House of Fraser and Debenhams are planning to overhaul their stores in a bid to remain relevant in a changing retail sector.
The revamp plans came after retailers noticed customers were preparing to spend more of their disposable income on leisure and holidays instead of shopping.
Both department store chains’ results, which come out this week, have shifted attention back on to the sector, which appears to be under pressure.
Chinese-owned House of Fraser this week recorded flat sales growth of £1.3bn for the year to 28 January, while like-for-like sales rose by 0.9%. The retailer said it was planning to upgrade its stores to give them a more “lifestyle-led” experience.
When Debenhams announces its results on 20 April it will also reveal plans to modernise its portfolio and in-store experience.
UK department stores have also been shuffling their boardrooms. John Lewis appointed Paula Nickolds as its first female managing director last year, while Debenhams hired Sergio Bucher, a former director of Amazon’s fashion arm, to spearhead its push towards an enhanced in-store experience.
Along with these personnel changes, what property changes could be on the horizon?
Too much space
The main challenge facing department stores, which can range from 60,000 sq ft to 200,000 sq ft, is that they are too big for modern retailing.
The problem is not too many stores, it is that they have too much space within them. Department stores and landlords need to work together to find the best way to reconfigure this space.
Allan Lockhart, property director of NewRiver Retail, says: “I don’t see another BHS situation coming through for the department stores. The real challenge for them is that they have way too much space and managing space and owning space costs money. If you have too much, then there is going to be a cost, which could be dragging down earnings, and that is what is playing on the minds of the equity investors at the moment.”
The space causing the greatest challenge is on the upper floors, which can be hard to lure customers to. Debenhams has agreed deals with Sports Direct to take space on the upper floors of some of its stores.
“Moving customers up through the building is a challenge, and the surplus space on the upper floors is not really attractive to other retailers,” says Lockhart. “Store operators are going to have to be creative to make the most of space and work with landlords to find ways to make it perform more efficiently.”
Debenhams is also looking to expand the use of hair salons and beauty treatment space throughout its portfolio in a bid to pull more customers through its stores. It is also working with brands such as Joe and the Juice and Patisserie Valerie to take surplus space and attract more people through the door.
Online balance
One possible solution for surplus space is to use it for logistics, which can improve the delivery of department stores’ rising online sales.
Installing more click-and-collect points utilises surplus space and helps get customers into stores.
House of Fraser’s results show that online sales accounted for 21.8% of total sales last year. The retailer is planning to improve the performance of its logistics and supply chain alongside its announced store refurbishment programme.
Fiona Hamilton, global head of international retail brands at BNP Paribas Real Estate, says: “The consumer wants the engagement alongside the physical offering. I think we will see department stores in new formats – they are evolving, not dying. Digital could be the department stores’ new best friend. There is an opportunity for them there.”
Use brands to lure footfall
Another way for House of Fraser and Debenhams to improve their in-store offering is to select and position brands carefully in an effort to make better use of space.
House of Fraser’s results revealed a 0.6% decline in the sales of in-house brands, and the retailer has announced plans to reduce its own-brand ranges. Debenhams also plans to cull some of its own-brand ranges after reporting a similar dip in sales.
Updating the offer of new brands is key to getting consumers in the door. Hamilton adds: “Selfridge’s is a prime example here as it constantly updates it offer. Some retailers are recognising the steps that need to be taken to make sure their offer continuously appeals to the consumer.”
However, getting the balance right between the amount of brands in store can be difficult. While stocking more outside brands is a clear footfall driver, it comes with more costly overheads, which can shrink profit margins.
Jonathan De Mello, head of retail consultancy at Harper Dennis Hobbs, says: “The department stores are suffering like everyone else because they have the brands within them, they have been hit by the crash in the value of sterling, their costs have gone up and their wholesale margin has gone down. They have felt the pinch.
“House of Fraser’s results show that its brands have not done very well and beauty has gone up. Everything that has happened to it has helped to inform Debenhams’ strategy.”
Store closures?
With many on leases as long as 20 years, shutting department stores is an expensive exercise. This could put a retailer such as Debenhams, which owns few of the freeholds in its 165-strong portfolio, in a tougher position if it decides to consolidate its stores. However, retailers such as John Lewis, which owns more of its freeholds, could have more flexibility if it moved to reconfigure its portfolio.
De Mello says: “Debenhams has the most shops and as a result is the most likely to think about rationalising. If it is going to continue to invest in online then it may have to look at trimming some of the estate.”
Another hint of the nervousness in the department store sector is the fact that three Debenhams freehold investment opportunities are currently on the market. Most of the investment opportunities have the department stores on long leases, but these offerings suggests that investors are apprehensive about the longevity of a tenant that size.
Not just the UK
The UK is not alone in its department store tribulations. The US market is also suffering. Sears has recently warned that it may be in danger of shutting down, and Macy’s is closing 100 shops around the US in order to stay profitable.
De Mello adds: “It is a highly competitive market and the likes of Macy’s have really struggled. It seems that the ones that are mainstream are struggling the most, and there are certainly parallels to be drawn with the UK.”
The occupier view: Morleys Stores
David Hordle is managing director of London department store group Morleys Stores, which is opening a store in the former BHS at Bexleyheath in south east London.
“The business has been going since 1921 so it has changed dramatically over the years,” he says. “We have recently invested £3m in bringing the stores up to the right contemporary look and feel. We go for a much smaller footprint than our competitors. The biggest store in our portfolio, at 86,000 sq ft, is in Wimbledon and the average store size is 40,000 sq ft.
“The bigger competitors have started to bring in retailers to fill voids and to fill space and so far it seems to be working, which says to me that there’s an opportunity there. In retail you can’t rest on what you are used to, you need to keep listening to the customers and satisfying their needs.
“It has taken months of hard work to get the Bexleyheath store off the ground. Bringing in new beauty brands to the area as well as fashion and home selection gives the customer another reason to come into the shop.”
To send feedback, e-mail amber.rolt@egi.co.uk or tweet @AmberRoltEG or @estatesgazette
