Department stores – Resistance is Futile

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By James Watson – 3rd May 2018

So it’s finally out in the open. House of Fraser has announced a CVA and Debenhams appear to be not far behind them in a process that could prove to be a pivotal moment for High Streets and shopping centres across the country.

Department stores are essentially re-sellers of other people’s brands. Their USP was the convenience of a ‘one-stop’ shop where you could get everything from socks to a sofa. That has been eroded by online retailing, brands selling direct and the relentless price war that has ensued.

There are, of course, honourable exceptions. Selfridges is arguably the best department store in the world and one of the finest shopping experiences you could wish to have. M&S’s clothing and home sales are up 5.3% year-on-year as a result of a proactive approach to a changing market. But even the redoubtable John Lewis – which has a very strong digital offer – has struggled to get the balance right. Some of their recent openings are rumoured to be trading below target and it will be interesting to see how the discussions go in respect of Westfield Croydon where they are being courted to anchor the scheme, and the upcoming break clause on their store at Touchwood Solihull.

The gap that failed department store chains would leave is profound. Three years after BHS’s demise more than 70% of their stores are still vacant. However, all is not lost, and there are a couple of (elementary) things that can be done:

1. CVA spells ‘opportunity’: close the stores where population densities are insufficient and accept the rental reductions on over-rented stores that still have a pulse.

2. Move the goalposts: change the basis of rental valuation moving forward to a turnover model. A Gross Internal Area basis of valuation where the same £psf rate is applied to the ground floor as the fifth floor is hugely inappropriate: just ask anyone working in Lighting on the top floor.

Taking rents back to sustainable levels and closing non-profitable stores has to be accepted by landlords if this 100+ year old format is to survive.

In the long run we actually believe that the department store format has a positive future. Brands want a direct relationship with their customers, look at what has happened in Central London and other major cities worldwide. Taking space in department stores in many ways is the perfect solution, provided rents are appropriate and footfall is sufficient.