January is a dangerous month for shops, but these business models may have been past their sell-by date in any case
HMV, Jessops and now Blockbuster. It’s been a hellish week in the retail sector. Almost 10,000 jobs are at risk and 1,000 shops may shut.
Why now? The short answer is that it’s the time of the year. January has always been the most dangerous month in the shopkeeping business. The tills are relatively full after the Christmas shopping rush and creditors judge they are most likely to minimise their losses by pulling the plug now. The longer answer is that the internet, supermarkets and a squeeze on living standards represent a fearsome combination for specialist business models that are, let’s face it, past their sell-by date in many cases.
Blockbuster’s demise cannot be described as a tragedy except for the poor employees. The business of renting out DVDs from shops is a victim of consumer behaviour. Sky Movies, LoveFilm and the revival of Saturday-night television, courtesy of X Factor and Strictly, have chipped away at Blockbuster. As for selling DVDs, the company has been up against Amazon and all the big supermarket chains for years. Blockbuster failed to spot the changing nature of its own market. The surprise is that it held out for so long.
At HMV the rot set in at the turn of the century when it failed to react quickly to the arrival of music downloading and internet retailing. Remember the forlorn comment in 2006 of the HMV chief executive Alan Giles as he resigned: “A year ago I was saying the internet would plateau at about 10% of this market. Now I say that I was wrong. I just don’t know now how far it will go. This is a brave new world for retailers.”
His successor tried to repair the strategic mistake online but was hardly helped by governments’ past tolerance of a loophole that allowed DVDs and CDs to be sent by post from the Channel Islands free of VAT. Mail order websites, such as Play.com, Amazon and Tesco, piled in.
Would earlier action to close the loophole have saved HMV? That’s harder to argue because the company’s store portfolio, numbering 240, also looks too large for a specialist in the internet age. Some 15-20 years ago, reckons large property developer Land Securities, the rule of thumb was that a retailer needed 200 stores to reach 50% of the UK population. These days, 60 is thought to be all it takes. Shoppers are willing to travel further to visit large shopping centres and online delivery can fill the gaps. That’s one reason why 14% of shop premises are vacant.
On living standards, the data is stark. Last July the Office for National Statistics reported that real income per head was at its lowest level since 2005, caused by rising prices and sluggish growth in wages. Note, too, that the savings ratio is rising, albeit modestly, which doesn’t help retailers chasing disposable income. With house prices outside London generally flat or declining, there is little appetite among consumers to take on more debt.
Nor does the structure of rental leases help retailers. Leases have shortened in length over the past decade but upwards-only clauses for rents are still the norm, making overheads inflexible. Turnover-related rents have become a precious asset for the few retailers that have them. Lucky old WH Smith – another chain that used to be mentioned alongside Woolworths (RIP) as one that would not be invented now – has enjoyed that privilege in its very successful division operating in railway stations and airports. Add a slick set of managers, led by the recently departed chief executive Kate Swann – who made a bold but smart decision to get out of the cut-throat business of selling music and movies – and WH Smith has been a stunning success for its investors for the past decade.
Property considerations hold one part of the answer to whether high streets can reinvent themselves after a cull that, almost certainly, is not over yet. Freeholds on a typical high street tend to be owned by a wide and varied collection of investors – pension funds, specialist property funds, individuals and retailers themselves. Co-ordinated redevelopment thus becomes tricky, and the competitive advantage of town-centre and out-of-town shopping centres that are managed actively by a single owner becomes entrenched.
There’s no easy solution to the property conundrum. But the most practical answer may to be accept that the great age of high street retailing is over and convert vacant units to uses for which there is a clear demand, such as affordable houses and flats.
Death by digital
History: founded in 1935 by Frank Jessop in Leicester
Collapsed: 9 January
Jobs: 1,370, now redundant
Stores: 200, now closed
History: traces its roots back to the turn of the 20th century and the first gramophone records, but the first Oxford Street store was opened in 1921. By the 1990s HMV had more than 300 stores in countries including Canada, Japan and Australia
Collapsed: 15 January
Jobs: 4,500 – at risk
Stores: 240. UK stores still trading. Many are expected to close, but some will stay open if a buyer can be found for the business. Sixteen Irish stores have closed
History: first store opened in Texas in 1985. The company expanded to the UK and was sold in 1994 for $8bn. It grew to 3,500 international stores. Filed for chapter 11 bankruptcy protection in the US in 2010. The UK business was separate.
Collapsed: 16 January
Jobs: 4,190 – at risk
Stores: 528. Some will stay open, if a buyer can be found