For all the noise this week about how UK retailers fared at Christmas, it feels as though we are missing the real debate we should have about the future of our shops – which is that vast numbers of them don’t have a future. And we would be better off accelerating this trend, not trying to hope for a miraculous remission from their terminal disease.
So far we haven’t been able to face up to this. No matter that our consumer preferences are now clear – we buy from larger shops in fewer locations, or online, or, now with click-and-collect, both at the same time! In policy terms, we want to have our cake and eat it … or at least have lots of little cake shops, but only ever shop at the big one. All politicians, local and central, are penned in by the public’s political preferences for a traditional high street. But the same public is the consumers whose spending preferences don’t match their political sentiment. And you can see why people say they want to preserve the traditional high street. Change only has negative outcomes in our current system. Planning restrictions mean that if shop locations are no longer economically viable, they aren’t replaced by something different and better. Instead, they either sit vacant (as one in five shops now do in the North and Midlands) or they are used by charities (who don’t have to be viable, as they don’t pay tax or wages). In the many sub-prime locations, even when shops are economically viable the growth sectors taking over the high street (betting shops, pawnbrokers, nail bars) are often perceived to be symbols of decline. So, no wonder that the public wants to avoid this slippery slope.
However, there are strong economic arguments for forcing the pace of change in retail. Retail is 10% of the UK economy and workforce. That’s the same proportion as manufacturing. If we count wholesale suppliers too, it rises to 15%. Our best retailers are the very best in the world. They are highly productive, fiercely competitive and tapping into overseas demand. But too many of our shops are unproductive, unsustainable and a poor use of the assets (human and buildings) which are locked into them. They are managing decline and just hoping to keep as long as possible. If we want an economy with higher productivity, higher wages, more exports, less dependency on consumption and one which puts its assets to most productive use, why would we resist structural change in retail, prop up failing businesses and prevent ourselves doing something better? The most recent UK government review of the high street in Autumn 2013 said that nearly half of all retail businesses were officially zombies (that was the term they used). And this rose to two-thirds for the smaller retailers. Even if online didn’t exist, we have too much retail space. Between 1971-2004, we added 54% more space in the UK. Always adding, rarely scrapping. At the same time, the number of outlets employing 100 or more people grew by 6000%, whilst the number with 9 or less staff fell by 54%. And then there is online. It looks like 20% of all shopping for Christmas 2013 was online (vs 15% the year before) and for non-food items it was 30%. The major destination shopping centres, the best department stores and supermarkets are faring well. But the less prime locations are declining. Sector specialists suggest that 30% fewer town centre stores will be needed by 2020. Town centres which comprised 50% of sales in 2000 now represent just 40% and falling. Outside London, rents for shops fell by 20% between 2008-12. In some big cities they fell further – e.g. 31% in Leeds and 27% in Nottingham.
This is clearly a historical moment. But will we actively shape the history? The one thing that history teaches us is that you don’t want to be a loser because it won’t be kind to you. When Napoleon said that “England is a nation of shopkeepers” it was a term of great respect, not an insult. With just half the population of France, Britain was formidable due to its stronger economy. In fact, the term “nation of shopkeepers” was popularised by a Scot, Adam Smith, who worried in 1776 that imposing a British empire on the world in order to create customers for British business was “a project fit only for a nation of shopkeepers”. He softened this to say ” or a nation whose government is influenced by shopkeepers”. And it is hard for any government not to be influenced by shopkeepers – all 300,000 of them, big and small, plus their 3m staff. But another person to whom history has not been kind (though nor was he) is King Cnut. He is mis-reported. When he tried to turn the tide in front of a crowd, it was not a futile act of vanity, but actually an ostentatious act of piety. He was proving, as a Christian, that in spite of his being the all conquering King of England, Denmark and Norway, he as a mortal had no power over the waves, unlike God. Politicians, local or national, can’t turn the tide of what is happening in retail. Perhaps they would be better to do what Cnut really did and affirm their inability, rather than do what Cnut is (falsely) reported to have done. The outcome will be the same either way. The tide is on its way.
I think the public now gets it. People see the difference between structural and cyclical change. They know how they are shopping. The real political choice is whether to slow the rate of change or accelerate it. So far, slowing it down is the order of the day. There are a couple of things which currently slow the rate of change.
Firstly, it is hard to change the use of shops. The most obvious option is re-use the sites for much needed housing. The government is consulting on whether small shops might have a bit more freedom to change. But this is a bigger problem. In the UK, shops are classified as “Class A” and this is the toughest class to convert into other uses. In the UK, we use the same term “Class A” to cover the most prohibited drugs. It can feel like one is as addictive as the other. Isn’t this a good time of year to go cold turkey and wean ourselves off the restrictions. This can’t be about the odd shop here or there. We could give much broader rights to change use. Or maybe we need a more dramatic act. Various sector specialists suggest that we need to lose a third of retail space in the next 10 years. Why don’t we require local authorities to have a statutory plan to convert at least 30% of their retail space for housing? In some cases, it may need to be higher given existing vacancies. In some prime locations, by exception, it might be lower. This could go as far as removing the right to operate a shop in the declassified properties. The plans could be produced after extensive local debate, which could help build ownership of the changes and a vision for the future, rather than nostalgia for the past. The solutions might be unexpected – e.g .maybe it is the 1990s big boxes which are voted out and become new housing, or maybe town centre retail areas become very compact, or even vertical, but with lots more people living on the doorstep in former shop sites and recreating in the area.
Secondly, there is also the sensitive issue of business rates. When shop premises can only be shops, it makes sense for government to give tax relief to non-economic shops. And in this context, one’s heart goes out to the very small businesses struggling to balance the books, aided by the small business relief. However, these reliefs are a lot of money, of the order of £2bn per year, propping up operations which are not sustainable. If shop premises can, or indeed have to, be easily and quickly changed to other uses, then the arguments for business rate relief disappear. As do, probably, lots of charity shops and very marginal businesses. There is a counter-argument which is that business rates should be charged on online sales to create a level playing field. This is superficially attractive. But business rates are a property tax. Online businesses do pay them, for offices, warehouses, etc. Why should they pay more again to punish them for their more productive use of assets? Isn’t it better that property taxes incentivise the best use of (relatively) scarce property? If non economic shops are converted into housing developments, then those properties will then pay Council Tax on the property they use.
Thirdly, there is community willpower. At the moment, a lot of energy goes into fighting change and wishful thinking. Letting go and embracing the future, could redirect this energy into creating new and better businesses, jobs and local communities.
Just in case you think my “Bah Humbug” spirit has lasted longer than Twelfth Night, I admit to the same sentimental conservatism about town centres as the next person. But how we approach these retail changes tells us a lot about how willing we are to grasp other difficult nettles throughout the economy. If we want a dynamic, more productive and sustainable economy, then we will have to accelerate the pace of structural change in many areas. It is indeed a time for hard decisions. Creative destruction always looks more like just destruction if we see it as a discretionary choice But it looks more creative if we see it as an inevitable change that we want to embrace and shape. What we do know is that the closure of shops will release hundreds of thousands of entrepreneurs to try their hands at other businesses – a nation of shopkeepers on the move. At least we will have the French worried.