You only have to walk down St. Giles to see one of the numerous casualties of the economic downturn. In October, JJB Sports became one of the 194 businesses that entered administration in the last 12 months, joining a host of high street names, including Clinton Cards, Comet and Blacks. With a contraction of 0.3% in the UK’s GDP in the last few months of 2012, and with Deloitte declaring it had taken over the operations of Blockbuster on January 16th, it would seem that 2013 could be another year where big names get publicity for all the wrong reasons – but why is it that an average of one retailer a week shut up shop in 2012?
Economists have a concept called ‘the shutdown condition’. Essentially, a company is better off producing nothing than producing any positive amount of goods if the price it gets for its products is less than the cost of producing the product, ignoring the ‘fixed costs’, like shop rental. Even if you discount the cost of renting the shop, the remaining costs, like paying staff and buying stock, are very expensive, and if revenue is not high enough to cover these, then the retailer can cut its losses by shutting down.
So why wouldn’t revenue be high enough? You would think that for a retailer like HMV, where they can buy stock well in advance ‘on speculation’ (i.e. expecting people to purchase it in the future), they would be able to turn a good profit. Unfortunately, without sufficient footfall in their shops, no retailer has a chance of turning a profit, regardless of how low the costs of procuring stock. Retailers like HMV, Jessops and Comet faced competition not only from their direct competitors, but from online outfits like Amazon, and from companies which could cross-subsidise their sales – Sainsbury’s for example, was able to sell blockbuster game ‘Modern Warfare 2’ more cheaply than most specialist stores because it would cover the relative losses with its profits from food sales. The profits from HMV’s retail arm fell from £24 million in 2011 to £1.3 million in 2012, a sign of just how dire the situation had become. This didn’t even correspond to a rise in the profits of their competitors – the Game Group entered administration last year, having reported multiple profit warnings to its investors in 2011, and with reports that suppliers were unwilling to do business because of unpaid bills.
However, it’s not just the existence of competitors that has driven many retailers into administration; a general change in technology has heralded the fall of retailers who were reliant upon now-defunct goods, like Jessops and GAME. Jessops specialised in digital cameras and accessories, and yet most smartphones now have cameras that can take pictures and record in high definition. Similarly, Blockbuster, 2013’s first high-profile casualty, specialised in video and DVD rental, but the rise of Lovefilm, Netflix and other download-orientated retailers with much lower costs (and who could charge less) left them unable to compete. Does this mean the demise of these companies was inevitable? No – but they had to be able to adapt. Names like WHSmith diversified into e-books in reaction to the success of the Kindle, and Jessops attempted to emphasise its photo-printing service and the sales of accessories to cameras. For WHSmith, they were moderately successful, with profits of £102 million reported last October; for Jessops however, even that was not enough in a rapidly changing business environment.
So, what’s the impact in the long term? The fact is that 2013 will definitely see more high-street names close, possibly for good if buyers cannot be found. If retailers don’t close, they will definitely downsize or reconsider their position – one reason for WHSmith’s resilience is that its Chief Executive, Kate Swann, has shifted the emphasis of the business away from the entertainment sector towards stationery. But does the collapse of so many big names mean the end of the high street? Not necessarily, for administration does not mean a retailer is gone for good – GAME, now owned by a private investment firm, is reported to be looking to purchase numerous stores formerly owned by its rival, HMV.
The most important lesson for high-street retailers is that the business world is changing, and reliance on past success as an indicator of prosperity in the future is a mistake. It is inevitable that some big names will close, but for those who survive, there are unparalleled opportunities to expand in response to the rise of internet shopping and shopping via smartphone apps. There are benefits to having physical shops on the high street for a retailer, but they cannot be its only source of income; in order to succeed it would seem, retailers need strong sales online as well as on the high street.