Erin Brookes: ‘There is no doubt that further retail consolidation is coming’

Thanks to the acceleration towards ecommerce caused by the series of lockdowns, the high street will be a different place altogether when consumers are eventually permitted to venture out of their homes.

The events that will arguably live longest in the memory of this recession – like the Woolworths administration just over a decade before – are the recent Asos and Boohoo deals.

Unaffected by months of store closures and beneficiaries of rising demand for affordable, convenient fashion, the online-only proposition has been a winning formula.

In contrast, outdated business models and significant fixed costs have finally caught up with some of the retailers that went into the pandemic with excess space and a weak online proposition. 

These defining deals highlight the polarising nature of the pandemic, inflicting success or distress on brands in the same sector to different extremes, with the common thread that ecommerce is the defining success factor. 

Covid-19 also created a perfect breeding ground for consolidation, as strong, well-capitalised businesses seize opportunities to grow and diversify, while the weaker seek to survive.

That is especially true for mid-market fashion – probably the most complex retail subsector, exposed to seasonality, a lack of demand for items such as work or occasion wear, and significant competition. 

A different type of crisis

Asos and Boohoo will pave the way for much more retail-on-retail M&A activity in the months to come – particularly transactions that take only the brands and assets, not the portfolio of physical stores. 

Boohoo, which has already been through a string of acquisitions, has not ruled out future deals, while Frasers Group, Next and JD Sports continue to explore potential opportunities with other high street favourites. The news that McKesson Group is seeking to offload its Lloydspharmacy chain is further evidence that more consolidation could be on its way.

While ongoing government support, including an extension to protections for commercial tenants to avoid eviction as well as a likely extension to business rates holidays, continues to kick the can down the road for many struggling retailers, this is very much the calm before the storm. 

The exact timing is up for debate, but we are expecting a flurry of distressed activity at some point during the second half of the year.  

What is certain though is that those businesses that have been slow to adapt, or lost relevance with their target audience, should be prioritising decisive action and innovative options for the future. 

As a strong online proposition becomes imperative for survival in the new normal – much more so than a network of high-footfall stores – and brand-only acquisitions become increasingly commonplace, where does this leave the future of physical retail?

In many cases, conversations are underway about the potential repurposing of sites. This crisis will largely not see retail space replaced with more retail space, much like occurred after the closures of BHS and Woolworths. 

Nor will it see a steady stream of casual dining outlets spring up, as in the aftermath of the 2008 financial crisis.

High street visionaries

I expect the long-awaited space reset is upon us and we will see the conversion of current retail schemes towards other uses – residential, leisure or towards public use such as green space. 

Visionary proposals like those in Stockton-on-Tees to demolish much of its high street to create a riverside park three-times the size of Trafalgar Square show the potential transformation that could be on its way. 

Alongside this trend, all retailers must evaluate the future shape of their estates and business models to acknowledge a much more highly penetrated online business and be ruthless about the role of sites in the portfolio that do not contribute. 

However, there is reason to be optimistic about consumer demand for offline shopping returning, though once lockdown restrictions ease it will likely settle into a different pattern as shoppers become much more selective over how they spend their time and online becomes the favoured channel for fast, convenient, transactional shopping. 

There is no doubt that further consolidation is coming, as well as a major change to how consumers and retailers value store space in the future. 

But this is not the end of physical retail. Those that seize opportunities to innovate will be able to grow brand loyalty and capture market share.