// Store-based profit margins have more than halved over the past 8 years, according to new research
// Pre-tax margins at the top 150 UK retailers plunged from 8.8% in 2009/10 to 4.1% in 2017/18
// Soaring operating costs, inflexible legacy lease structures and changing shopping habits have contributed to the fall
Store-based profit margins have more than halved over the past eight years, due to a combination of operating costs, legacy lease structures and changing shopping habits.
According to a new report by global professional services firm Alvarez & Marsal, in partnership with Retail Economics, pre-tax margins at the top 150 UK retailers plunged from 8.8 per cent in 2009/10 to 4.1 per cent in 2017/18.
The fall has been attributed to soaring operating costs, inflexible legacy lease structures and changing shopping habits.
Retail Economics Retail Cost Base Index shows that operating costs rose by 2.4 per cent in 2018, and by 10.8 per cent over the last five years.
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The research also indicates that large multiple retailers now occupy up to 20 per cent more store space than is necessary and financially justifiable, despite the spate of store closures in the past six years that saw a net loss of more than 7000 units.
Retail Economics suggests that business rates cost the retail industry £7.5 billion last year alone, while each hike in the National Living Wage cost the industry around £1.5 billion per year.
Meanwhile, demand for retail space in the UK has hit its lowest level since 2007, with vacancy for high streets, shopping centres and retail parks all rising to 11.5 per cent, 13.6 per cent and 7.1 per cent respectively in the latter half of 2018.
Retail Economics also estimates that around 37,000 units lie empty across the country, and 11,600 of that total have been unoccupied for more than three years.
Despite the gloomy data, the report said physical store browsing accounted for 80 per cent of total retail sales and is expected to remain above 65 per cent over the next five years.
This suggests that physical store browsing will remain an important part of the shopping experience for consumers, especially among millenials and generation Z groups.
Alvarez & Marsal managing director Richard Fleming said that reports of the “death of the high street” have been exaggerated, although he acknowledged that most of the UK’s biggest retailers are in fighting to stay afloat.
“We’re entering a new era of retail, presenting opportunities for forward-thinking incumbents, entrepreneurs and investors,” he said.
“Those that collaborate with landlords and local authorities will be the big winners going into the next business cycle.
“This needs to involve striking the right balance between retail and leisure through strategic partnerships, nimble pop-up schemes, agreeing temporary rent cuts that allow companies to reshape their debt and operational structure, or adopting turnover-based rents where retailers and landlords stand or fall together.”
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