Five Reasons The U.K. And Europe Won’t Feel America’s Retail Pain, And Two Why It Might
Retail in the U.S. is not in a death spiral, as The Real Deal claimed recently (using a shorter and ruder adjective).
But it is not in a great place either. Dozens of department stores and fashion retailers are either in bankruptcy or closing hundreds of stores. As a result, shopping centre owners have been the target of short sellers, and have in some cases been forced to buy back big chums of space in their malls to try and refurbish and re-let it.
The truism says that where the U.S. goes, the U.K. and Europe inevitably follow six months to a year later. But the chances of this retail strife emigrating across the pond wholesale are unlikely. While there are some things to be wary of, these five factors will keep U.K. retail healthy.
1. Density and proportion of malls
A key figure to keep in mind when comparing the U.S. and Europe is the number of shopping centres per capita — the U.S. is simply more over-shopped, with around 29K SF of gross settable area per 1,000 people, according to Cushman & Wakefield, compared to 2,856 SF/1,000 in the U.K. and 2,691 SF/1,000 in Europe.
“Europe is much more restrictive when it comes to allowing retail development,” said Florencio Beccar, head of retail investment for Europe at CBRE Global Investors. “The market is structurally quite different, and you have far more people in the U.S. left with zombie malls or with space that needs restructuring.”
Malls, which have particularly struggled, account for around 40% of all retail space in the U.S., more than double the figure in Europe.
2. Internet penetration
Of course, the internet is having a seismic affect on retail on both sides of the Atlantic. But the U.K. leads the U.S. in e-commerce penetration, with 12% of all retail sales handled online in the U.K. compared to 9% in the U.S, according to eMarketer's H1 2016 report.
“The U.S. lags behind in that respect — we’re a small island with wall-to-wall broadband,” Savills Executive Director of Retail for the U.K. Sean Gillies said.
Figures for Europe are even lower, and while that could imply further disruption, Beccar is not overly concerned.
“We expect retail sales to top out at around 25%, but it won’t be the same for all countries. It will get there quicker for larger economies like Germany and the Netherlands, but we don’t expect it to converge in the near future.”
3. Lease types
Co-tenancy clauses have amplified the problems for U.S. mall owners. These contractual agreements often restrict what types of tenants can locate near them, and sometimes new retailers coming into a mall have a clause in their lease that if certain other retailers — usually large anchor stores — leave, they can also break their lease and depart. A trickle of closures can thus quickly become a flood.
“We don’t have that provision in Europe,” said Jaap Tonckens, chief financial officer at Unibail Rodamco, Europe’s largest property company. “Landlords here will be able to avoid that situation where tenants can just walk away.”
4. Better quality of malls
The sheer number of malls in the U.S. have made them a commodity, according to Value Retail founder and Chairman Scott Malkin, and millennial consumers are turning away from commoditised products. Standardisation has significantly devalued and depreciated brand equity of U.S. companies, he said.
The lack of density means the U.K. and Europe have fewer poor quality, commoditised malls — although they still have some (see below).
5. Department stores
“In the U.S. department stores have pursued aggressive and highly self-destructive strategies that have marginalised them and reduced the pricing power for their brands,” Malkin said, and the woes of the department store sector have hit U.S. malls the hardest, with Sears and Macy's closing hundreds of stores that filled a lot of floor space in each mall.
“The Netherlands and Germany have already been through that, and you don’t see the same reliance on department stores in European malls,” Tonckens said. “In Europe, centres tend to be anchored by grocery stores, and people still go there for their weekly shop,” Beccar pointed out.
In the U.K. shopping centres do tend to be anchored by department stores, but the sector looks more healthy.
“The poorer quality operators, like BHS or T.J. Hughes, have already gone,” Gillies said, and brands like John Lewis have done an excellent job in combining online and physical offerings.
The Downside: There will still be a big shakeout in U.K. retail
“Will we see the same turmoil in the U.K. and Europe as in the U.S.? Yes, it won’t be exactly the same but the trend will be similar,” Malkin said. “The shift towards omnichannel and highly experiential physical retail will continue. And there will be a greater cost and complexity of delivering that. So overall there will be new definitions of who the successful operators and which locations are successful, and a new way of segmenting the market.”
Marks & Spencer is in danger of becoming obsolete, sources told us off the record. It is not an anchor, but the retailer has a large number of large stores and has posted poor financial results recently.
Up to a quarter of all shopping centres need a lot of work
“The market in the U.K. is already being split into winners and losers,” Beccar said, and the market does have some over-development.
Specialist retail asset manager Vixcroft estimates that around a quarter of all shopping centres are in the hands of non-core, short-term owners like banks or private equity firms.
“Over time I think these centres will transpose into the hands of specialist owners and asset managers,” Vixcroft Chief Executive Daniel Carter said. “They will retain retail or other town centre uses. But that requires significant capital expenditure.”