Store-based profit margins at breaking point
A brand new report highlights more bad news for the UK High Street with store-based profit margins plunging by more than half in eight years, pushing swathes of retailers to ‘breaking point’.
The study by professional services firm Alvarez & Marsal (A&M) and Retail Economics found that profit margins on in-store activities for 150 of the UK’s biggest High Street retailers have dropped from 8.8 per cent in 2009/10 to 4.1 per cent in 2017/18.
The drop in margins has been driven by a surge in operating costs - up 10.8 per cent since 2014 - attributed to a legacy of inflexible lease structures combined with changing consumer habits as footfall dries up.
Business rates remain a significant burden for retailers that are overly exposed to property, the study found, following a £7.5 billion overall rise last year due to government revaluation.
The survey found that in some parts of the country the cost of business rates now exceed retailers’ rental values.
A&M estimated that the UK’s large multiple retailers now occupy up to 20 per cent more store space than they need and can financially justify in the current climate. As a result, retail rental and capital value expectations have fallen to 10-year lows as investors lose confidence in the market.
Demand for UK retail space is at its lowest since 2007, with secondary locations, like local shopping centres and high streets, experiencing the steepest declines in footfall. This has translated into a 60 per cent decline in the total volume of retail transactions at these locations over the last two years, according to the report.
The large multiple retailer space has been most acutely affected, with a consistent store decline in each year since 2013, culminating in a net loss of 2,481 stores in 2018 alone.
Further pressure has been piled on by consecutive wage increases, coupled with the impact of the Apprenticeship Levy, which has further accelerated labour costs; all of which has taken its toll on retail viability.
Each hike in the National Living Wage is estimated to cost the retail industry around £1.5 billion per year.
Richard Fleming, managing director and European head of restructuring at A&M, 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.