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When one store closes, another one opens…

Ainsley Moore Head of UK Real Estate Advisory, PwC United Kingdom

Our latest store openings and closures research, as expected, paints a fairly bleak picture of what’s to come for high street retail and leisure. There have been fewer openings, an increase in closures, and permanent changes to the make-up of shopping and leisure destinations.

With openings and closures, comes a significant strain on real estate and, with property often accounting for a significant proportion of costs, difficult strategic decisions will need to be made. However, none of the trends we are seeing have been initiated by the COVID-19 pandemic alone, rather it has accelerated major trends that were already taking shape. Businesses have been afforded little time to react, but there is a rare opportunity to create a mandate for potentially radical business transformation for which real estate can be the enabler. 

We believe there are a number of short and medium term approaches that can allow businesses to seize this opportunity and emerge leaner, smarter and stronger.

Amid accelerating closures (a record 11,120, and record net decline of -6,001) there have still been consistent openings (5,119 - the highest since 2017).

Short term

Support your cash flow

Whilst arguably, the crisis has accelerated a longer term market restructuring that was already pending, dealing with the immediate issues in hand must take priority:

  • Engage in proactive negotiations with landlords to restructure existing leases. A consensual approach is more effective and efficient and is more likely to drive the best outcome for all parties.    For example: turnover rents offer a potential lifeline to both landlords and tenants if pitched at the right level; or, the option to rebase rents to more sustainable levels can help maintain investment value for landlords. We expect long term town centre retail rents to continue to fall in non-prime locations. However, landlords left with empty properties and large business rates liabilities will still be keen to let the property – even if it’s at a heavily reduced rent.
  • Consider the opportunity to release necessary cash from assets; for example, selling owned properties and leasing them back from the new owner, providing a cash flow from the freehold which can be used to support operations.

Medium term

Use real estate to drive change

Property is an often-underestimated enabler of cultural change and business growth. For businesses able to take a longer-term view, it’s important to think holistically about how a business will occupy real estate and how cost savings could be used to facilitate strategic change. 

  • Review your real estate strategy to ensure alignment with the strategic objectives and the future size and shape of the business.
  • Assess current supply and future demand for real estate (both from the business and the market) to optimise the configuration, reduce operating costs, and generate income.
  • Develop a comprehensive business case for change, informed by robust analytical evidence.

Optimise your costs

With a clear view of the business' future direction and with an understanding of the assets/locations that they want to be in long term, then it’s important to consider how this can be achieved most effectively. For example could the business’ leased portfolio be renegotiated to achieve rent reductions? Options might include:

  • Extending the lease term in return for a lower rent cost and potentially rent free incentives - this does not have to be done on a ‘business as usual’ asset-by-asset approach, but can be done in a more unique procurement style lease regear, delivering significant savings across a portfolio of assets in a short time frame.
  • Where a business has the same landlord for multiple assets, there may be the ability to negotiate a swap of underperforming assets out for no cost, capitalising on the value uplift that is delivered to an investor through regearing the retained leases.

Optimise your revenue

Use data to uncover patterns and trends in customer purchasing behaviours and make better data driven decisions.

  • Understand the services your customers purchase outside of your stores, to identify potential sublet or concession opportunities.
  • Understand the key drivers that affect the revenue generating ability of differing site locations or concession types.
  • Estimate new site revenue based on historical, catchment area and banking data.
  • Predict effects of site openings and closures on other sites and predict the potential market share of varying concession alternatives.

Think differently

When it’s right for the business, leaders should grab this chance with both hands. While hasty decisions are to be avoided, however, so is inertia. The changes that have been surfacing in the real estate sector are accelerating and can no longer be ignored. 

Read 'Stores openings and closures H1 2020'

Contact us

Ainsley Moore

Ainsley Moore

Head of UK Real Estate Advisory, PwC United Kingdom

Tel: +44 (0)7595 611487

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