Store Wars: A new hope as the shop strikes back

Four years on from the start of lockdown, the legacy of the pandemic and its impact on consumer shopping behaviours is still visible. But while some of the changes have persisted, none have sparked a fundamental shift. Despite early predictions of a radical sea-change in consumer behaviour, shoppers have returned ‘en masse’ to physical stores, which is boosting the prospects for brick-and-mortar retailers and retail places across the country. Below we examine the evidence for and drivers behind the resurgence of physical shopping, and the subsequent revival of the store.

1. Online sales growth slips into reverse

The amount spent online has been moderating in the last 18 months. The monthly data is volatile and can be misleading, with the latest ONS numbers showing online sales fell by 4.1% in January 2024, before rebounding to 2.1% growth in February. More instructive is the annual data - online sales grew by 1.0% over the year to February, most likely due to inflation. 

This low /no growth scenario is reflected in CACI’s latest data - online retail sales are forecast to remain flat in 2024, at £112.5bn. At the same time, physical sales are forecast to grow from £368bn to £389bn, representing >5% growth. As a result, the online penetration rate is actually forecast to decline from 23.4% of total sales in 2023 to 22.4% in 2024, the first time the upward trajectory of online has been reversed.

UK Retail Sales, Physical and Online Splits: 2023 and 2024

Source: CACI, JLL

2. Prime footfall and in-store spend recovery driving occupier demand

While footfall remains marginally below pre-COVID levels at an aggregate level, the post-pandemic return to the store continues to gather momentum, particularly for prime retail locations. Footfall across Hammerson’s properties rose 3% in 2023, with dwell time up 5%. And spend levels have generally recovered more strongly than footfall - according to New West End Company, overall spend in the West End in 2023 was in line with 2019 levels, despite footfall remaining 19% down.

Retailers are recognising and reacting to this shift, with recent research showing that demand for new UK stores remains buoyant, despite the ongoing challenges. Listed retailers have announced plans to open over 200 stores this year, including B&M, Dunelm, Greggs and Marks & Spencer. Notably, Primark is investing more than £100m in its UK stores in 2024, incorporating three new shops, three relocations and two ‘significant extensions’. Pandora is also planning a ‘large expansion’ of its store network over the next couple of years, Hobbs has plans for seven new stores, while Ikea plans to open two more stores in Oxford and Brighton, having recorded a million new store visits in the last year.

3. Online pureplays continue to take physical space

And then there are the online pureplays which continue to take physical space. These online brands, such as Albaray and Sosander, are investing in stores to build brand awareness and trust, as well as providing a more visible and tangible presence in the community. Sosander, for instance, plans to open up to eight stores this year in affluent towns across the UK. 

The rationale is clear: despite a boom in online shopping in what was already one of the world’s most developed ecommerce markets, most products are still sold in shops. Overall, the trend of online brands expanding into physical retail is a response to the evolving needs and preferences of customers, as well as a recognition of the benefits of an omni-channel retail strategy.

4. Costs and returns: key drivers of store-revival

The store-revival represents a remarkable reversal from 2020 and 2021, and is being driven partly by a substantial reduction in fixed costs of operating stores, due to steep rental falls, and the recalibration of business rates. The ecommerce boom during the pandemic years was partly borne out of low cost of capital for online pureplays. This has now reversed, with physical (omni-channel) retailers now set to outperform, as online has been hit with higher prices for everything from freight to marketing.

In particular, online returns remain a pressing problem for the sector, with clothing returns averaging 13% across purchases made either in shops or online and as high as 30% for online-only. Retailers including H&M, Zara, Boohoo and Urban Outfitters have all introduced fees for online purchases. However, a recent report found that just 9% of consumers would be willing to pay to return goods where it had been previously free, while 39% would instead return the item to a shop - another driver of consumer (and retailer) demand for stores.

5. Polarised recovery: RWH and prime locations ‘outperform’

The latest data from Local Data Company on store openings / closures shows that the store-revival is not universal across all location-types. At an aggregate level, there are arguably still too many stores in the UK, which partly explains the 33% increase in overall net closures in 2023 compared to the previous year (largely due to services such as banks and betting shops moving online). However, there are some bright spots, with openings on retail parks net positive (+0.3%), reflecting consumer demand for the convenience and accessibility of the out-of-town offer.

Also, prime retail locations are ‘outperforming’ - the latest data from the REITs indicates that leasing levels are at record levels (Hammerson +23% LFL), and tenant sales performing strongly (URW +6.4%, above core inflation). This, together with active shopping centre curation, bodes well for rental tension and future rent growth potential – indeed we have already seen some evidence of growth at the prime end of the market in Q1.

Outlook: online growth restarts, but future of the store assured

We are clearly in a period of rebalancing of the online and in-store channels. However, few analysts believe that online sales have peaked - as inflation cools and the economy stabilises, online retail sales (and indeed offline sales) are expected to grow steadily from 2025 onwards. According to CACI, total UK retail sales will reach £634bn by the end of the decade (growth of 32% from 2023). Physical sales will increase by almost £70bn to £436bn, but online sales will increase by £85bn to almost £200bn (c.1.5% p.a growth in online penetration rate). As a result, online is expected to represent just over 30% of total retail sales by 2030.

For retailers, they face a pivotal juncture as they continue to merge their physical and online operations, and identify which channel will be more profitable and where to prioritise investment. It is instructive here to analyse the recent report from Next, which has been more successful than most at combining stores with online operations. According to its full-year results, while much future investment is being directed at online (notably its Total Platform), Next expects its store portfolio to stay roughly the same size, reflecting its view that demand for in-store shopping will remain relatively stable.

The re-balancing between the channels will continue to playout, and with online retail growth restarting from next year, retailers certainly need to focus on enhancing their digital presence. However, it is now clear that shops will remain at the heart of customer-centric, ‘unified commerce’ strategies – as a result of resilient consumer demand for physical shopping, the outlook for the store is more positive than it has been for several years.

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