OUTLOOK 2023
Retail
The retail sector will be in for another bumpy ride in 2023 due to the continued weakening of the economy. Reduced household income and the increasing cost of goods is expected to impact the sector as consumers cut down on the amount of products they purchase. Retail chains will continue to rationalise their estates to accommodate the strategic shifts in consumer behaviour following the pandemic, which could result in some store closures. We anticipate further polarisation between the value and luxury sectors as struggling consumers look to reduce spend whilst luxury shoppers remain largely unaffected by the imminent recession.
Cost of living crisis - the consumer
For a brief period towards the end of 2021, it appeared as if things would return to some form of normality for the retail sector as we emerged from the pandemic. But the Omicron variant, rapidly rising inflation and rising household costs sent shockwaves through the global economy, particularly in the latter part of 2022 which is expected to carry on into 2023, resulting in a decrease in households’ discretionary spending. Erosion of household savings, accumulated during the pandemic, are expected to continue, to support consumers’ consumption during this cost of living crisis, with the Bank of England predicting a 2.25% decline in average household income during the year.
Rising costs will affect the lowest-income households more significantly – a recent estimate by Retail Economics suggests that lower-income households have seen their discretionary spending fall by 15.8% versus a 1.1% fall for the most affluent households, and this is expected to worsen, as household energy bills increase over the winter.
% MONTHLY CHANGE IN DISCRETIONARY INCOME
Source: Retail Economics
MONTHLY RETAIL SALES VOLUMES VS ONLINE SALES % CHANGE
Source: ONS
Retailers hit on all fronts
The multiple challenges facing retailers in 2023 are causing huge concern. Whilst demand for products and services are likely to drop, there are multiple pressures to contend with: rising energy costs; further supply chain disruption; and higher purchasing costs, particularly for goods and materials purchased overseas, which have become more expensive due to currency rates, as well as adapting to rapidly changing consumer behaviour. There is significant risk of corporate failure from highly leveraged retailers due to increased costs in servicing debt and we could see some retailers enter pre-pack administration or into a company voluntary arrangement (CVA) throughout the year as they struggle to remain profitable. We should also see some retailers re-gear leases to benefit from rental savings or rent free periods to weather the storm.
The rating revaluation due in 2023 will offer much-needed support for the sector. It is predicted that there could be a significant decrease in rateable values between the 2017 and 2023 rating lists of 26%, equating to a loss in rateable value of over £5.6 billion. In other welcome news, downwards transitionary relief will be applied immediately instead of over multiple years. There was also further good news for those retailers which were eligible for a 50% reduction on business rates to April 2023, as this has been extended to April 2024, with the reduction increased to 75%.
“The retail sector will continue to be impacted during 2023 from the cost of living crisis, as consumers continue to tighten their belts. There are, however, some retailers, intending to expand their estates during the year, particularly in the grocery sector“
Miles Martin, MD Retail UK, Principal
Rationalising Estates
Does this negative outlook mean yet another tranche of store closures as we witnessed during the pandemic? We expect to see some casualties, particularly those that have struggled in 2022, but it’s likely that we see far more retailers rationalise their estates. This will result in store closures in poorly-performing locations or where the store footprint is now too large, but those same retailers are also likely open stores at more successful locations which match their growth strategies. For example, Marks and Spencer announced it would speed up its store closure plan over the next 5 years by removing 67 larger stores as it ‘reshapes’ its estate, but it will open over 100 Simply Food stores over the same time period, which fits in with its strategy to grow its non-food through online sales and to increase the food basket size by selling a wider range of groceries from larger than average food stores
There remains a whole host of retailers who are looking to expand and open new stores across the UK in the coming years. The grocers, including Tesco, Sainsburys, Asda and Morrisons, are looking for new sites to open convenience stores. And the discount chains, Aldi and Lidl, continue to embark on ambitious store opening plans – Aldi announced it would open 100 new stores over the next two years, whilst Lidl plan to open up to 200 new stores by 2025. As a result of the increase in store openings, grocery market share from both discount chains should increase - currently, both retailers have a combined market share of the grocery market of over 16%, second only to Tesco as consumers continue to switch to value brands.
Outwith the grocery sector, other retailers are growing their estates throughout 2023. This is predominantly at the value end of the sector, including Greggs, Home Bargains, Poundland and B&M. There is also likely to be an increase in the number of international entrants looking to enter the UK market. London, obviously impacted by the decrease in international tourism over the last three years, could prove attractive if rents are favourable in prime locations. Retailers previously unable to access prime real estate could be attracted by cheaper rents and more favourable terms. Sephora, the French beauty retailer, announced its return to the UK, following its exit in 2005, with plans to open a London flagship store in 2023.
Frasers, the luxury fashion and beauty retailer, has announced it is opening three flagship stores (in Leeds, Cardiff and Gateshead) during 2023, each store being over 80,000 sq ft in size. Based on its performance during previous recessions, we expect minimal impact on the luxury sector from the current economic crisis. Affluent consumers are less likely to be affected by increased household spending and are likely to continue with normal shopping patterns.
Although 2023 is expected to remain challenging for retailers, there are opportunities. For new entrants there are retail locations offering short leases (for example, Land Securities now offer retail leases as short as one day), which could allow retailers, such as some pure-play companies, to test a location or new format, who might feel the need to open in physical locations to increase brand awareness. There could also be an uplift in the number of shoppers returning to physical locations as the online share of retail sales continues to decline. In Asos’ most recent trading statement it announced sales were worse than expected as customers had returned more items than they had bought. Rising costs from deliveries and returns are likely to be passed on to consumers in the future which could lead to a swing back in favour of bricks and mortar retail - Zara and Boohoo now charge for returns and we expect more retailers to implement this in 2023. And distress for some retailers, which could result in forced store closures, could represent an opportunity for other retailers looking for units in prime locations but have previously been unable to due to a lack of suitable space.
STORES CLOSED DUE TO RATIONALISATION OF ESTATE (MULTIPLES)
Source: Centre for Retail Research