UK retailers squeezed more than continental peers

UK retailers are squeezed more than their peers in continental Europe, according to Rogier Quirijns, portfolio manager of the European Real Estate Securities Fund at Cohen & Steers.

Quirijns made the comment following the news on Thursday that the House of Fraser will close 31 – almost half of its 59 - stores in the UK. The 169-year old department store chain has proposed paying lower rents on 11 more stores via a company voluntary arrangement (CVA), claiming its portfolio was ‘unsustainable’ unless creditors agree, the Financial Times reported.

The stores scheduled for closure  include HOF’s flagship London Oxford Street store. HOF’s Chinese owner, Nanjing Xinjiekou Department Store, needs the rental reductions to sell its majority stake to C.banner International, whose chairman is the brother-in-law of the chair of Nanjing Xinjiekou’s parent company.

HOF is the latest in a spate of UK retailers to announce store closures as consumers shift away from the traditional high street, Quirijns noted. UK retailers are facing rising costs due to factors including weakening sterling, on the back of an increase in national living wage, and higher business rates – a property tax set by the government based on ‘rentable value of the property’, he added.

Cyclical and structural causes
‘Revenue is increasingly difficult to maintain for retailers as UK GDP is slowing and consumers cannot fund more spending from lowering saving rates as they are already historically low. Also, consumers are experiencing negative to flat real income growth in general. In addition, consumers continue to shift spending to online competitors. Online sales continue to grow at double-digit rates, and the penetration rate at 16.4% in the UK, at year-end 2017, is among the highest in Europe. The overall retail pie is not growing at the present, but is shared amongst more retailers.’

An increasing number of UK stores are trading unprofitably or failing to make the transition to omnichannel, he added. ‘Recently, we have seen an acceleration in retailers in the UK entering CVA, which enables retailers to pay back creditors over a fixed period of time and renegotiate existing lease terms. Other retailers have announced strategic plans in which store portfolios will be rationalised over the coming years.’

Quirijns said that some of the causes for store closures are cyclical, such as GDP and consumer demand. However, other causes are structural such as the transition from offline to omnichannel. ‘We expect retailers that fail to transition to omnichannel to experience a difficult trading environment and expect store closures to continue from this subset of the industry.’


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