A nation of shopkeepers shaken by the shift online

The country once mocked as a nation of shopkeepers is increasingly moving online.

The share of retail sales made via websites, tablets and mobile phones in the UK has risen steadily from about 5 per cent in 2008 — the year the iPhone launched in the UK — to hit 30 per cent in May this year at the height of the UK lockdown, according to the Office for National Statistics. 

That has helped make it one of the world’s most developed ecommerce markets. The UK was the first overseas market targeted by Amazon, which started operating in the country in 1998, and was an early adopter of online grocery.

But the growth of ecommerce has resulted in acute challenges for traditional retailers who spent most of the preceding three decades opening new stores in order to reach new customers and expand sales.

Data compiled by Altus, a consultancy, from government valuation records show there is still 125m square metres of retail selling space in England and Wales, which many experts think is around a third more than retailers actually need.

As a result, sales density — sales per square foot — has fallen. At fashion retailer Next, it reached £231 for the financial year to January 2020 against £366 in 2011. Because stores’ running costs are relatively fixed, profits quickly follow sales lower — independent analyst Richard Hyman thinks that as a rule of thumb, any retailer with sales below £200 per square foot will struggle to make much of a profit.

Next has the luxury of a strong online business, which is supported by its store estate in various ways, but few other UK retailers are in such a fortunate position.

Online growth

The headline figures mask wide variations between sectors, but coronavirus has turbocharged the shift online across all of them. According to Kantar, 13 per cent of food retail is now online against about 7 per cent before the pandemic.

Charts showing the growth of online retail sales

Penetration has also grown in areas such as DIY because many non-essential stores were closed during the UK’s 12-week lockdown.

Hundreds of thousands of people ordered online for the first time, swelling online sales volumes. If even half of those newbies develop an ecommerce habit, the impact on store sales could be severe.

Declining margins

While the decline in food retail margins in recent years has more to do with the rapid expansion of discount supermarkets since the financial crisis, the fall in non-food margins is directly linked to the growth in ecommerce.

Chart showing retail profit margins

There are few barriers to new entrants, operating costs are lower and price transparency is increased.

Additionally, companies such as Amazon have access to vast amounts of capital and are prepared to tolerate low margins for long periods in order to win market share. That has forced incumbents to keep their own prices competitive, often at the expense of profitability.

Job losses

Even as retail prices have come under pressure, labour costs have risen as the UK’s statutory minimum wage has increased, prompting widespread attempts among retailers to improve staff productivity.

Chart showing retail employment

Alongside day-to-day cost cutting, big retail failures have added thousands to the unemployment queues.

The Centre for Retail Research estimates that by June this year, 28,455 retail jobs had been lost through insolvencies and 21,355 through rationalisation. It expects 235,000 job cuts in total for the year, up from 143,00 last year.

Retail vacancy rates

The UK’s gradual economic recovery from the financial crisis had started to eat up some of the space left vacant by big high street failures such as Woolworths and BHS and reduce the percentage of space left vacant.

Chart showing retail vacancies

But the deteriorating economics of stores in the wake of the pandemic is likely to accelerate an already-rising number of closures.

The Local Data Company expects the overall retail vacancy rate to surpass its previous peak of 14.6 per cent, reached in early 2012, by the end of 2020. 


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