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Adapt or Perish: The Retail Sector Under Pressure - Cameron MacDonald

TM Lewin, Harveys, Go Outdoors, Laura Ashley, Debenhams, Victoria’s Secret, Cath Kidston, John Lewis. All of these companies, and more, have announced major store closures since the start of the COVID-19 pandemic – just one consequence of the global economic recession the virus has triggered. They occupied some of the estimated 20,622 stores that will shut in 2020, up nearly 30% on last year. This will leave thousands of units in retail parks, shopping centres and on the high street empty, begging the question of what, if anything, can replace them.

This issue is not a new one – long-term changes in shopping trends that favour online retail have already led shopping centres to adopt short-term leasing and experiential focuses in a desperate bid to maintain footfall. COVID-19 has acted as a catalyst to an already sharp retail shift, leaving landlords and operators with very little time to avoid a fate similar to that of Intu, the largest shopping centre operator in the UK, which was forced into administration in June this year.

Amazon has taken advantage of this unique position in the USA, having expressed interest in transforming a number of shopping centres into fulfilment centres to keep up with sky-rocketing demand. The online retail giant took on over 100,000 staff in the first month of the pandemic, and its US quarterly revenues – up 43% – confirm that much of the future of retail rests in Amazon's hands. The firm may well seek similar opportunities in the UK, which could lead to out-of-town retail parks becoming a mere souvenir of our in-person past.

Even if out-of-town malls and retail parks are transformed for a different use, the high street cannot be subject to the same changes. For at least 400 years, high streets have been the central hubs of towns and villages, with weekly markets, independent stores and social opportunities. The high street concept has long been in decline; a review panel was established in 2011 to identify the issue and establish potential solutions. The Portas Review arguably had a positive impact, with footfall increasing in nine of the twelve pilot towns within two years.

However, this benefit was short-lived, according to evidence presented by Melanie Leech, CEO of the British Property Federation, to the business, energy and industrial strategy committee. Leech contended that COVID-19 has “vastly accelerated” the predicted decline of the high street, doing two years’ work in a matter of weeks. This is worsened by the fact that 20% of independent retailers cannot afford to reopen to a reduced footfall, ensuring closure until at least 2021, if not forever. The government is being urged to taper off their business support measures – as opposed to simply ending them – to provide support to those retailers that have chosen to delay opening, so as to ensure that one day they can return.

The high street might benefit from retail park transformations, with any retailer wanting to keep space being forced to take high street retail units. This is likely to be an ugly shift, with large chain retailers such as Currys, Sports Direct and B&M taking once-coveted high street units at a reduced rate, and landlords having little choice but to accept whatever offers they receive.

If landlords cannot keep units filled, they might have no option but to convert shopping units into residential property. The Social Market Foundation ("SMF") hypothesises that the expedited decline is now irreversible, and suggests a release of commercial land for development, which would allow over 800,000 homes to be built. A speech by Boris Johnson in late June promised to revive the high street by enabling conversion of retail units to homes, cafes and offices without requiring planning permission. The SMF sees this as embracing the future, and supports the move to avoid “postponing the inevitable” collapse of high street retail.

The acceleration of this shift to online retail, and indeed the transformation of physical retail units, presents a unique opportunity for certain commercial law sectors. In line with government strategy for the next four years, there will be an uptake in real estate and planning law streams, especially focused on conversion of existing property. There will no doubt be severe local and legal opposition to many of the policies presented with regards to streamlining property conversion, in the hopes of preserving the current high street, which will be met with a number of litigatory disputes.

There will unfortunately, but certainly, be major increases in the insolvency and restructuring as well as employment practices with most firms having to make redundancies, especially in physical retail. This will probably be accompanied by declines in retail M&A, although many (including McKinsey and KPMG) remain confident for a swift bounce-back to retail after COVID-19 dies down. Even if we do see a fast economic recovery, it will likely reveal a new retail economy, evolved to embrace the inevitability of the future.

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