Restructuring for the future of retail Restructuring for the future of retail

Restructuring for the future of retail

09 January 2022

It’s worth reflecting on the performance of the retail sector over the summer as we head into autumn and the golden trading quarter. The ongoing disruption caused by coronavirus restrictions continues to have a profound impact. Some retailers are benefitting from the staycation boom, and others are suffering from disrupted footfall.

What's in store? retail report

Our 2021 survey of the UK retail market, What’s in store? found more than a few surprises. Click to access the full report. 

Access our full retail report

Pandemic forces change

Immediately after the first pandemic lockdown in 2020 there was a wave of retail restructurings but that wasn’t repeated in 2021. This is partly because affected businesses finished their restructurings last year, and partly because the tough trading conditions that undermined retailers have improved a bit – notably in respect of business rates relief and landlords gradually moving to discounted and turnover rents. The retail business rates discount announced in the March 2021 Budget was especially welcome. 

As a result, in 2021 we’ve seen a modest retail recovery that was mainly driven by a reduction in retailers’ fixed operating costs. The pandemic has partially addressed the structural issues of high fixed rents and business rates which used to undermine the competitive position of physical retailers. 

RetailNonetheless, one fifth of the retailers surveyed for our What's in store? report in August 2021 said that a Company Voluntary Arrangement / restructuring debt would be a priority for their business over the next two years.

Rent negotiations and store repurposing

There is a sea change happening in retail rents. The high level of voids, coupled with the government’s moratorium against landlord action (extended to 25 March 2022), has led to many landlords actively negotiating revised rents as a means of securing tenants. Shorter tenancies and turnover-based rents are replacing upwards-only rent reviews. We’ve helped clients to exit poorly performing stores and renegotiate rental agreements – for one client, we were able to achieve a 70 per cent reduction in their rent bill.

Landlords can expect these negotiations to continue. 24 per cent of the retailers surveyed said that reviewing their store estate would be a focus, although the good news was that 58 per cent expected to expand their retail footprint. 

Retailers that weathered the pandemic are therefore operationally far more efficient than they were before it started and may now have less competition than they did before. Overall retail sales may be bumpy compared to 2019, but conversion and average sales are higher in many cases. The reduction in operating costs significantly improved profitability for some businesses. In addition, many retailers used the furlough scheme to tailor their staffing requirements and were able to preserve cash as a result.

Shopping centres plagued with a high proportion of voids and those dependent on travel hubs, specifically in London, continue to suffer. Retail issues caused by the lack of commuters should diminish as people return to their workplaces. Likewise, the reopening of universities and the return of students to city centres will boost retail spending. 

Landlords are recognising that they cannot command premium rents on premises with permanently reduced footfall, and shopping malls and department stores that won’t see a return to pre-pandemic levels of footfall may need to be repurposed. John Lewis, for example, plans to build 10,000 homes on the land it owns. This repurposing will continue to reduce retail capacity, and hopefully drive footfall into the remaining centres. 

Better times ahead

In conversations with a range of retailers, we found that they are relatively optimistic about the future despite the past 18 months and recent disruptions. Supply shortages may complicate what would otherwise be a normal Christmas (some product lines are out of stock already). Even so, shopping as a leisure activity is part of our culture and there is an appetite for its return after months of lockdowns and enforced self-isolation.

So, while there’s wide acceptance that the short-term prospects for retail are slightly uncertain, the outlook still looks good in the longer term. 

What's in store? Retail report

Our 2021 survey of the UK retail market, What’s in store? found more than a few surprises. Click to access the full report.
Damian Webb
Damian Webb
Partner and co-head of Restructuring
Damian Webb
Damian Webb
Partner and co-head of Restructuring