Business, Innovation and Skills CommitteeWritten evidence submitted by CACI Limited

We are pleased to submit on behalf of CACI, a memorandum with regard to the topics listed in the Committee’s announcement of the UK Retail Sector Inquiry. We have focussed on, “The impact of on-line sales and direct sales on High Street retailers” as our expertise is particularly relevant to this topic.

As background, CACI is the leading consultancy in location planning in the UK. We advise retailers, including Clarks, Debenhams, John Lewis and Pets at Home on their retail portfolios and the most appropriate locations for store openings. In our work advising retail property developers and owners such as British Land, Land Securities and Westfield, we interview 80,000 shoppers per annum across 80 major shopping locations. These surveys (undertaken face to face in retail centres) provide the most comprehensive view of how the UK shops. We also advise retailers and developers outside the UK.

Whilst we do not request the opportunity to give oral evidence we do recognise the importance of the Committee’s inquiry and would be willing to provide further assistance and information if required.

Ian Thurman
Vice President, Location Planning, CACI

12 April 2013

1.0 Executive Summary

1.1 We have focussed on the implications for retailers and retail locations as a result of changing consumer behaviour particularly towards shopping for comparison goods.

1.2 Our analysis argues that the failures of some retailers and the difficulties of some town centres reflect a range of factors rather than merely the impact of the internet. Some retailers and retail locations were only sustained by the pre-recession boom in consumer spending.

1.3 We provide evidence to show that comparison retailing is increasingly focused on a smaller number of larger centres and we expect this trend to continue.

1.4 We suggest that proposals seeking to improve town centres are destined for failure if they focus on comparison retailing. We believe that many smaller and weaker centres need to find a role other than comparison retailing and, probably retailing in general, if improvements are to be achieved.

1.5 Further retail property development will be financially viable and necessary in selected locations to meet consumer demands and replace outdated retail property. Policy should take into account the range of retail formats and locations required by retailers meeting the demands of modern consumers on the evidence of their shopping habits. Policy makers should be wary of looking back to a nostalgic view of traditional “High Streets”.

2.0 Introduction to CACI

2.1 As background, CACI is the leading consultancy in location planning in the UK. We advise retailers, including Clarks, Debenhams, DFS, Hobbycraft, Hugo Boss, John Lewis, Pets at Home and Whistles on their retail portfolios and the most appropriate locations for new stores. We advise retailers across the full range of store formats and locations including convenience stores, town centres, retail parks, factory outlet centres and regional out-of-town centres.

2.2 In our work advising retail property developers and owners such as British Land, Intu, Land Securities and Westfield, we interview over 80,000 shoppers per annum across 80 major retail locations. These interviews (undertaken face to face in retail centres) provide the most comprehensive view of how the UK shops. In association with the British Population Survey, we also report quarterly on consumer confidence by demographic group.

2.3 In recent years we have been involved as consultants in the major UK retail centre developments at Westfield London, Westfield Stratford and Land Securities’ Trinity Leeds advising on potential turnover, catchment reach and tenant mix.

2.4 We advise retailers and developers outside the UK. As a consultancy we are not directly involved in the leasing or sale of property.

3.0 CACI Submission

3.1 This submission is made on behalf of CACI with particular regard to the issue of “The impact of on-line sales and direct sales on High Street retailers”. We have considered this issue in the context of wider factors that affect the performance of the retail and retail property sectors.

3.2 We include evidence to show that there are challenges other than online and direct sales that should be considered in understanding the challenges facing “High Street” retailers. We would also question the usefulness of the term “High Street” in understanding retail. It harks back to a bygone era and the term fails to adequately reflect the needs of consumers and the retailers that meet their demands. Britain’s retail hierarchy now consists of a very wide range of retail formats. These formats all play their part in meeting the needs of modern consumers.

3.3 There is a nostalgic view of independent retailers and local shopping in traditional streets that is backed by sparse evidence of consumer demand. Our evidence on comparison shopping, with regard to consumer demand and shopping patterns points to increasing amounts of spend heading towards larger centres both in-town and out-of-town. In our view there is a danger of policy being swayed by nostalgia rather than reflecting the reality of consumer demand.

4.0 Retailer Issues

4.1 2012 and 2013 saw headline grabbing retail failures leading some to foretell the death of the bricks-based retail sector and town centres. These failures did not come as a surprise to anyone keeping even half an eye on the retail economy. The clear reality is that the market is flat, likely to remain so for the foreseeable future, and that the share of all retail sectors moving online is only going to grow in the years ahead, as shown by Figure 1.

4.2 A detailed analysis of the latest retail performance figures shows that despite this backdrop there are similar numbers of retailer successes to the failures. Whilst the success stories do not match the heady days of pre-recession retail growth, that is a fact of the new reality, and investors and landlords will review their expectations in line with this new inevitability.

4.3 The big name recent failures have been mortally wounded by one, and often more, of the following factors that has impacted them more than the pervading market conditions:

Failure Factors

Technology shift

Both in terms of their core products being particularly attractive online and, in some cases, the products they sell being made obsolete by new digital download formats

Category killer

The presence of a dominant competing player in the retailer’s sector (whether bricks, clicks or omni-channel)

Retail centre consolidation

Leaving retailers with too many stores in the wrong locations as increasing shares of shop-based (offline) spend head towards the healthiest comparison retail destinations (Figure 2)

Commoditisation

With customers unable to discern a compelling reason to visit a retailer’s stores

Under-investment in omni-channel

Over-reliance on stores at the expense of internet and mobile platforms

4.4 With regard to the latter case, we would argue that under-investment in omni-channel alone has not yet been the principal reason for any of the major casualties. Most retailers are just about keeping pace with the need to open alternative channels, relative to the online risks in their market sector. Whilst some might argue that the likes of Blockbuster and HMV could have moved faster, the reality was that they were hit more by a combination of the first and second conditions.

4.5 There simply was no room for them in the new market with Amazon as the established power player. It was an almost certain demise irrelevant of how much they could have invested. In many cases of retailers with weak store performance (eg HMV, Waterstones, Homebase and Argos) these issues were exacerbated by store portfolios bloated by over-ambitious expansion of store networks when consumer spending and rents were both high.

4.6 In understanding the effect of online sales on bricks-based retailers, there is a danger of believing a retailer’s press release that cites online sales as the reason for weaker store-based sales. The internet has joined poor weather as an excuse for profit warnings. The internet has increased the rate of change in “survival of the fittest” on the high street but it is a long way from being the sole cause of retail failures.

4.7 The relationship between online and “bricks” should not be seen as mutually exclusive. Analysis we have undertaken for major retailers shows that some omni-channel retailers increase their online sales when they open a new bricks & mortar store because of the “brand anchor” and “showroom” effect.

4.7 At CACI we track the “Retailer Health”1 of over 750 multiple brands to help us both advise property owners with their letting strategy and to help us to evaluate the strength of destinations for retailers’ growth and optimisation strategies. The vast majority of recent retailer failures fell into the “Weak” and “At Risk” categories.

4.8 We are inevitably going to see retailers fail in the years ahead. Failures will occur where the pressures outlined above overcome what were often once solid retail businesses. We expect other retailers to fall by the wayside. The highly competitive nature of retailing and the attractions of the sector to entrepreneurial innovators create conditions where established businesses fail when they do not meet the latest consumer demands. We are still seeing fallout from the debt-fuelled consumer boom when weaker retailers with outdated formats and poor product offerings could still survive.

4.9 The current retail sector is about success as well as failure. The good news story, that so often gets overlooked, is that we have a similar sized list of retailers that we have quantified and categorised as either “Strong” or “Very Strong”. This list includes retailers as disparate as Cath Kidston and Bright House, Whistles and Hobbycraft, Evans Cycles and Pets at Home. These retailers have appropriate formats, their product ranges have a clear consumer target in mind and they are well-grounded financially.

4.10 Primark [Very Strong] and WHSmith [Strong] are fascinating examples of the complexities of retail which mean that general headlines about the state of the market are inevitably wide of the mark. Almost uniquely Primark has no transactional web presence and a few years ago WHSmith was looking over-spaced and irrelevant across a set of categories that seemed to be heading for retail Armageddon. Primark’s differentiation means it continues to be a stellar growth story. Meanwhile, whilst WHSmith’s like-for-like retail sales may not be a good news story, their continued steady growth in profits shows how good management and merchandising in a controlled realignment to today’s consumers can result in a post-recession success story.

4.11 Successful retailers will grow and some of that growth will be met by store expansion. It is important that policy provides the opportunity for growth rather than seeks to corral successful retailers into inappropriate and outdated retail locations.

5.0 Property Issues

5.1 The challenge for the property market is the two-way link between Retailer Health and Centre Health. Too many unhealthy retailers or vacancies in a retail centre leave the centre vulnerable to decline. Yet retailers need to realign their portfolios to maintain their Retailer Health, avoiding over-exposure to declining/“unhealthy”, as well as over-rented schemes. Inevitably this will result in on-going consolidation of both retailers and retail destinations.

Figure 1

ONLINE SHARE ACROSS ALL RETAIL SECTORS

Source: CACI

Figure 2

CONSOLIDATION OF STORE-BASED SPEND TO HEALTHIEST RETAIL CENTRES

Note: The Centre Health grading is assessed from a range of variables across a number of topics, including type & size of retail offer; position in local retail hierarchy; local economy; population and spending trends.

Source: CACI

5.2 Prior to the recession when life was good for consumers, retailers and property investors there were supposedly few issues to resolve. Consumers were spending at high levels and investors believed that any shop with a “good retailer covenant” was the ultimate high return, low risk investment. And some retailers expected that revenue growth would go on forever for bricks-based stores.

5.3 Recent analysis by CACI shows that the prospects for 2,750 of the UK’s 4,000 shopping locations are so poor that they will struggle to survive as viable locations for retailers selling comparison goods beyond 2015. With grocery retailers calling a halt on further development (except for convenience stores) the demand for retail space is in long term decline. However there will be locations where more retail development will be commercially justified (see section 8).

5.4 Across a sample of shopping locations surveyed by CACI, four main trends were noted between 2011 and 2012.

17% increase in shopper visit frequency;

marginal increase in average spend per visit;

4% decrease in average dwell time; and

14% decrease in average catchment size.

These centres tend to be higher grade and larger centres. Across the year average spend increased by 12% in “A” grade centres and slightly decreased in other centres. We believe that this shows a movement to larger healthier centres for consumers’ comparison shopping needs. However whilst spend and dwell time declined in the B-E centres, frequency of shop increased. This is evidence that centres providing a more local function have a future in providing convenience services rather than shopping trips for comparison goods.

5.5 According to Sir Mervyn King in a speech in 2012, “a downward correction of expectations about future incomes and wealth has rendered unprofitable some of the investments made before the crisis.” We might feel that it’s a reassuringly obvious comment but the impact is more serious…” a good example is the investment made in shopping centres which is now proving less valuable than anticipated, or making redundant some of the pre-existing stock of retail space.”

5.6 We would suggest the general principle is accurate but the weight of decline will fall much more strongly against the retail locations classified by CACI as C, D, and E. Whilst many shopping centres offer destinations favoured by consumers, there will be substantial amounts of older retail space that will be surplus to requirements as far as comparison retailing is concerned.

5.7 For retailers, choices about their future store locations can be stark—a well-marketed shopping centre with turnover-related rents or an individual high street unit in a location in decline with upward only rent reviews. The choice will only become clearer as time goes on. In the CACI study only 116 centres were “A” grade—strong vibrant centres that will continue to thrive and 283 centres were “B” grade. An increasing economic divide between retail centres’ catchment populations will bring a strong geographical element to decision making in UK retail.

5.8 With many comparison retailers now thinking carefully about the numbers of stores required in an omni-channel world, there will be significant amounts of redundant retail space. On the flip side there will be an intense battle for the larger A & B class centres where every retailer wants a slice of the consumer action. These A & B centres are responsible for 44% of offline comparison spend, despite being less than 10% of all retail centres in the UK.

5.9 For investors, there will be long term concerns about many of their retail property assets. Gone are those days when retail property anywhere in the UK with a supposedly good retailer covenant and upwards only rent reviews was considered as the ultimate hedge against inflation and as safe as gilts. Retail administrations have shown the errors in this assumption.

6.0 Rejuvenating Town Centres

6.1 We believe that many retail locations will not achieve rejuvenation in their comparison retailing function as a result of government initiatives & task forces. Retailers will need to tread very carefully in structuring a viable portfolio and property owners will have to assure their retailer clients that their investments have a long term future based on the strength of the local economy and its consumers. These decisions will be founded on robust analysis of potential turnover rather than “town centre initiatives”.

6.2 We have classified the Portas towns as shown in Figure 3. Nearly half of these locations are in CACI’s “At Risk” list classified as D or E. Larger centres such as Stockport (D) and Wolverhampton (D) need to address retailing issues in their centres from a detailed understanding of their retail function and catchment. However for the smaller D and E locations we do not believe that that significant improvement will be achieved in these centres by focussing on comparison goods and supermarket retailers. In these locations other floorspace users need to form the major drivers for change. Plans for smaller town centres within these “At Risk” grades will be destined for failure if they focus on comparison retailing as a salvation.

Figure 3

PORTAS TOWNS—1ST AND 2ND WAVE: CENTRE HEALTH

	Retail Location	Centre Health Grade
Portas – 1st wave	Bedford	B
	Croydon	A
	Dartford	C
	Bristol – Bedminster	D
	Liskeard	B
	Margate	D
	Market Rasen	C
	Nelson – Lancashire	C
	Newbiggin-by-the-Sea	D
	Stockport	D
	Stockton-on-Tees	C
	Wolverhampton	D
Portas – 2nd wave	Ashford – Kent	C
	Berwick-upon-Tweed	C
	Braintree	E
	Brighton – London Road	C
	Hatfield	E
	Leamington Spa	B
	Liverpool	B
	London – Waterloo	A
	London – Forest Hill	D
	London – Lower Sydenham	E
	London – Commercial Road	D
	London – Roman Road	D
	London – Poplar	E
	Loughborough	C
	Lowestoft	E
	Morecambe	D
	Rotherham	E
	Tiverton	C

Source: CACI

7.0 Centre Health of Retail Locations in BIS Committee Members’ Constituencies

7.1 We recognise that the Members on the BIS Select Committee may find it useful to have local context for the analysis we have presented. Figure 4 below shows how a selection of town centres, other retail locations in their constituencies and nearby larger centres are classified in CACI’s Centre Health analysis.

7.2 As the analysis shows in respect of some Members’ local centres there is a major challenge in finding a new role for many town centres. Of all centres in the Member’s constituencies there are 2 “A” grade centres; 4 “B” grade centres; 11 “C” centres; 15 “D” centres; and 56 “E” centres. We believe that the challenge to improve many of the centres graded “D” and “E” will not be met by attempts to focus on comparison retailing or in restricting the expansion of larger retail centres that are an increasingly important choice for consumers.

7.3 A full listing of retail locations by Members’ constituencies is included at Appendix A.

Figure 4

SELECTED CENTRES IN MEMBERS’ CONSTITUENCIES AND NEARBY LARGER CENTRES

Retail Centre	Centre Health Score Band	Constituency
Canvey Island	E	Castle Point
Rayleigh—Stadium Way	C	Castle Point
Basildon	D
Thurrock Lakeside	A
Edinburgh—Gyle Centre	C	Edinburgh West
Edinburgh	B
Glasgow	B	Glasgow North
Glasgow—Partick Cross	E	Glasgow North
Gosport	E	Gosport
Portsmouth	C
Portsmouth—Gunwharf Quays	A
Irvine	E	North Ayrshire and Arran
Northampton	B	Northampton South
Northampton—Nene Valley Retail Park	B	Northampton South
Sheffield	C	Sheffield Central
Sheffield—Hillsborough	D	Sheffield Central
Meadowhall	B
Stratford-upon-Avon—Maybird Centre Retail Park	C	Stratford-on-Avon
Stratford-upon-Avon	A	Stratford-on-Avon
Sunderland	C	Sunderland Central
Gateshead—Metrocentre	B
Newcastle upon Tyne	C
Wednesbury—Gallagher Retail Park	A	West Bromwich West
West Bromwich	D
Dudley—Merry Hill	B
Worcester—Elgar Retail Park	E	Worcester
Worcester	B	Worcester

Source: CACI

8.0 CACI’s Views on the Future for Retail Locations

8.1 The financial problems of some retailers and the difficulties faced by some towns reflect a range of factors in addition to the internet. These issues were concealed by the pre-recession boom in consumer spending.

8.2 Evidence is provided to show that comparison retailing is increasingly focused on a smaller number of larger centres and we expect this trend to continue.

8.3 Proposals seeking to improve smaller town centres will fail if they focus on comparison retailing. We believe that many smaller weaker centres need to find a role other than comparison retailing and, probably retailing in general, if any initiatives are to succeed.

8.4 Policy on retail development and initiatives to support town centres should reflect evidence from consumer preferences and the range of retail formats required to meet consumer demands.

8.5 Policy makers should be wary of looking back to a nostalgic view of the traditional “High Street” that in reality fails to meet the needs of consumers.

8.6 There will be retail development opportunities across the UK in selected locations to meet consumer demand. Town centre retailing with outdated formats should not be a reason to halt improvement of retail floorspace.

8.7 We are currently undertaking analysis to identify those locations across the UK where further expansion/development of comparison-focused shopping would be commercially justified.

Appendix A

CENTRES IN MEMBERS’ CONSTITUENCIES AND NEARBY LARGER CENTRES

Retail Centre	Centre Health Score Band	Constituency
Canvey Island	E	Castle Point
South Benfleet	E	Castle Point
Thundersley	D	Castle Point
Hadleigh—Essex	E	Castle Point
Rayleigh—Stadium Way	C	Castle Point
Canvey Island—Northwick Retail Park	E	Castle Point
Basildon	D
Bluewater	A
Thurrock Lakeside	A
Edinburgh—Craigleith Retail Park	E	Edinburgh West
Edinburgh—Gyle Centre	C	Edinburgh West
Edinburgh—Corstorphine	E	Edinburgh West
Edinburgh—Davidson’s Mains	E	Edinburgh West
South Queensferry	E	Edinburgh West
Edinburgh Airport	C	Edinburgh West
Edinburgh—Glasgow Road	E	Edinburgh West
Edinburgh	B
Glasgow	B	Glasgow North
Glasgow—Finnieston Street Retail Park	E	Glasgow North
Glasgow—Argyle Street	E	Glasgow North
Glasgow—Byres Road	E	Glasgow North
Glasgow—Hyndland Road	D	Glasgow North
Glasgow—St George’s Cross	E	Glasgow North
Glasgow—Maryhill	D	Glasgow North
Glasgow—Summerston	E	Glasgow North
Glasgow—Possil Park	E	Glasgow North
Glasgow—Anniesland	E	Glasgow North
Glasgow—Great Western Retail Park	E	Glasgow North
Glasgow—Drumchapel	E	Glasgow North
Glasgow—Partick Cross	E	Glasgow North
Glasgow—Scotstoun	E	Glasgow North
Fareham—Speedfields Park	E	Gosport
Gosport	E	Gosport
Stubbington	C	Gosport
Rowner	D	Gosport
Lee-on-the-Solent	D	Gosport
Portsmouth	C
Portsmouth—Gunwharf Quays	A
Irvine	E	North Ayrshire and Arran
Brodick	D	North Ayrshire and Arran
Saltcoats	D	North Ayrshire and Arran
Dalry—Ayrshire	D	North Ayrshire and Arran
Kilbirnie	E	North Ayrshire and Arran
Beith	E	North Ayrshire and Arran
Millport	D	North Ayrshire and Arran
Largs	C	North Ayrshire and Arran
Lamlash	D	North Ayrshire and Arran
Northampton	B	Northampton South
Northampton—Abington	E	Northampton South
Northampton—St James End	E	Northampton South
Northampton—Weedon Road	E	Northampton South
Northampton—Becket Retail Park	D	Northampton South
Northampton—Nene Valley Retail Park	B	Northampton South
Northampton—Riverside Retail Park	E	Northampton South
Northampton—Duston	E	Northampton South
Northampton—Far Cotton	E	Northampton South
Northampton—Orbital Trade Park	E	Northampton South
Sheffield—Abbeydale Road	E	Sheffield Central
Sheffield—Guernsey Road	E	Sheffield Central
Sheffield—Highfield	E	Sheffield Central
Sheffield—Eccleshall Road	C	Sheffield Central
Sheffield—Broomhill	D	Sheffield Central
Sheffield	C	Sheffield Central
Sheffield—Parkway Central Retail Park	E	Sheffield Central
Sheffield—Rutland Road	E	Sheffield Central
Sheffield—Hillsborough	D	Sheffield Central
Meadowhall	B
Bidford-on-Avon	D	Stratford-on-Avon
Alcester	E	Stratford-on-Avon
Studley	C	Stratford-on-Avon
Henley-in-Arden	D	Stratford-on-Avon
Stratford-upon-Avon—Maybird Centre Retail Park	C	Stratford-on-Avon
Stratford-upon-Avon	A	Stratford-on-Avon
Shipston-on-Stour	C	Stratford-on-Avon
Sunderland	C	Sunderland Central
Sunderland—Fulwell	E	Sunderland Central
Sunderland—Chester Road	E	Sunderland Central
Sunderland—Millfield	E	Sunderland Central
Sunderland—Grangetown	E	Sunderland Central
Sunderland—Sunderland Retail Park	E	Sunderland Central
Sunderland—Pallion Centre Retail Park	E	Sunderland Central
Sunderland—Southwick	E	Sunderland Central
Sunderland—Leechmere Industrial Estate	E	Sunderland Central
Sunderland—Trimdon Street Retail Park	E	Sunderland Central
Gateshead—Metrocentre	B
Newcastle upon Tyne	C
Tipton	E	West Bromwich West
Great Bridge	E	West Bromwich West
Oldbury—Oldbury Green Retail Park	E	West Bromwich West
Wednesbury	E	West Bromwich West
Oldbury	E	West Bromwich West
Wednesbury—Gallagher Retail Park	A	West Bromwich West
West Bromwich	D
Dudley—Merry Hill	B
Worcester—Elgar Retail Park	E	Worcester
Worcester—Shrub Hill Retail Park	E	Worcester
Worcester	B	Worcester
Worcester—Hylton Road	E	Worcester
Worcester—St Johns	E	Worcester