found themselves with empty properties they are struggling to fill. Many are coming under intense pressure from remaining tenants to reduce rents and offer rent holidays.

The share prices of real estate investment trusts (REITs) with large exposure to retail have suffered heavily in the past year. Some are trading at discounts — in other words, the total share value of the trusts is lower than the actual value of the properties they hold. This may make them look like bargains, but they can fall further.

In contrast, property trusts investing in the warehouses and distribution centres upon which online retailers depend have seen strong growth and have been among the best performers in the sector. This market may be becoming saturated, though, and values may be peaking.

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