Another festive season has come and gone, and the latest sales data released on ‘Retail Super Thursday’ tells us stories of a number of former high street heavyweights who are struggling and whose traditional business models are now inadvertently causing their downfall.
Winners and Losers
But how are stores, that used to be the pinnacle of British retail, now suffering their worst Christmas since the height of the financial crisis? Before the results of Retail Super Thursday had even been released, the growing disparity between traditional bricks and mortar retail and ecommerce retail had created a backdrop of tense trading conditions.
Some of the losers from the 2018 festive period included HMV, who have recently been called into administration for the second time in six years as a result of changing consumer habits and a (no longer recent!) shift to online streaming, and Debenhams, who have been struggling for some time, reported like-for-like sales falling 6.2% in the 18 weeks to January 5th.
Many retailers are referencing volatile and increasingly difficult trading conditions as the cause of these disenchanting results, with retail correspondents confirming that our high streets have been left exposed and vulnerable thanks to the spiralling cost of keeping a bricks and mortar stores open, the decline in consumer footfall during November and December and of course the increasing competition coming from online giants such as Amazon.
A Shift Towards Online Shopping
Each year Christmas shopping increasingly shifts more towards being an online event, but is it fair to ascribe the rise in ecommerce businesses as the main catalyst for this trend and the causal reason for the downfall of the great British high street? This narrative that the high street is suffering because digital has an unfair advantage and are stealing away customers is a tired one and requires unpacking. Let’s take the often cited ‘rates’ debate for example.
Ecommerce businesses and traditional bricks and mortar stores are both competing for consumer interest in a crowded marketplace, however operating a successful online store requires a completely different business model and involves a widely different distribution of running costs.
Distribution of Costs
In a recent article, Amazon confirmed their UK business rates of £63.4m, which is roughly £40m less than Next despite generating over double the number of sales compared to the UK retailer. Looking further into these figures, only £2m of Amazon’s rates bill (3%) comes from the seven Whole Foods Market stores that they own, and the business rates for their High Street Kensington flagship amount to nearly £1m. Amazon commented that: “Online sales are still less than a fifth of total retail sales in the UK”.
The additional tax burden for high street retailers plays a significant role in the growing imbalance between ecommerce and high street stores and adds additional pressure to already tense trading conditions. However, as noted above, the two operate using two completely different business models which require two completely different distributions of costs. To simply accredit the troubles facing the high street to the rise in ecommerce and its supposed advantages is both irresponsible and inaccurate and adds fuel to the notion that digital businesses should be taxed more.
The two largest costs for a high street store are likely to be their rent and their stock, both of which are governed by the private sector. Rates bills come under focus because they are legislated by the Government and are not insignificant of course, but small relief on this one cost alone will do little against poor gross margins on the long term performance of a business.
Furthermore, rates on a high street should be high as they cost more to maintain! We need to invest in and improve our city centres, a central government decision to cut costs here would only serve to put an increased strain on local government and could consequently result in our shopping districts becoming even less desirable places to go. Rates may be an easy target, but they are ultimately unlikely to reverse the current market trends.
The Price of A Ecommerce Store
So why does digital still get the blame for this cost being different when it comes to running an online store? Let’s look at this from the ‘etailers’ perspective, there are no barriers to entry when creating an online store, for example, competition is rife and can come from nowhere. In order to run a successful business and generate sales online, a large percentage of your costs need to be spent in driving traffic to your site as there will be virtually no organic footfall on day 1 without prior funding or investment in your online footprint via SEO, PPC and social media.
A retail store on the high street, on the other hand, may be paying a higher percentage of rent and rates, but they get a guaranteed or the very least a predictable level of footfall on day 1 and every day thereafter, making these figures effectively a part of their marketing cost. Comparing marketing costs, rent and rates across the industries would be a far more revealing analysis to undertake.
Etailers do benefit from a tax system geared towards encouraging research and development where there are notable reliefs available, which no doubt contributes to the low rates of tax that these digital businesses pay. We should look to similar reliefs for the high street, rewarding innovation and those businesses genuinely investing to improve the nature of their retail, rather than un-targeted and blunt measures to reduce rates.
When it comes down to it, an ecommerce store is the same threat to a high street store as an escalator is to a set of stairs. One is seen as more convenient than the other, but preference will always come into play and really they are both just different means to the same end – to sell a product to a consumer. The next step for stores hoping to survive the changing retail landscape rests in their ability to innovate their customer experience and integrating a seamless multi-channel approach which will make it easier for customers to shop their products.
CEO& Founder, Digital Cake