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The future of retail is hybrid!

1 month ago

Retail has been at war with itself for at least the past decade as old-style bricks-and-mortar businesses tried to keep up with the new kids on the online block. Big names like BHS and Toys “R” Us vanished from high streets and retail parks, while others like New Look underwent brutal CVAs, which is a way for companies in distress to pay off their debts over a fixed period of time.

Established businesses launched their own websites but for many the rot had already set in. A lack of investment, or a failure to understand how the new world worked, created a vulnerability, and when the first COVID lockdown forced closures, the shift from old to new simply sped up. For behemoths like Arcadia, the nailed-on overheads were too great and the need to pivot quickly was impossible for a business that size.

Online sales surged during lockdowns

Source: ONS

“Shopping as an experience still has its place, particularly for big ticket items where people want the chance to touch the merchandise before they commit.”

The proportion of online retail spend jumped by almost 15% while COVID-related restrictions were in place; it did slip away considerably when people were once again given the choice of where to spend their cash.

Shopping as an experience still has its place, particularly for big ticket items where people want the chance to touch the merchandise before they commit. And since May, the numbers have remained stubbornly static, a trend that’s certainly giving businesses like Boohoo (BOO:AIM) a growth headache.

Despite now resembling an online department store with many familiar names joining Boohoo’s stable, the lack of a physical presence might be becoming an issue and one that could get more acute as the months progress.

With the supply chain stretched to breaking point, delivery costs have skyrocketed at the same time many traditional retailers have manged to pare down at least their rents. That’s not to say bricks and mortar is enjoying a total renaissance: Primark’s sales haven’t been stellar and it’s rethinking its stance on online, at least when it comes to attracting eyeballs, as a transactional site is not yet on the cards.

Mixed fortunes for retailers

SOURCE: Company Accounts

The real winners seem to be retailers giving the customer what they want, when they want it. That includes the choice of channel as well as the ability to buy online and collect or return the goods in-store.

Next (NXT) could be considered the swot of the retail world. After making what some might have considered a giant own goal by allowing rival brands to utilise its shops and delivery offer, Next has shot out of the changing room in the second half, making it a seriously superior competitor on a playing field that’s rather changed from its pre-COVID formation.

Next’s latest online sales growth would have been enough to make Boohoo weep and its stores have become a hybrid, both shop window and glorified warehouse.

Anyone thinking that Next’s performance is unique just needs to consider how Hotel Chocolat (HOTC:AIM) has emerged from the past 18 months as a business that has found a way to succeed both offline and online.

Even Amazon, the bastion of online sales, has just opened its first non-food store in the UK, offering customers an opportunity to indulge their senses with their four-star merchandise.

Whether the experiment will result in hundreds of Amazon hubs depends on the customer engagement but if the Next omni-channel story is any indication, those yellow smiles could become a staple of our high streets and not just our letter boxes.

The value of physical spaces

Before the pandemic, online-only retailers had begun experimenting with stores in prime locations and there’s nowhere quite as cool as London’s West End. The CEO of property company Shaftesbury (SHB) Brian Bickell took me on a tour of the company’s estate a few weeks ago and pointed out a couple of achingly hip stores that are otherwise ’online only’.

They’d grabbed the space initially as a glorified advert but had both been pleasantly surprised by both the sales rung up in store and the uptick in the general area.

It’s a phenomenon also experienced by Yorkshire-based Joe Browns when it opened its physical store in Sheffield’s Meadowhall shopping centre a few years ago.

Retail vacancy rates skyrocket

Source: Local Data Company

As ever, the key is location, location, location. No successful brand wants to be knocking up against empty spaces and post-pandemic vacancy rates have hit an all-time high.

Shaftesbury’s boss refers to the phenomenon as a ’cancer‘ and he’s pulling out all the stops to make sure it doesn’t spread through his estate.

Big boxes (warehouses) are being resized and repurposed and bucket loads of data is being pored over to ensure it owns retail property located in places with the best footfall.

“Advisers and investors need to be as savvy as shoppers themselves. They need to probe a retailer’s outlook and be sure they have appropriate plans in place to keep up with the changing landscape.”

The idea of retail as entertainment and experience is nothing new; it’s why shopping centre owners like British Land (BLND) have spent so much time and money reworking the leisure offer, understanding retail is about more than just sales.

That’s a lesson online names are beginning to learn; their core consumer might be happy but attracting new shoppers will take more than just a jazzy website. Margins are getting tighter and with that decreases the ability to use price as the key tactic to draw customers in.

Advisers and investors need to be as savvy as shoppers themselves. They need to probe a retailer’s outlook and be sure they have appropriate plans in place to keep up with the changing landscape. It’s no longer a case of bricks or clicks but of a smart, workable mix of the two.

Past performance is not a guide to future performance and some investments need to be held for the long term.

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Danni Hewson

Danni Hewson

Job Title
Financial Analyst

Danni spent more than 19 years at the BBC, presenting and reporting on business news across a variety of programmes – including BBC Breakfast, BBC News Channel, BBC Look North and latterly Radio 5 Live’s flagship business programme ‘Wake up to Money’. She is now responsible for producing analysis and commentary across a broad range of subjects at AJ Bell, from financial markets, to economics and personal finance.

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