Wednesday 23 May 2018

Net loss: How online shopping is hammering Main Street retailers

Developments in UK retail could be a precursor to events here as Irish businesses catch up with the digital revolution

Gavin McLoughlin

Gavin McLoughlin

It has been a frightening time for British retail. Last Thursday, Poundland became the latest in a slew of major players to announce materially bad news, with around 100 stores set to close.

A fortnight ago, Debenhams issued its second profit warning in four months, saying it had got its Christmas strategy wrong. Electronics retailer Maplin has gone into administration, while Carpetright is closing 90 stores and cutting around 300 jobs. Clothes retailer New Look is closing 60 stores and cutting around 1,000 jobs.

Smartbox chief executive John Perkins
Smartbox chief executive John Perkins

It's tempting to blame it all on Brexit and, indeed, it may be partly responsible. Figures out last week showed that though the UK economy is growing, it posted its worst performance since 2012 in the first quarter of this year, with a 0.1pc expansion.

But if growth is present at all there must be something else happening on the high street. Unsurprisingly, it's the shift to digital that's the prime suspect.

An auction of a Birmingham shopping centre last month is a case in point.

Abbeygate Shopping Centre near the Midlands city was sold off for £4.3m (€4.89m), a fraction of the £17m it fetched 13 years ago.

"These kind of shopping centres have shown a dramatic drop in value over the last 10 to 15 years," Acuitus auctioneer Richard Auterac said in an interview before the sale.

"It has taken some owners a long time, but we're now seeing more acknowledgment that it's a difficult market to be in", which prompts them to accept lower prices.

The auctioneer sold another centre, Callendar Square in Falkirk, Scotland, for £1m in October, according to its website. That property had an estimated value of almost £26m in 2006.

Retail groups here acknowledge that the acceleration of online shopping has had a negative impact on the sector.

Retail Excellence Ireland (REI) released figures for the first quarter last Monday which put like for like sales 0.2pc behind the prior year. Minor year-on-year growth in January and February was offset by a decline in March - perhaps due in part to the snow.

REI deputy chief executive Lorraine Higgins said a number of REI members had reported losses in the first quarter as a consequence of the shift to digital.

"Those retailers with an omnichannel offering managed to offset the losses in their bricks and mortar stores because they were able to enhance their digital strategy to reach out to consumers. But that's not something that's possible for all retailers," she added.

Patchy broadband is one reason for that of course. There's also a case for lifting the amount available to businesses under the State trading online voucher scheme.

The scheme allows SMEs to get a €2,500 grant to develop digital capability. But Higgins estimates it takes at least €10,000 to have a fully functioning ecommerce website.

Despite the sense of gloom, suppliers still see value in traditional retail channels.

Smartbox chief executive John Perkins, an Apple veteran of the Steve Jobs era, told the Sunday Independent that "online hasn't killed all the retailers, but it will kill some of them".

His company provides gift experience vouchers, both online and in retail.

"What we see overall on the high street is that the number of retailers has shrunk, but there's still a lot of retail consumers out there."

In the US, usually at the forefront of consumer trends, the idea of the "retail apocalypse" has become so pervasive that it has its own Wikipedia entry.

But it's not simply that Amazon has been eating everybody's lunch. Many chains have been loaded up with lots of debt - often from leveraged buy-outs.

The debt coming due, along with excess floor space and the continued growth of online, has led to a perfect storm, with the prospect of continuing job losses for workers at the lower end of the income scale.

Bloomberg reported earlier this month that at the last count, US store closures announced this year reached a staggering 77 million sq ft. That's according to data on national and regional chains compiled by CoStar Group.

Retailers are well on their way to surpassing the record 105 million sq ft announced for closure in all of 2017. And even though retailers have been retreating for years, the US still has about 24 sq ft of shopping space per person, many times more than any other developed nation, according to research firm Green Street Advisors.

But where there is chaos there is opportunity and, in an Irish context, businesses are starting to move away from a negative view of online towards embracing the possibilities, according to Thomas Burke who leads Ibec's retail arm Retail Ireland.

The shift to digital means that Irish retailers are no longer dependent on their local catchment area - instead they can start selling products further afield and reach far more customers.

REI characterises Irish retail as being in a state of flux and its hard to disagree.

Anecdotally, many Irish retailers are seeing first hand how shopping patterns are shifting to online. Online sales are growing strongly for those which have developed good websites, while shop owners are having to go the extra mile to get people through the door.

Dublin retailer Arnotts, owned by the Selfridges Group, is spending €11m on upgrading its business and a chunk of that will go on technology to integrate its bricks and mortar systems with its website.

And internationally, retail giants are scrambling to meet the fast changing demands on consumers.

Zara, owned by Spanish group Inditex, is moving on to the next level of digital retailing with the launch of an augmented reality app.

Rival retailer H&M recently reported a 60pc fall in first-quarter profit. Its chief executive, Karl-Johan Persson, said there had been "mistakes" in not adapting quickly enough to the internet.

Unfortunately for Irish companies, the prospects for those who fail to pay attention to the woes of international retailers are unlikely to be good. (Additional reporting by Bloomberg)

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