Key points

Many iconic brands have significantly scaled back their presence on the high street or now only trade online.
Retailers will need to maintain a balance between their online and physical presence to achieve operational resilience.
Retailers will stand to benefit if they strive to adapt, and to seek out new methods and strategies that fit within their current world dynamic.

By Damian Webb, Partner, RSM UK

Retail industry trends in the past few years

Over the last couple of years, as advisers, we have witnessed a fundamental and structural change in the retail industry. Globally, the enforced lockdowns, as a response to the outbreak of COVID-19, radically undermined physical retail; exacerbating the underlying structural issues associated with bricks-and-mortar businesses, notably a high fixed cost base which, in many cases, undermined the viability of the underlying delivery model.

The COVID-19 pandemic accentuated these issues. Businesses, in many cases, were faced with a stark choice; either move their services or products wholly online, or reduce their core estates to mainstream shopping centres, or premium-quality shops. In 2020, across the globe, restructuring specialists saw iconic household names collapse, such as JC Penney in the United States, and Virgin Australia. Here in the UK, these trends were more pronounced due to higher underlying property costs, and we saw the failure of major retailers such as, Debenhams, House of Fraser, and Accessorize.

What is happening now?

Most retailers today, with a few exceptions, continue to trade with a smaller footprint and a lower-cost base; many iconic brands have significantly scaled back their presence on the high street or now only trade online. The internationally recognised U.S. retailer, GAP, as an example, closed a great number of stores in the UK, Ireland, and across Europe, by September 2021. However, the retailer will continue to operate internationally online. Interestingly, GAP recently struck a deal with the UK high street “powerhouse”, Next, in order to preserve some of its physical presence as a concession online and within some UK stores.

The savagery of the failures and restructurings in 2020 has ensured that the restructured retail market is actually in a much better place than initially anticipated. Retailers have managed, in many cases, to reduce their cost base, notably through securing significant rent concessions, and reducing underlying overhead costs. Rent is now often linked to activity, rather than underlying property values, so that retailers can ensure costs are variable and in line with activity, as compared to the pre-pandemic fixed costs.

While it is clear that people enjoy the convenience of online shopping, there is still a robust demand for physical retail; however, the experience and proposition for consumers is key. Many retailers are therefore making substantial investments in their stores to address years of under-investment, which also acts to counter the limited experience that can be enjoyed via online purchases. Online sales have struggled after the initial boom of the pandemic, and the underlying high-delivery and return costs have illustrated the benefits of a strong, physical retail model. With landlords looking to address their portfolio of voids, many retailers are opportunistically looking to expand their own portfolios, effectively countering the pre-pandemic trends.

The future of physical retail

There appears to be a modest renaissance of bricks-and-mortar retail globally. There are a range of factors influencing this, but a fundamental aspect is that people are, generally speaking, social beings, and shopping is a key part of social interactions. This notion is being increasingly reflected on the high streets, with an increase in coffee shops, services, and activity-based retailers. This is intrinsically driving footfall and discretionary spending. With many incentives being available to retailers, it is becoming an attractive proposition, as compared to the high-acquisition costs associated with online retail.

However, online retail is not going anywhere soon. Retailers will need to maintain a balance between their online and physical presence to achieve operational resilience. Wherever retailers are located, understanding the inherent challenges is critical. For example, physical shops have very little storage for stock, compared to the warehouses from which products can be ordered online. There is also the convenience aspect of being able to jump from store-to-store, item-to-item, all without having to leave your seat. Online retail and physical retail will continue evolving together, and we are going to see new brands on the high street, and cutting-edge, innovative stores. Amazon, for example, has a predominantly online presence, but has branched out in the past few years with bricks-and-mortar book and grocery stores; there is even an ‘Amazon Salon’, all of which fuse technological advancements with the in-person, physical-shopping experience.

A new age in retail: the internet

In the wake of these recent developments and issues, the traditional retail industry has been forced to change and enter a new era. Industry titans, and other older businesses that survived the impact of the pandemic, are competing with younger and more socially aware brands on platforms that they lack experience with, notably - the internet and social media. Staying on-message and keeping up with trends has become a crucial element of surviving within this new age of retail. The connectivity that the internet and social media provides has meant that retailers need to be more aware than ever of their demographic and the trends of their customers. In the UK, an example of this was the failure of Arcadia Group Ltd, where they lost touch with their core audience. Originally, Arcadia’s popular and fashionable brands, such as Topshop, Topman, and Miss Selfridge, appealed to younger consumers, but as this demographic increasingly moved online, and was influenced by social media, the performance of these brands deteriorated. The later acquisition of these, and other brands from the Arcadia stable, by the likes of ASOS plc and Boohoo Group plc, organisations that were built via the internet and social media, demonstrated this new world order. Around the world, the same could be said for a number of other failed retail businesses, the structural issues being the same: underinvestment in their online presence, an absence of creative direction, and a poor understanding of core-customer needs and trends.

A new age in retail: social media and influencer marketing

It is no surprise that social media can have a large impact on societal opinions and trends. The unprecedented rise in social media’s popularity has created a new form of outlet for business marketing that is especially effective for the retail sector - the influencer. The idea behind an influencer is to sell a personality and a lifestyle that followers are influenced by. Influencer marketing, when done correctly, can be a wildly profitable venture. A single influencer can have multiple online outlets; Facebook, Twitter, Instagram, TikTok, and YouTube; each with their own audiences and potential customers. Companies such as Pretty Little Thing, ASOS, and Boohoo, have been noted for their use of influencer marketing, collaborating with social media personalities that have millions of followers, enabling a greater promotional reach.

It does not stop there, though. We have seen entire businesses built off the back of influencers, many of whom have also built their own brands, mostly in the fashion and beauty sectors. Gymshark, for example, began as a small start-up. The founder, Ben Francis, was a pizza delivery boy when he founded Gymshark in 2012. When his company achieved a $1.3bn valuation last year, Ben Francis became one of the richest self-made people in the UK, aged under 30. Gymshark was one of the earlier brands to adopt the influencer marketing model, and its success could largely be attributed to this methodology. In their early days, and even now, they would gift free clothing sets to fitness influencers, who would then recommend their products to their large following; building a collaborative loyalty between brand and influencer, a loyalty that would then also be passed onto followers. It is a business model that yields very robust growth prospects, provided that the product is good, the social media campaign structures are well-thought out, and there is a genuine connection between brand and influencer.

The next chapter

As we all know, the world is changing. In order for retailers to survive, it is increasingly critical that they change with it. In many senses, the retail sector can be seen as conservative with many businesses refusing to change, subsequently resulting in their demise. It is important to recognise that the way things are currently done, or have been done in the past, does not necessarily future proof the business. Retailers will stand to benefit if they strive to adapt, and to seek out new methods and strategies that fit within their current world dynamic; they need to challenge every aspect of their business and never become too comfortable in the way things are done, keeping their finger on the pulse at every step. While physical retail may be making a comeback, the internet is not going anywhere, and as these two landscapes merge, retailers will need to find new and exciting ways to attack these opportunities with creativity and curiosity.
 

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