Store profit margins halved by soaring costs

Store-based margins have slumped by more than half from 8.8% in 2009/10 to 4.1% in 2017/18, according to a study by Alvarez & Marsal and Retail Economics.

Operating costs have climbed by 10.8% since 2014, as a result of factors such as inflexible lease structures and changing shopping habits. Retailers now have around 20% more store space than they need and can financially justify.

Despite the pressure on bricks-and-mortar shops, the research showed they remain central to retail, accounting for approximately 80% of total sales and expected still to account for 65% over the next five years.

Shops, especially flagship destinations, remain ”hugely relevant” to millennials and gen Z consumers who value the role of bricks and mortar more than their older counterparts. A quarter of 16-24-year-olds visit a flagship shopping destination at least once a week, versus once every six months among 45-54-year-olds.

Business rates, wage increases and the impact of the apprenticeship levy have added to the costs borne by stores.

The changing dynamics have hit retail rental and capital value expectations. Demand for UK retail space is at its lowest since 2007, hitting secondary locations in particular. As a result, there has been a 60% decline in the total volume of retail transactions at secondary locations over the last two years.

Alvarez & Marsal managing director and head of restructuring, Europe, Richard Fleming said: “Most of the UK’s biggest retail brands are in the midst of a fight for survival. We have already seen some high-profile casualties and many more are on life support. But reports of the death of the high street have been greatly exaggerated.

“We’re entering a new era of retail, presenting opportunities for forward-thinking incumbents, entrepreneurs and investors. Those that collaborate with landlords and local authorities will be the big winners going into the next business cycle.

”This needs to involve striking the right balance between retail and leisure through strategic partnerships, nimble pop-up schemes, agreeing on temporary rent cuts that allow companies to reshape their debt and operational structure, or adopting turnover-based rents where retailers and landlords stand or fall together.”