The news that American Eagle has opted to not open on either of the UK’s two premier shopping streets is very noteworthy. First, an American retailer coming here and taking a realistic view is a rarity. All too often, they do little or no research, pay far too much for space, and then feel forced to price too high in a naive attempt to make the economics work. So hats off to American Eagle who have priced sensibly, and not been seduced by the bright lights and promised riches of prime West End floorspace.
Does this say something about UK retail occupancy costs? Absolutely! The fundamental shift in UK retail trading economics has been underway for a while now, and it has much further to go. The reality is that the capacity of retailers to pay as much for space as they have in the past is in decline. Their margins are being squeezed and almost all are looking to product suppliers to help finance cost reduction. The idea that occupancy is somehow immune to this is fanciful.
Right now, most retailers’ store portfolios are delivering yoy LFL sales declines. Their positive numbers are relying on online, and that revenue is mostly earnings dilutive. I am NOT saying that no one can make money from stores any more, including prime locations. What I am saying however is that the decades-long upward-only easy money for landlords is over, just as it is for their retail tenants.
** More detailed analysis about the future landscape of UK retail and shifting economics can be found on the subscription website