By elizabethh

End of the Space Race

Three astronauts from the International Space Station have just landed in Kazakhstan. But no, I’m not thinking about that kind of space story. I’m thinking about retail space and I’m intrigued by another major retailer calling attention to the disadvantages faced by traditional physical stores. A few weeks ago I was startled by the head of B&Q saying that he would like to do without one quarter of his stores, complaining among other things about the burden of property taxes. This month it’s Justin King, chief executive of J Sainsbury, with a similar message about taxes.

“There is a difference between bricks and mortar retailers who pay rates, National Insurance and all the other domestic taxes that are due, and online retailers who by virtue of their lack of physical presence in the high street don’t contribute in the same way.”

UK retail business rates (property taxes) are a major cause for complaint at the moment. Any tax is unpopular, especially in difficult times! However business rates are based on complex value calculations which are now out-of-date. A revaluation was planned for 2015, but has been postponed.

Some retailers would benefit from a revaluation, in line with current difficult trading conditions. In other areas, values – and taxes – would rise considerably. Just who the gainers and losers would be is not certain. We’ll have to wait now to find out. The bigger point seems to me, however, to be about the fundamental shift in the nature of store portfolios, in the e-commerce world.

Time was, that a fundamental driver of retail corporate success, in terms of profit growth, was simply store expansion. Those who could keep on enlarging their store portfolios kept on growing and kept on pleasing the market. The race for space was the name of the game. I can remember stock market analyses which explained stock price, based on expected earnings, largely on the basis of expected space expansion. In the last few days I’ve listened to the news about Tesco cancelling its UK store expansion programme; about John Lewis expanding overseas without opening any stores at all; and about Thomas Cook planning a huge downsizing of its store portfolio. And I’ve been out shopping: a depressing experience with vacant stores everywhere.

So today, the strategic game looks quite different to me. It’s not necessarily a space race, building or occupying more and more stores. Many retailers have quietly shifted their thinking about store sizes too: using smaller spaces more effectively. Of course there are growing firms, looking to be represented more widely, or, like Morrisons, fill the holes in a national network. But extending and deepening the brand, rather than extending the physical reach, looks much more like the key to growth.

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