Introduction
Over the course of the last two years the KPMG/SPSL Retail Think Tank (RTT) has observed that the health of British retailing is coming under increasing pressure from the rising cost base associated with running retail enterprises. Property constitutes one of the key cost components and the perhaps surprising lack of reliable information about this is the subject of this latest white paper produced by the RTT.
Retailing is becoming ever more sophisticated and its practitioners are tapping into new data streams to improve its standards, efficiencies and customer knowledge. Yet there is one area in which reliable, quality information is difficult to come by. This is on the make up of the retail landscape: its current composition; the retail footprint; the amount, sector and type of property in the pipeline; and a detailed picture of what is in the planning stages.
It strikes the RTT that in this age of mass information and communication, such paucity of knowledge is both surprising and potentially detrimental to the future health of British retailing.
What is known about retail property?
Based on Valuation Office figures for England and Wales, together with various trade figures for Scotland, it is reasonably certain that there is approximately 1.4bn sq ft of gross retail space in Great Britain, which equates to 23 sq ft per capita. The property stock has been growing at about 1% per annum since the early 1970s, which is well below the rate of sales growth.
Whether there is enough retail space or not is both a contentious issue and one that is extremely difficult to answer, given the current level of market knowledge. Policy makers, local planners and retailers all struggle to agree in this area. We have seen this debate in the headlines recently, following the Competition Commission’s review of the UK grocery market, which in itself must be at least partly based on inadequate data.
The group acknowledged that quality data on retail – albeit partial – does exist but it is not freely open to everyone. Many private sector bodies collect data, but this is neither publicly held nor used in public policy or regional and national planning decision-making. The data – such as loyalty card information – are also not necessarily available to smaller players or new entrants to the market, and therefore those larger players who do have access to it naturally have a significant competitive advantage so long as censuses of distribution information is not available.
The last Census of Distribution, a decennial attempt to identify sales at local trading location level, was published in 1976 (based on data collected in 1971) and this information was used well into the 1980s. The RTT notes that no spatial data linked with key local sales data has been published since then, meaning that the information available for formulating retail planning policy has evolved very little over the past 37 years and not kept up with the pace of change in the retail sector.
An awareness of the gap left in official statistics by the failure to undertake censuses of distribution, led to a project being commissioned during the second half of the 1990s, under the aegis of the then Department of the Environment (DOE). It was later continued by the Office of the Deputy Prime Minister (ODPM) – to estimate floorspace, rateable values, employment and retail sales in certain towns in England and Wales. Some estimates of (gross) retail floorspace, rateable values and employment were eventually published, but not sales figures. The project, though better than nothing, fails to provide the key local sales performance information previously available to planners from the Census of Distribution.
Information regarding shop floor space is available periodically for England & Wales from the Valuation Office but not for specific shopping areas (e.g. for the area containing shops in a town centre). The Valuation Office figures also do not identify net sales areas or the usage of the space by shop type – the figures required, if sales data were also available, to calculate turnover per sq foot estimates. Without this information it is not possible to verifiably measure impact, a central concern in the planning field and one highlighted in the Competition Commission report.
In addition, there is no national database of shop supply, parking availability or even detailed road flows of the kind necessary to measure accessibility change issues such as any increase in shopper-related traffic on roads serving certain major town-centre trading locations. Over half the population now shops in less than 80 major non-food trading locations, mostly major town and city centres, down from over 200 in the early 1970s; a major market share shift. This planning-led concentration in town centre shopping activity, often exacerbated by other commercial development in the same locations, has inevitably had a major impact on traffic flows.
Meanwhile, UK population censuses, unlike in other countries, do not include questions on household income; a key requirement for measuring and comparing prosperity at local level.
What is the effect of the lack of retail property data on retail stakeholders?
The RTT discussed the possible impacts upon various stakeholders in retail; government and infrastructure, retailers, consumers and the City. It noted the following potential effects on each group:
The implications for policy making and planning
- The amount, type and distribution of UK retail space is not accurately known and therefore it is not clear if the ‘right’ type of space exists or is being developed. The government is saying that the policy should be evidence-based, but does this lack of evidence mean Government planning policy and its implementation is flawed?
- There is neither enough nor the right kind of data to make objective, market-based decisions on property development in the retail sector. This could mean that the property which is being developed may be a misallocation of resources (e.g. the space, size, location or mix of retailers may not be properly optimised).
- Local authorities do not have the data to actually measure the impact of their decision-making on local shopping or the wider community; currently, impact assessment is essentially hypothetical.
- The location of retail property development, through market concentration, may be exacerbating congestion and, in turn, be affecting the environment through consumers needing to travel further to make purchases. Mark Teale of CB Richard Ellis posed the question: “With green issues central to public debate, is it not more important than ever to inform planning decisions with hard facts rather than via guestimates and popular opinion? In the absence of regular censuses of distribution, it is difficult to see how future retail sector needs can be effectively planned for at all.?
The implications for retailers
- Retailers bear high costs in terms of occupational costs, particularly in contrast with other nations such as the United States, although the RTT noted that UK retailers have probably become more efficient with the space which they have as a result of this. The example of innovative approaches to the problem of space, for example by using mezzanine floors, was cited although the planning permission-free boom for mezzanines has now ended.
- Individual retailers – particularly smaller ones – and incomers from abroad cannot easily know the amount of space or best locations that would be optimal for their business, due to the lack of data.
- Space constraints are inhibiting the size and type of shop and shopping experience, as well as merchandising choices and depth of stock. The development of the DIY sector was discussed, which was unpopular with planners when out-of-town stores began to appear in the 1970s. Had these objections to out-of-town stores not been overcome, the DIY retail sector in Great Britain would probably not have developed at all. The same is true of grocery market expansion which could not have occurred within the traditional shopping stock. Opposition to out-of-town shopping, in this respect, often appears to result – due to the paucity of hard information available – from an exaggerated fear of what might happen rather than an informed view of what actually does happen when such schemes are developed.
- Retailers are being constrained by obsolete space, much of which dates from before the Second World War. A significant proportion of this space, euphemistically described as poor secondary or tertiary, does not meet modern retailing requirements. It is estimated that only about two-thirds of existingspace is viable for multiple retailers, due to its age, location, accessibility or size and configuration.
- If more space was available, companies in the sector could potentially expand more easily and cheaply, and employ more staff. Does this mean that the lack of space is restricting the ‘growth’ of the sector and inhibiting retail sector employment growth?
- The RTT noted that the equivalent of 23 sq ft per capita of retail floorspace for every UK shopper compares with 50 sq ft per capita (of much cheaper) space in the US.
- If more space was available, the UK retail sector might see both an increase inbetter shopping spaceas well as less expansion of UK retailers abroad. There could also be greater investment from overseas retailers as a result of better information and more readily-availableretail space.
- When discussing the implication of property costs for retailers, it was noted that this issue previously came to the fore during the last recession. In a tough economic environment – and the RTT’s latest predictions for the health of the sector were the least positive they had ever been – property costs become a more pressing issue for retailers. When top lines go down, property costs tend to remain the same and retailers are often tied to long leases. This further adds to the debate of how efficient the supply-side of the sector is.
- However, it was noted that retailers may not wish to absorb all the ‘red tape’ of completing forms to provide data to the government on their branch sales and floorspace, nor – in some cases – be particularly keen, for competitive advantage reasons, on seeing local sales information in the public domain at all.
The implications for others
Consumers
- Consumers may be paying higher prices, as space constraints inflate property prices and reduce retail sector efficiency.
- The availability of property could be affecting choice and stock availability. If more space was available, retailers would have more stock in stores, affecting consumer choice as well as trading efficiency. At the moment, retailers have to rely heavilyon warehouses and distribution, which add additional costs.
- The lack of space may be creating a less enjoyable shopping experience due to busy shops and congested car parking and may be a contributing force in the creation of ‘clone’ towns.
The City
- The City recognises that there are issues around data within the retail sector but as collection costs money, the question of who would absorb this was posed. There is good quality research available from shop property agents, but inevitably there are issues on how impartial or authoritative this can be.
- The lack of property space data has a negative impact on valuations in the sector because of the perceived impact on future profitability of the so-called ‘mountain of new space’ in the pipeline. If more extensive local market information was available, views regarding the growth potential of individual retailers would be better informed.
- The RTT noted that the City is effectively in the dark as to individual retailers’ local costs, turnover per sq ft or regional efficiency as they only ever see the overall UK ‘bottom line’.
The economy
- The RTT noted that if better data was available to planners, the quality and type of space provided would improve, boosting both retail sector growth and employment prospects.
- The RTT foresees the coming of a tipping point with respect to the ongoing viability of older, less retail-friendly, tertiary retail locationsand tertiary space generally.
- However, if new, unsuitable retail property is being developed because of inaccurate or unavailable data, does this mean that resources are being allocated incorrectly, and the retaileconomy is actuallybeing damaged?
Conclusions
The RTT points out the lack of accurate, comprehensive data on local retail performancein the UK which has a knock-on effect in the planning and provision of retail space. In particular it noted:
- Space requirements in the retail sector could be better planned if consistent, publicly available information on local sales and floorspace was available, as in the past. There could be a less piecemeal planning approach, with better informed, faster and fairer market-led decisions and fewer mistakes.
- The collection of these data for wider publication, however, has significant implications for those who might be required to provide it, those who already havesome of it (such as from loyalty cards) and use it to their advantage and those who benefit from the lack of wide availability of local sales information (e.g. by potentially limiting competition).
- Censuses of distribution and a central database of planning applications would be useful data in planning decisions. However, it was acknowledged that the data collection implied may be perceived as a significant additional burden to retailers in these difficult trading times.
The RTT concludes that the lack of data detracts from the overall health of the sector. Better information would be beneficial to all key stakeholders; retailers, planners, consumers, the government, the economy and the City. The question remains as to whether there is the will to collect detailed national retail data, how it should be done and who should finance it.
RTT White Paper Spring 2008_0-1.pdf
Date Published: 8/1/2008 5:35 PM
Note to Editors:
The RTT panellists rely on their depth of personal experience, sector knowledge and review an exhaustive bank of industry and government datasets including the following:
Members of the RTT are:
- Nick Bubb – Independent Retail Analyst
- Dr. Tim Denison – Ipsos Retail Performance
- Jonathan De Mello – Harper Dennis Hobbs
- Martin Hayward – Hayward Strategy and Futures
- Maureen Hinton – Conlumino
- James Knightley – ING
- Richard Lowe – Barclays Retail & Wholesale Sectors
- David McCorquodale – KPMG
- Martin Newman – Practicology
- Mike Watkins – Nielsen
The intellectual property within the RTT is jointly owned by KPMG (www.kpmg.co.uk) and Ipsos Retail Performance (www.ipsos-retailperformance.com).
First mentions of the Retail Think Tank should be as follows: the KPMG/Ipsos Retail Think Tank. The abbreviations Retail Think Tank and RTT are acceptable thereafter.
The RTT was founded in February 2006. It now meets quarterly to provide authoritative ‘thought leadership’ on matters affecting the retail industry. All outputs are consensual and arrived at by simple majority vote and moderated discussion. Quotes are individually credited. The Retail Think Tank has been created because it is widely accepted that there are so many mixed messages from different data sources that it is difficult to establish with any certainty the true health and status of the sector. The aim of the RTT is to provide the authoritative, credible and most trusted window on what is really happening in retail and to develop thought leadership on the key areas influencing the future of retailing in the UK. Its executive members have been rigorously selected from non-aligned disciplines to highlight issues, propose solutions, learn from the past, signpost the road ahead and put retail into its rightful context within the British social/economic matrix.
Definitions: The RTT assesses the state of health of the UK retail sector by considering the factors which influence its three key drivers.
- Demand – Demand for retail goods and services. From a retro-perspective, retail sales, volumes and prices are the primary indicators. When considering future prospects, economic factors such as interest rates, employment levels and house prices as well as others such as consumer confidence, footfall and preferences are used
- Margin (Gross) – Sales less cost of sales; the buying margin less markdowns and shrinkage. Cost of sales include product purchase costs, associated costs of indirect taxes and duty and discounts
- Costs – All other costs associated with the retail operations, including freight and logistics, marketing, property and people
The Retail Health Index – how is it assessed?
Every quarter each member of the RTT makes quantitative assessments of the impact on retail health of demand, margins and costs for the quarter just completed and a forecast of the quarter ahead. These scores are submitted individually, collated and aggregated in time for the RTT’s quarterly meeting. The individual judgements on what to score are ultimately a combination of objective and subjective ones, drawing upon a wide range of hard datasets and softer qualitative material available to each member. The framework follows the example of The Bank of England Agents’ scoring system on economic intelligence provided to the Monetary Policy Committee.
The aggregate scores are combined to form the Retail Health Index (‘RHI’) which is reviewed at that meeting and occasionally revised after debate if members feel it appropriate. The RHI tracks quarter on quarter changes in the health of the UK retail sector and as such provides a useful and unique measured indicator of retail health. The index ‘base’ of 100 was set on 1 April 2006. Each quarter, it assesses whether the state of health has improved or deteriorated since the previous quarter. An improvement will lead to a higher RHI score than that recorded in the previous quarter, and with a deterioration leading to a lower score. The larger the index movement, the more marked the shift in the state of health.
The RHI has two main benefits. Firstly, it aims to quantify the knowledge of the RTT members in a systematic way. Secondly, it assesses the overall state of health of the UK retail sector for which there is no official data.
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