Analysis: Re-evaluating store portfolios

Perennial questions about the size of retailers’ store estates have become even more persistent as the industry has been responding to the impact of the UK’s recession. Curbing expansion, or even downsizing, has been a priority for some, and Marks & Spencer is one of the more high-profile retailers announcing a scaling back of UK store expansion plans this year. Arcadia, meanwhile, has made no secret of the fact that it may not be renewing swathes of the leases due to expire in the next five years, leaving it with a smaller store portfolio than it has at the moment.

In fact, in September, figures from property agent CBRE’s Chain Expansion report, showed that the number of shops operated by multiple retailers fell for the first time in 14 years during the first half of 2012. In addition, the importance of offering a multichannel service to customers is also affecting store formats, and therefore space requirements.

However, there are retailers still looking for that perfect property spot, and many have taken advantage of the downturn to up their own expansion.

One sector where this is particularly noticeable is the value market. Poundland property director Craig Bales is quick to admit that the current climate is a golden opportunity for the value retailer.

Not only is the squeeze on consumer spend causing a flight towards discount shopping, but landlords grappling with sluggish demand and rising void rates are offering the kinds of deals that have allowed Poundland to open stores at rapid rate.

Poundland is one of the few retailers really pressing hard with expansion amid all the challenges of the market, and its rivals B&M Bargains, Home Bargains and 99p Stores are doing the same.

By the end of this financial year, Poundland will have added 68 new stores, an extra 400,000 sq ft, to its portfolio. That will take the overall portfolio from the 389 stores it had at the beginning of the year to 457, an increase of 17%, and a similar expansion to that undergone by the retailer in 2011/12.

And Bales expects growth on the same scale next year. He says: “There’s a clear opportunity for us to expand at the moment. In the current conditions consumers are challenged and we’re providing an opportunity for them, hence the growth of the whole sector.”

But even despite such growth, Bales expresses a note of caution, not just about Poundland’s own fortunes but for the whole value sector. It might be undergoing a growth spurt, but the value sector must, he says, know its own limits.

“There’s been a race for space, but it’s not sustainable,” he says. “We can’t keep going on at the same rate. We can’t all have 800 stores. It’s effectively a new market and there are a lot of players in it, but there’s going to be some consolidation.”

Retailers are expanding at the other end of the value scale too though. For example, niche upmarket grocer Booths, based in the north of England, is looking at cautious expansion of its portfolio, currently comprising 29 stores. But as Booths property director Graham Booth explains, it is being very selective about its store decisions.

“Despite the difficult economic backdrop Booths has continued to pursue opportunities to replace ageing stores and build new ones in areas of the north where its style of retailing is most likely to be appreciated,” says Booth. “Booths has a unique retailing proposition for which there is a sufficient level of demand in new districts within the north. We take a long-term view of property development and seek to open at least four stores over the next five years”.

Meanwhile, homewares retailer Dunelm Mill is also still in expansion mode, but has been carefully calculating its requirements. According to its latest market scan, the retailer will require about 200 stores to cover the UK, says chief executive Nick Wharton. The retailer opened 14 last year, with a likely 12 by the end of this year.

Fellow home products retailer Lakeland is also looking at expansion. “We are currently trading out of only 60 locations, and our expectation is we will continue to expand,” says Lakeland marketing director Tony Preedy. New stores this year have included its new-look formats in Brighton, Bluewater and Enniskillen.

Multichannel conundrum

The increasing importance of multichannel retailing is another crucial factor influencing property directors’ plans at present, as it poses a conundrum.

On the one hand, more shoppers buying goods online means fewer sales over the counter and therefore a falling demand for physical space. However, a study by UK property agency CBRE this year of the likely effects of multichannel on retailers’ property strategies, found that 60% of retailers surveyed – with a total 32,000 stores between them – said they would have more shop space in two years’ time as a result of multichannel retail, while only 28% said they would have fewer domestic stores in 2014 than now.

Most retailers predicted their online sales to double over the next two years and 63% said they would like to have a fully integrated multichannel offer up and running by the end of 2014. In addition, two-thirds planned to use their stores as delivery points for goods bought online and 80% planned to install kiosks as shopping points.

Therefore, a new type of demand is emerging – not for legions of new stores, but for carefully selected units suitable for the shop of the future.

Patrick Keenan, director of property consultancy Lunson Mitchenall, cites the successful multichannel players as being some of the big drivers for space in the current market, and in the future. “Clever retailers make best use of internet shopping offers to generate customer interest and brand loyalty, and bolt-on in-store performance through returns and so on,” he says. “Despite talk of retailers downsizing, in many cases the opposite seems to be occurring, and retailers are actively looking at increasing both overall size of store portfolio and/or individual size of stores.”

For some retailers the key is ensuring the fewer stores they keep are as impressive as possible, says CBRE head of high street retail Tony Devlin. The success of the whole brand, he says, depends on it. He explains: “A store is the shopfront to the whole business. The store has to be the ‘best in class’. Multichannel retailers have to think about driving footfall from store to web and web to store – there has to be a lot of synergy there.”

Lakeland, for example, is experimenting with a new format and design “to bring the product displays more to life”, says Preedy. “Stores have an important role to play in creating the brand and an image in the mind of consumers, and then the web can capitalise on that.”

Wharton also carefully considers the impact of online on the Dunelm store portfolio.

The retailer’s property projections are under constant review, he says, so that if the impact of multichannel on property requirements shifts, the retailer is ready to adapt. However, for now there is no inclination towards downsizing in format terms at Dunelm. But ultimately, the store needs to work particularly hard these days to entice customers.

“Being a one-stop shop and broad-range category proposition, that does need space to bring it to life,” says Wharton. “Our average store is 30,000 sq ft with 20,000 SKUs.”

Value sector activity

Returning to the value sector, Devlin points out that some of the retailers with the biggest appetite for physical space are those without the multichannel platform, because they don’t have to factor in this necessity. “Some of the discount players such as B&M, Home Bargains and Poundland are very active partly because they don’t have an ecommerce platform,” he says. “It’s not something that has to affect their decision-making process.”

Another value retailer that has been signing major new stores is Primark. The most recent of these include a 90,000 sq ft unit at the Hermes-owned Centre:MK in Milton Keynes as well as one on Oxford Street. Centre:MK asset manager Gavin Murray says the deal is a clear sign that the opportunities exist for value players, as long as the space is exactly right.

“It’s the natural evolution of retail,” he says. “This is the only type of site that Primark would have taken because it needs to be connected to other good retail space and it needs large units.” So the demand is still there, but, as Murray says, “retailers are looking for fewer but better stores”.

The days of exuberant growth are certainly gone, but there are still many retailers looking for the perfect space. The difference, it seems, is that where quantity was the name of the game five years ago, whether you are a multichannel player or not, the next stage is most definitely all about quality.