The Information

Is Jeff Bezos the saviour of the British high street?

Bricks-and-mortar retail has a belief problem. Everyone thinks it's doomed so nobody invests. But ecommerce is reaching its limits, which is why arch disruptor Amazon is building physical stores.

by Paul Simpson
Last Updated: 20 Mar 2019
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If high street retail is dying, why is Jeff Bezos investing billions in it? Has the Amazon founder and CEO, to use one of his favourite insults, taken a "stupid pill"? Or does he see something that others don’t?

On past form, you would probably bet on the latter. Amazon already has seven bricks-and-mortar stores in the UK, acquired when it paid $13.7bn for American grocer Whole Foods. This past Black Friday, for the first time, it opened a pop-up shop in Shoreditch to sell its wares. The online behemoth is also reported, in the Sunday Times, to be scouring the UK for places to test its automated, staff-less, convenience store format.

Three are already open in Seattle, Amazon’s home city, and three in Chicago, but the company has talked of launching thousands of stores. Industry insiders say it is only a matter of months before such a store opens for business in the UK.

So what is going on? First of all, it’s worth saying that there is one thing every retailer (even the online ones), manufacturer and consultant agrees on: they cannot foresee a time when there is not a single brick-and-mortar store left in the UK. "In the future, we may have less retail, but it will be better retail," retail consultant Mary Portas tells Management Today.

"The high street is not dead or dying, it just needs to be reimagined. When we shop, how we shop, why we shop – all that has changed forever but people will always want a place to meet, to spend time and to transact – and these basic human needs are never going away."

The media narrative of the ‘retail apocalypse’, championed particularly in the Daily Mail, rests on the unspoken assumption that online shopping will sweep all before it. Yet retail experts disagree. By KPMG’s estimates, almost 20 per cent of UK retail sales are online – possibly as high as 28 per cent in non-food purchases – but Paul Martin, its UK head of retail, believes that online sales will hit a ceiling, possibly at around 35 to 40 per cent of the market.

Rachel Lund, head of insight and analytics at the British Retail Consortium (BRC), has a similar view, although she puts the ceiling a bit higher. "Ecommerce could level out at around 50 per cent – higher in some categories but lower in others such as food," says Lund.

At the same time, she says, Britain’s online spend is broadening. Talk of a tax on Amazon, the pantomime villain in this industrial melodrama, obscures the fact that the UK’s second and third largest online retailers are Tesco and Sainsbury’s. The internet has also made it possible for thousands of smaller retailers and manufacturers to sell their wares across Britain.

Amazon is already the UK’s fifth-largest retailer, behind grocers Tesco, Sainsbury’s, Asda and Morrisons, accounting for £4 in every £100 spent last year. Yet, in the medium to long term, it cannot maintain its astonishing growth if it has nothing to sell to the millions of us who like to do most of our shopping in the high street. Nor are all these consumers ageing Luddites – a recent survey of 10,000 millennials by analytics firm Adoreboard found that 49 per cent preferred to buy their clothes in store.

In the short term, Amazon’s entry into the high street will intensify competition. This may lead to more casualties, although we should be wary of the myth of invincibility that surrounds the company – Portas was disappointed by its fashion pop-up store, feeling that "it had no soul".

Yet the company’s investment in bricks and mortar could at least change the narrative. The media – and, more importantly, investors – may be forced to recognise that "legacy retail", as Portas calls it, is not dying, but evolving into something we can’t yet envisage.

The West Midlands town of Nuneaton is as good a place as any to understand how painful that evolution is. Thousands of new homes are being built around the town, which has a population of around 87,000, yet there is little evidence of that dynamism in its high street. For many locals, the rot set in when Marks & Spencer closed its store in 2011. Since then, a domino effect has led BHS, Co-op, Mothercare and JJB Sports to follow suit.

The council is so desperate to keep the large Poundland store, built on a site it owns, which was occupied by Woolworths in happier days, that it only charges the retailer £1 a year in rent. (The shortfall from that deal is estimated to have cost the council nearly £466,000 in two years.)

Locals lament on Facebook about the dire state of the town centre, many preferring the 30-minute drive to the shiny, newish and somehow more optimistic Leicester Fosse Park Shopping Centre but, in some ways, you could argue that Nuneaton has been luckier than most.

Between 1997 and 2014 (at which point the industry stopped counting), 4,333 banking branches closed across the UK, yet the town has lost only one, Barclays, which, unfortunately, was the most physically prominent. Like one in four of the bank branches closed in the UK, Barclays’ building is standing idle. The town also still has a library – 478 of those closed in Britain between 2010 and 2017 – an HMV (one of barely 120 stores still trading in the UK) and a vibrant twice-weekly street market.

The greatest worry for Nuneaton’s retailers and residents is the future of its Debenhams store. Standing diagonally opposite the now defunct Barclays, the department store is the biggest unit on Queen’s Road – as the town’s high street is called – but could be one of up to 55 shops shut in the next three to five years, as the chain seeks to stem horrendous losses.

High streets like Nuneaton’s have suffered for a variety of reasons. For a start, there is the undeniable fact that the UK, like most developed markets, has far too much retail space. The traditional bricks-and-mortar strategy – essentially, have a physical presence on every high street – and the rapid expansion of the supermarket chains in the 1980s and 1990s has left markets with, KPMG’s Martin estimates, 35 to 50 per cent more space than they need.

That’s why, in the first half of this year, roughly 16 stores closed per day in the UK – although we should also note that roughly eight stores opened every day.

The rise in online shopping has made that overcapacity worse but for many retailers, locked into long-term leases on their stores, the best they can do is manage decline. When Mike Ashley bought the remnants of House of Fraser, one of his first priorities was to try to renegotiate leases – the chain’s annual rent bill was estimated to be around £140m.

He publicly blamed "greedy landlords" for the closure of stores in Edinburgh, Hull and Swindon. The Sports Direct founder is the kind of bull who carries around his own china shop but many retail executives privately sympathise, even if they question whether igniting a public dispute with landlords was the wisest move.

Retailers have also been hit by what Portas calls "the death of stuff". In the past 30 years, the amount we spend on leisure has more than quadrupled. Even in the past decade, blighted by the worst recession in living memory, it rose by 30 per cent. The ‘experience economy’ has become something of a cliché but it is a trend that too few retailers have tapped into.

That begs the question – have retailers been responsible for their own downfall? Portas certainly has no doubts. "Many of the retailers that have gone were the mediocre ones. Has the closure of BHS left a gaping hole in your life? And Toys R Us was terrible. When I went into a store 20 years ago, it was clinically depressing. There were toys but no creativity."

Many traditional retail players were slow to see the threat of ecommerce and, when they did see it, overestimated how much time they would have to meet it. One cause of House of Fraser’s meltdown was a troubled website relaunch, which actually led to online sales falling by 7.5 per cent last Christmas.

Managers also failed to recognise that the pace of change was itself changing. As one retail CEO said: "The metabolic rate of retail keeps rising." Legacy retailers were slower than Bezos to realise, in a world where consumers can buy what we want, how we want, whenever we want, how quickly "Wow!" can become merely acceptable.

Governments must take their share of the blame too. As one consultant put it, "They’ve only been able to see online shopping coming for 15 years so you might have thought they could have ensured that, financially, there would be a level playing field in that time."

Council tax has blighted – and ended – some notable political careers, so the reluctance to tinker with it is understandable, but the stasis has given online retailers a significant financial advantage over their traditional rivals. Chancellor Philip Hammond’s recent announcement that he will spend £900m to knock up to a third off bills for small retailers was welcomed but, for Portas and Lund, the measures do not go far enough.

"Objectively, the system is fundamentally wrong," says Lund at the BRC. "Nobody has designed it like that, it has just evolved, but basing the tax on property puts an unfair burden on the retail industry, which accounts for five per cent of the UK economy but pays almost 25 per cent of its business rates."

The fact that, until Hammond’s recent budget, even public toilets were subject to tax sums up the madness of the system.

Like Portas, the BRC believe the system needs a complete, fundamental overhaul, that spreads the tax burden more fairly. Yet at the moment, with Brexit dominating the political and administrative agenda, there seems to be little will in Parliament or government to tackle such an issue. Hammond’s budget has, at least, provided respite for smaller retailers.

The business rates policy is, for Portas, symptomatic of a bigger malaise. Given how important the high street is to Britain’s economy and society, she finds it hard to believe that there is no joined-up national plan to aid its redevelopment. She is not talking about 1970s style bailouts for lame ducks in the British car industry but a vision for the high street which reflects the valuable role it plays in our communities, and doesn’t just focus on the revenue it can generate.

The absence of any coherent strategy makes it almost inevitable that individual government departments do not consider how their policies and spending plans will impact on retail. If, for example, budgetary constraints force councils to close libraries and raise parking charges, it should come as no surprise that fewer people visit town centres. They may be even less likely to bother if there are no banks left in town – and branches are still closing across the UK at a rate of 60 a month.

In this context, footfall on Britain’s high streets has proved remarkably resilient. The BRC’s figures for September to November 2018 show a decline of 2.3 per cent, with retail parks (down 1.4 per cent) faring better than town centres (down by 3.7 per cent).

These figures don’t fit the retail apocalypse narrative, but they do reflect an industry undergoing a turbulent transition. The good news – if you can call it that – is that British retail is being buffeted by this storm before France and Germany, because online shopping is so popular here, and may therefore recover more rapidly and be able to apply the lessons learned elsewhere.

The disappearance of some familiar names from one, some or all of our high streets is unsettling. A recent poll found that Woolworths, which shut up shop in 2009, was the high street brand Britons missed most. Yet there is a counter-narrative here that is too often overlooked. Primark has grown consistently, opening new stores for the past five years straight.

It is convinced, in the words of John Bason, finance director of parent company Associated British Foods, that the "high street is not remotely dead". The retailer’s success is even more remarkable because it does not sell online. Even Harrods, the epitome of old school British retail, broke the £2bn revenue barrier for the first time in its 169-year history last year, repeating the feat in 2018.

You can, of course, prove anything if you are willing to cherry pick examples, but the latest retail report from the Local Data Company suggests that the real state of British retail is a bit more complicated than the tale of doom and gloom being spun by the media. The LDC report showed that, in the first half of 2018, 349 barbers, 160 beauty salons, 122 shoe repair units, 94 vaping stores, 70 supermarkets, 52 independent coffee shops and 51 ice cream parlours opened for business.

These new stores are not opening up fast enough, nor occupying enough space, to fill the gaps left by the tens of thousands of outlets that have shut. Yet they do suggest that the high street is quietly being reimagined, as Portas has suggested it needs to be. It is easy to regard the high street of yore with a nostalgic glow – especially the pick-and-mix counter at Woolworths – but it would be hypocritical of shoppers, who spend 20p in every £1 online, to argue that the high street should be frozen in time.

For Portas, retailers need to take note of our declining interest for owning "stuff" and turn their stores into places where people go to share an experience. The example often cited is Nike’s flagship store in New York City, which is both high-tech (by scanning a code on an in-store mannequin, customers can shop a complete look and have the items brought to their fitting room) and experiential (Nike Plus members can customise and personalise products).

The sportswear brand’s House of Innovation is vast (covering 68,000 square feet), different and, quite probably, too expensive a proposition for many smaller brands and retailers. Yet the philosophy behind the concept can be applied in different ways.

Heidi O’Neill, president of Nike Direct, told Forbes magazine: "A funny thing happened on the way to the death of retail. It turns out that when you actually talk to consumers, they still want to shop by touching and trying on. They still want to connect, to step into a space and to feel something."

That rationale has inspired many online brands to open up bricks-and-mortar stores. In the US, opticians Warby Parker, men’s fashion brands Bonobos (which is now owned by Walmart) and UNTUCKit, and mattress retailer Casper are using shops to build their brand, showroom their products (Casper lets you take a nap in store) and, of course, sell stuff.

"Feel something" is critical here. If traditional retailers are going to reap the rewards of the ‘experience economy’ many of them need to improve the way they make shoppers feel. For some, the solution will be technology. For others, it will be about having more personable, knowledgeable sales staff.

For a few, it will be about providing entertainment, a live demonstration by a chef or working with other stores and councils to create events that bring shoppers into town. The opportunity is there, says Lund. "We will always have a retail sector, but it will be very different, more diverse, more high tech, and more about the experience they give the consumer."

When Napoleon derided the British as a "nation of shopkeepers", we took the insult as a compliment. The high street has a strange significance in British society and the decline of some well-known brands can, too easily, be twisted into a narrative of national decline by our media. Yet Britain will remain a nation where shopkeepers flourish.

Image credits: GettyImages

This article was originally published in the December 2018 issue of Management Today.


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