Popping to my local: The future of our high streets
The rise of the independents
Retail can be brutal - consumers can be both fickle and fiercely loyal. Whilst the pandemic has put pressure on the entire real estate industry, no sector has been impacted as dramatically as retail. Already experiencing disruption due to the rise of e-commerce, Covid-19 has accelerated retail’s seismic transformation. While many debated ‘the future of the office’, at times it’s felt like retail has had to focus on survival rather than re-invention.
During the pandemic, consumers voted with their feet and their fingers. The uptick that e-commerce has witnessed over the last 18 months has been well documented, driven by both necessity and choice, as the efficiency of click & collect and rapid delivery has proven increasingly appealing. However, as consumers have got to know their high streets a little better, there has also been a substantial movement towards shopping locally and experiencing unique, independent and authentic retail concepts. For retail to survive, it needs to embrace both sides - enabling omni-channel, scalable mass consumption as well as the offer of local, independent retail.
It’s clear that the real estate industry has some catching up to do, to enable physical retail to meet the expectations of the modern consumer. For a successful post-pandemic bounce back, there needs to be a permanent push towards ‘local’ across high streets, town centres and retail destinations, replacing the ‘anonymous’ retail line-ups of mass brands. More than ever, retail landlords must embrace the rise of the independents, the SMEs, family-run stores, creatives, start-ups, entrepreneurs and innovators and support them to revitalise the UK’s retail landscape.
The barriers and solutions to a sustainable retail landscape
Retailers and the real estate sector cannot afford to wait for government support and policy changes to be implemented - retail needs to act now. The single biggest challenge for the re-invention of retail is the rigid structure of conventional leases. This is holding back the regeneration required to rejuvenate the sector and presents a structural barrier to attracting the type of fresh, new retail brands that will excite consumers.
Retail pops-ups are fantastic, creating an immediate buzz and an ever-changing line-up for consumers. But ultimately, pop-ups are a sticking plaster over a much larger problem. A longer-term solution is needed, specifically a permanent shift to a more flexible leasing model.
Deposits are another major barrier that need rethinking. Rather than retailers paying a large upfront cost, there are alternative options, without the landlord having to compromise by accepting a lower deposit. For example, with a Deposit Guarantee, tenants pay a monthly fee and landlords get paid out if the tenant defaults. We estimate there is at least £4bn of capital locked up in retail commercial deposits which could be used by retailers to invest in their business and their growth. Hand in hand with deposits is the ‘profits test’, an archaic method and crude approach to analysing a retailer’s risk.
Landlords know they need to move beyond the traditional ‘profits test’ and embrace independents. Many are now repositioning prime space to smaller retailers, understanding the unique value they bring to a retail environment. Yet as landlords look to embrace smaller tenants with weaker covenants (that don’t pass the profits test), they ironically become more likely to request larger deposits, further increasing the barriers to entry for independent retailers - this is where alternative deposit options could step in and provide a compelling solution.
Keep it local - supporting independent retailers
On a positive note, Centre for Cities’ recent high streets recovery tracker showed how quickly high streets in the UK’s largest cities and towns are returning to their previous pre-pandemic levels of activity in terms of footfall. The upcoming festive period is a great opportunity for physical retail to reposition itself on a sustainable footing for the future.
Covid-19 has provided the real estate industry with a ‘reset moment’ in retail - a unique opportunity for both landlords and tenants to re-evaluate how to best set physical retail up for sustainable success and engage with today’s ever-more discerning consumers.
Smaller, local businesses and new existing retail concepts must be a big part of the answer - while barriers such as the rigidity of conventional retail leases and traditional cash deposits need to be rethought from first principles. There is no silver bullet and it will be an ongoing process to adapt to an ever-shifting retail landscape, but with the right mix of open-mindedness, innovation and collaboration, we will hopefully see our high streets and town centres thriving again soon.