The dangers of downsizing for retailers

Written By:

Stephen Springham, Knight Frank

26 Jan 2018

4 minutes to read

Categories: Retail UK

• Dixons Carphone reported a 4% increase in year-on-year revenue for the 10 weeks ended 6 Jan 2018. Like-for-like revenues in the UK & Ireland were up 3%, driven by an 8% increase in mobile sales, benefiting from the iPhone X and new propositions. However, the negative effects of Black Friday (demand spike in November, slow December) were definitely reflected in the results, with Christmas promotions not living up to either Black Friday or last year. 
• On par figures from WH Smith. Group like-for-like sales fell 1% in the 20 weeks ended 20 Jan 2018. Total sales were flat year-on-year, with High Street sales down 5% (-4% like-for-like). Gross margin rose year-on-year, although slightly less than anticipated, in part reflecting lower sales of high margin spoof humour books compared to the same period last year. The Travel business, which makes up almost two-thirds of the company’s annual profit, saw total sales increase by 7% (+3% like-for-like).  
• Strong figures from some of the more niche retail operators. Pets at Home reported revenue of £223.3m for the 12 weeks ended 5 Jan 2018, with rising sales across all categories. On a like-for-like basis, group revenue rose 7.2%, boosted by merchandise sales (+6.8%), both instore and online, and services (10.1%), reflecting strong growth in specialist referral vet services. Hotel Chocolat announced a 15% increase in sales over the 13 weeks ended 31 December 2017. A total of 10 new branches were opened in the UK, expanding the network beyond 100.

Stephen Springham, Head of Retail Research:

As the Christmas trading updates slow to a trickle, it’s a good time to revert to the one that most caught my eye – that of Mothercare. Mothercare clearly fell into the ‘loser’ camp over Christmas, but the more telling detail in its trading statement was criminally overlooked.

Mothercare’s strategic direction of travel in the UK is well-documented – it is retrenching its physical presence in favour of building its online business. Many commentators applaud this strategy and suggest that it serves as a blueprint for many other retailers with a significant store base. To be more explicit, many are calling on the likes of Marks & Spencer and Next to do the same, with tentative (if not to say spurious) figures of 20% - 25% of overall floorspace widely touted.

Admittedly, Mothercare probably did have too many stores, many of which were uncompetitive. In part, this is a by-product of its longevity on the high street. Many of its stores harked back to the bad old days (or good old days, depending on your point of view) of 25 year leases and upward-only rent reviews. Little wonder it wanted to exit some of those at the earliest opportunity.

But what do the latest trading figures tell us? For the 12 weeks to 30 December, UK floorspace was cut by a further 6% (ca. 90k sq ft), leaving the portfolio at 143 stores (1.4m sq ft) at the end of the year. Not surprisingly, this resulted in an 11% decline in overall UK sales and the marquee number is that online now represents 42% of total UK sales. So far, so logical.

But even culling floorspace has not reversed underlying performance, with like-for-like sales down 7.2%. More tellingly still for a business so intent on growing its e-commerce business, online sales were down by a staggering 6.9%. We have long argued that the future of retail is multi-channel and that stores and online are complementary rather than competitive. John Lewis has previously alluded to this symbiotic relationship in affirming that online penetration/sales are much higher in areas where it also has a physical presence.

Mothercare’s figures underline (and partially quantify) this symbiotic relationship, albeit from an inverse perspective. Sales from closed/closing stores do not simply gravitate to that retailer’s online arm – a large proportion will probably just go to a competitor. In simple terms, stores support online sales and if the store is not there, the online side will also take a significant hit.

So, why would a retailer want to get rid of 25% of its floorspace, which would probably also result in a double-digit decline in its online business? And give up a third of its market share? And relinquish economies of scale? And put undue pressure on its gross margin in so doing? The economics simply do not stack up. Selective disposals, fine. Wholesale closures, no.