The recent spate of administrations doesn’t surprise me at all, if anything I believe 2013 will prove even more difficult for retailers globally.
Prominent venture capitalist Marc Andreessen recently spoke about the death of retail, and in the UK we’re witnessing it first hand. Just two weeks into 2013 Jessops fell into administration, and soon after HMV was added to the long list of bricks & mortar casualties that have ignored their online presence and paid the price. I personally saw how the downturn in 2008-9 affected small independent entrepreneurs; we downsized our business from eight retail stores to two within 18 months. Everyone thought the good times were just around the corner, but five years later and the big boys are feeling the pinch now too.
Undoubtedly, the rise of ecommerce has had an effect on footfall and revenue on the high street, but I believe companies that expanded aggressively are the ones that are now feeling the repercussions of unsustainable growth. Large companies continued to pay exorbitant premiums to get their hands on prime properties – Forever 21 broke the record with a £14m premium for their Oxford Street flagship store. Premiums aside, the rents that landlords are demanding make it impossible for individual stores to run profitably. The Tommy Hilfiger store in Knightsbridge, for example, pays rent+rates of about £1.5M/year. I know because we moved out of that store to make way for them. That’s £30k a week, and doesn’t include staff, electricity, fit out, cost of goods, etc! To break even they need to take at least £60k a week; £8,500 a day, at least 100 transactions at £85, meaning more than 1,000 people through their doors. All just to break even. That’s difficult when tourists are no longer visiting London in their droves and consumer spending continues to dwindle.
A single bad month (think Olympics) can have such a detrimental effect on profitability, now imagine the 25-40% drops in revenue that the high street has experienced over the last few years. Inevitably, many companies committed to long term leases at unsustainable rentals just can’t survive. That’s why Marc Andreessen intimated that the H&Ms and Zaras are “more transitionary than permanent.” They have opened stores up and down the country and if they don’t find a way to innovate, both online and offline, they will end up closing stores and watch revenue plummet too.
For my father’s generation, the high street was the arena for entrepreneurs to take risk and make it big. The barriers to opening a store in high footfall areas are now ridiculously high, so our generation of entrepreneurs are finding opportunities online. We are approaching ecommerce differently from the companies that made it big in the noughties. New business models are popping up, and each with a laser targeted focus on their niche customer segment. This is making it even more difficult for the big, old school retailers with bad websites and poor or no multichannel strategy to compete.
I’m sure we’ll see more administrations in the coming year and I’m sure that there will be some big name surprises. I’m also sure Marc Andreessen is correct; we’re witnessing the beginning of the death of traditional retail.