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2024 Retailer Watchlist Summary

Core Content

Knight Frank's 2024 Retailer Watchlist provides an assessment of the health and risk of the UK's top 300 retailers based on their likelihood of encountering financial or operational distress. The report aims to offer early warning signals to landlords, valuers, and investors, enabling them to prepare for potential challenges in the retail sector.

The Watchlist classifies retailers into six categories based on their risk profile, with 31 multi-channel retailers identified as 'at risk' (10.3% of the base), and 27 online pure-players also marked as 'at risk' (9%). This represents an improvement compared to 2022, when 36 (12.0%) multi-channel retailers were flagged.

Key Takeaways

• Retail Distress Overview: Retailer failure is a complex and multifaceted issue, often driven by structural challenges rather than simple explanations like weak consumer demand or online competition. Retailers may fail through various forms, including full liquidation, CVAs, or administrations, with some cases involving strategic restructuring or repurposing.

• Store Closures and Vacancy Rates: In 2023, 61 retailers failed, impacting just 971 stores, the lowest since 2015. Overall vacancy rates have stabilised at around 14%, though this varies by location. Shopping centres, for example, have a higher vacancy rate of 17.6%.

• Sector-Specific Distress: Fashion is the largest contributor to retail distress, accounting for 38.5% of all store closures between 2008 and 2019. Department stores and variety chains, often seen as the main culprits, only accounted for 7.9% of closures. Off-licences and music/video/DVD retailers also had significant impacts, with off-licences contributing 15.5% of failures.

• Online Pure-Players: The rise of online retail has reshaped the sector, with online-only retailers being more vulnerable to failure. The report highlights that 27 online pure-players are now at risk, a 22% increase from 2022. These businesses often face long-term financial challenges and are less likely to achieve profitability.

• Historical Context: Retail distress has not been a consistent trend, with fluctuations over the years. The most severe distress occurred in 2008/2009 (Global Financial Crisis) and 2020 (pandemic). The report notes that while the number of retailers failing has increased, the number of stores affected has decreased, suggesting a shift in the retail landscape.

Methodology and Classifications

The Watchlist is based on Mintel's 2024 Retail Ranking, which includes the top 300 UK retailers with annual turnover of £60 million or more. Retailers are classified into six categories:

• Red: Already in administration or recently undertaken a CVA.
• Pink: Major risk; severely under-performing or CVA/administration rumoured.
• Orange: Moderate risk; some downsizing or store rationalisation likely.
• Green: No immediate apparent risk.
• Brown: Major risk for online pure-players; severely under-performing or CVA/administration rumoured.
• Yellow: No immediate apparent risk for online pure-players.

2024 Results

• Reds (3.3%): Include multi-channel operators such as Wilkos, Ted Baker, and Supergroup, as well as online pure-plays like Farfetch and Victoria Plum.
• Greens (55.0%): The majority of retailers are considered low-risk, with the proportion rising to 60.2% when considering turnover-adjusted data.
• Pinks (10.3%): Reflect a slight improvement from 2022, with 31 operators identified as at risk.
• Browns (9.0%): Online pure-players at risk, up from 22 in 2022.
• Yellows (11.0%): Online pure-players with no immediate risk, down from 33 in 2022.

Property Implications and Consequences

• Retail failure has significant implications for property markets, particularly in terms of vacancy and reabsorption of space.
• Department stores remain a challenge due to their historical presence and the difficulty in reabsorbing their vacant floorspace.
• The report suggests that the high street is becoming more resilient, with fewer store closures per retailer failure, indicating a more nuanced retail landscape.

Conclusion

The 2024 Retailer Watchlist highlights a more stable retail market, with a focus on multi-channel retailers and a growing concern around online pure-players. The report underscores the importance of understanding the underlying causes of retail failure, which often lie in financial management, ownership structure, and market dynamics rather than just the rise of online retail. For the real estate sector, this means a shift in focus towards non-fashion operators and a greater emphasis on financial due diligence.