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The future of the Retail Sector

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The future of the Retail Sector

The future of the Retail Sector

If you’ll pardon the pun, here’s a basket-ful of musings on the retail sector, looking back on the past year and into the future...

Bricks vs clicks

The sparring match between the physical and online retail experience rumbles on with physical retail’s apparent continued demise making headline news – fuelled, of course, by restrictions imposed in the last 12 months and highlighted by the loss of some massive names from the high street, including those recently bought by online platforms in deals which involved shedding the stores.

It’s inevitable that forced closures and ongoing limitations as a result of social distancing will continue to put pressure on physical retail, particularly in the short term, but it would probably be naive to lay the blame for its woes entirely at Covid’s door, or indeed to give up all hope for the tangible shop format. It’s arguable that Covid has just swept away some businesses which were already on unsteady ground and accelerated the need to truly rethink the retail offering.

Rent

The introduction of the moratorium on “commercial eviction” for non-payment of rent gave retailers some breathing space at a time when lockdown left them unable to trade from their stores to amass the income they needed to meet rental obligations. The moratorium is due to end on 31 March 2021.

Most landlords and tenants reached agreements fairly early on as to what was to happen with regard to the “missing” rent – whether it was to be paid in equal chunks over the next few quarters or collected on a stepped basis over a period time, with or without interest. We’ve also seen parties agreeing to push back break and review dates or even extend the term by a year, pretty much ignoring that 2020 ever happened!

Online

Imagine we’d had a pandemic at a time before there was widespread access to the internet! We’ve written previously about the importance of connectivity’s role (here) during these times and it wasn’t a surprise that statistics showed a substantial uptick in the number of households buying online and an increasing percentage of total retail spending occurring across the ether. We’d be lying if we said we’d not experienced the frisson of hearing a knock followed by the joy of opening the door to a cardboard box on the mat!

It’s likely that the popularity of online shopping will remain high, particularly until Covid is entirely under control, but as the case numbers decrease, the vaccination programme continues and lockdown measures ease, it wouldn’t surprise us to see shoppers return – even if only in the short term - as people crave the physical experience.

You only need to look at the evidence from Summer 2020 which saw a degree of “revenge shopping” when non-essential retail re-opened and it’s always interesting to note that the lure of some new trainers and the desire to hang out with mates after months of being stuck indoors saw many of the younger generation keen to get back to the shops, as this clearly illustrated the significance of the social side of the physical shopping experience for even the most tech-savvy generation.

The experience

Once the novelty of being able to go out to the shops again starts to wane, it’ll be interesting to see who retains footfall. Retail brands have been under pressure to provide much more than a storage facility of goods that people can buy. When they can purchase quite easily from home, why would they come to store?

Various concepts have sprung up with the aim of attracting customers to come and to stay, from in-store masterclasses and other events using the retailer’s products, through to curated collections and complementary concessions such as coffee, make-up or technology. The interaction between website, social media and physical store is also important in this scenario with retailers looking to build brand presence and to interact with consumers on all levels.

Support local & the high street

At a time when we were asked to work from home where possible and were forbidden to stray too far from our doorsteps, local shops took on an enhanced role. Social media was awash with calls to “support local” and there was ongoing interest in independent shops offering something different to the mainstream.

With the successful switch to working from home for many and the acceptance of home-working actually being feasible, those who would usually be supporting the “commuter economy” with their lunchtime and after-work shopping and leisure activity in the cities, may well be swerving the commute, logging on at home and popping to the local shops during the day.

The potential for the resurgence of the high street is a lively debate at present. Easier planning laws may facilitate change, diversity and flexibility, allowing spaces to be more tailored to the needs of individual localities and not just to be filled with rows of shops. It would be nice to see spaces which facilitate a range of potential uses without needing too much in the way of capex for tenants and rental agreements which allowed for flexibility.

Companies may look to support changes in working patterns by moving into the high street to embrace the concept of satellite offices more local to a tranche of employees. Let’s not forget the continued drive towards sustainability and more conscious purchase choices – particularly amongst the younger demographic - which sees people happier to support shops with a cause or a focus on their employees or the environment.

The key to revitalising the high street is not to pine for the old but to create an entirely and tailored place which offers a diverse mix of employment and public services through to retail, leisure, beauty and culture, with a particular focus on community and interaction.

"The future of retail – Let’s be honest, nobody is entirely sure what the future has in store for retail, but the chapter entitled “Covid 19” may well have been the shake-up call to accelerate the pace of change."
The legal docs

Naturally, we’d like to wade in with our views as to what we might see on the legal front with regard to the documentation and its commercial basis...

Turnover rent leases 

Turnover rent leases have long been a feature in the retail sector, much more than in other areas. Unlike the traditional quarterly fixed rental payment, turnover rent leases appeal to retailers as the rent is relative to their success in the store (it’s generally a percentage of turnover, usually subject to a base rental amount – although the concept of a base is also being challenged). With ongoing Covid restrictions, we saw many landlords offering to switch their terms to a turnover basis, at least in the short term, in order to provide a degree of assistance in the face of continuing uncertainty whilst providing the potential for them to recover some income, albeit probably at reduced levels.

With calls for landlords and tenants to work more collaboratively, we suspect that we’ll see the turnover rental model being used more as it seems to provide a structure for that collaborative and risk-sharing structure. However, it’s not without its limitations; issues surrounding certainty of income and concerns as to impact on investment and valuation will need to be considered.

In addition, in a world where stores are increasingly being used as physical showrooms and warehouses for pre- and post-online activity, careful thought needs to be given on a commercial level as to what is included within the turnover definition.

Shorter lease terms

Shorter lease terms or more frequent break options, providing a high degree of flexibility to adapt to a changing market place, might also be high on a retailer’s wish-list. Whether they have to pay for this flexibility with higher rents is one for the agents out there!

Lease documentation 

While we’ve moved away from very traditional documents drafted with a quill pen, a degree of mystery does often still surround some leases, particularly in terms of terminology, and they can sometimes be a bit on the long side. With a drive for more flexibility comes a demand for straightforward leasing documentation and clear advice so lawyers need to be ready to document these arrangements in a way which protects the parties but also allows for the process to run swiftly and smoothly in order to be able to adapt to changing circumstances and needs.

Pandemic clauses 

Just as threats relating to terrorism, changes to legislation and new case law has inspired additional and alternative clauses in the past, pandemic clauses may become a more regular feature and parties should consider talking about this up front as part of the commercial discussions, so as to agree the principles around which the documents should be drafted.

Get in touch

If you need help with any legal agreements connected to the high street or retail in general, please do get in touch with Rhiannon Penney, as we’d love to help.