As LDC's Head of Insight & Analytics, Ronald Nyakairu works with our clients across a wide range of sectors, from retail and property to local government and academia. His contributions have been featured in several publications, and he is a regular speaker and panellist at key retail events, including our Retail & Leisure Trends Summits where he provides insights on the retail market.
Ronald and his team are the authors of our full and mid-year insight reports, including our upcoming H1 2023 analysis. Ahead of the summit, we spoke to him about current retail trends, international brands, and potential challenges for H2 2023.
Was there anything that surprised you while compiling the H1 2023 analysis?
The key points in the analysis are probably going to be around independents. Since the pandemic, we have seen independents have been a lot more resilient than the chains. The chains were quick out of the blocks in terms of announcing store closures, not reopening underperforming stores, reformatting their portfolios, and changing formats to adapt to the changing landscape. While independents have been a lot slower and I think it's almost been a delay factor based on various government provisions, which have enabled them to stay afloat and be shielded from the turbulent times. Various things such as business rates relief, access to various financing support packages, protection from rent payments and various other support measures have been able to keep the lights on.
However, from 2022 these started to be removed, starting with the end of the rates relief in April 2022 and various measures around the end of government COVID support. This is the truth of the numbers and now you can see independents are starting to feel the pinch, with the rise in energy prices a key trigger for many to close their doors for good.
Last year we reported a net increase of nearly 1,000 units. Whereas the gap this year is much closer to the national chains, with quite a strong net decline, with this the same across all regions.
How do you think the retail market is going to fare for the second half of 2023?
I think it's still very hard to tell. We've seen that the government's struggled to bring down inflation. We've seen consumers have continued to tighten their spending, and this isn’t expected to ease in H2 2023. However, we know that during the seasonal period for Christmas people may be in a better financial position, so there may be some uptick. However, I think many retailers are now much more cautious when it comes to opening new stores. So I don't anticipate there to be much more in terms of a net increase, particularly independents. I think the net decrease may even increase going into the end of the year, as more and more independents start to feel the pinch and start to close, however, we may also start to see some chains come under pressure from a sustained period of discounting with many fearful of passing on the cost increases to the consumer in an already fragile market. This is evident with the collapse of Wilko this past week.
In terms of vacancy, we anticipate the vacancy rate to continue to rise, however, very slowly due to redevelopment efforts, but we anticipate this rise to continue throughout, until the end of the year. The leisure sector is particularly hardest hit, particularly pubs, which had some of the highest energy bills. And with the much milder summer, there may likely be a heavy discounting in the fashion sector in order to clear out stock leading to a greater pressure on margins. Hence, there may be additional challenges for fashion brands heading into 2024 with tougher like-for-likes as inflation begins to flat line.
What do you think are going to be the major challenges for the next half of the year?
I think a key part for some of the sectors, is not only around the impact the interest rate has had on the consumer but also within the investment market there's been a lot less activity in terms of transactions, whether that's selling or buying shopping centres. Many commercial agents have reported about the lack of activity, with retail parks being the exception with this format continuing to be seen as the winning asset class in retail.
There will be some who continue on the growth path and continue to open stores. Particularly discounters where we've seen players like Aldi and Lidl continue to open, but also interestingly looking to open in more affluent locations where shoppers are looking for discounts or looking to cut spending may shop down on certain supermarket items such as consumer goods. We've also seen redevelopment, which has held up quite strong in the first half of the year with the redevelopment numbers staying in line with what we saw in H1 2022 despite the increase in cost of borrowing and the cost of materials. So we continue to see proactive landlords looking to take up space and convert this into much more useful spaces for their local high streets and town centres.
We've recently seen a spate of international brands making their UK debut or returning to the UK after a period of absence. Why have these brands chosen the UK to expand into, and why now?
I think the opportunity is available. We’ve done a lot of analysis on Oxford Street and documented some of its challenges to reoccupy space. I think a lot of these brands have also seen the potential for the UK market, or despite there being much higher internet penetration rates, there's still a need to have a physical presence. We saw that across the numbers in 2022, where many digitally native brands were opening units on the high street. I think also the availability of units and the re-evaluation of values and the fall in rents, all of those make this proposition much more worthwhile.
We also have to consider the market share with fashion and clothing. We've seen quite significant closures in terms of the fashion space over the past 5 years with the demise of brands such as Topshop and Debenhams. This left a gap in the market where some of these brands may look to prosper. We have also seen the cost of occupancy drop particularly in prime London locations due to new business rates in April 2023, with many international luxury brands still seeing London as a significant retail destination as shown by the record tourist numbers in 2023 so far.
What are some of the key trends we're going to see across the GB market going forward?
Looking into the future, I think a lot of retailers are now much more resilient. I think that's shown in the numbers. In previous reports, when we've seen any challenges, particularly in the consumer or in terms of the economy, there's been quite a drastic uptick in vacancy rates, uptick in closures. But when you look at the numbers, they're a lot more measured, and a lot more buoyant, and retailers have a more long-term strategy. But they’ve also become a lot more resilient to these short-term challenges having to be agile and adaptable to the changing headwinds. So I think a lot more retailers are starting to get comfortable with this challenging market. One thing that this does lead to is a lot more caution when they open a new site, almost in terms of the level of data, scrutiny, and analysis needed to really understand how each location will support the bottom line. This is where our data becomes key, adding a layer of comfort in the decision-making process for both expanding brands, but also brands managing their portfolio with many needing to undertake renovations or refurb work to meet the rising building standards in the new environmentally sustainable world.
I think also in terms of store selection, there's a much wider choice. We've seen a polarization towards retail parks due to the various benefits they provide retailers in terms of out-of-town convenience of car parking spaces, and being able to supplement their delivery fulfilment in the back house due to the square footage. However, I do think high streets still have value, particularly in those more community hub centres where there would be lower levels of car ownership or a less affluent population. Hence we're going to see a lot more space being converted to non-retail so whether that's community hubs, medical facilities and other sort of everyday facilities with the high street almost being seen as a sort of a platform for brands or different occupiers to reach their consumers. Retail park vacancy rate is starting to fall, and we can expect to reach a tension point with a limited pipeline of new retail parks landlords can expect to see rental values begin to rise due to competition which may see a move back to more affordable accommodation in in-town locations.
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