Seven Investment’s financial director, Peter Sleep, takes a look at the High Street and says its changing face presents opportunity rather than crisis.
It seems that coffee shops are like mushrooms – they grow overnight with very little encouragement and thrive well once established. This is a healthy development and shows that UK plc is functioning just fine despite all the challenges we read about whether from the internet, high taxes or Brexit.
For as long as I can remember, there have always been predictions of the death of the high street, yet it has remained remarkably robust. Many years ago, commentators were concerned that supermarkets were putting lots of small traders out of business. I remember my mother taking me from the baker, the butcher and the greengrocer (we didn’t have a candlestick maker). They have all disappeared now because they could not compete with the convenience and low cost of the supermarkets.
Change is continual. More recently, many of the electrical stores, music retailers and newsagents have disappeared as we now buy their wares online. It is not only more convenient and productive, it also involves fewer resources like trucks on our road, paper and plastic packaging and labour – surely a good thing.
This is all a part of what the economist Joseph Schumpeter called the “gale of creative destruction” which has been going on since the industrial revolution. The old, expensive and labour intensive ways we work slowly change as more innovative, efficient and lower cost ways of working come along. This is true whether it is spinning and weaving or whether it is a high street in south west London.
Thus old retail businesses disappear and new ones spring up. That process can be painful at times, as employees of Marks and Spencer are finding, but ultimately it is one that makes us all better off. Right now, our high streets are having to both innovate and cut costs in an almost Darwinian way.
The reason we have so many coffee shops today is because it is hard to order a cup of coffee over the internet and because coffee shops are so profitable. For instance, Costa Coffee repays its shareholders in about two years, an astonishingly quick payback, and a lesson that the remaining bookshops have been quick to learn.
Labour costs are high on the high street and even supermarkets are also looking to reduce costs through innovation. They are doing this most obviously by using self-checkout tills which are now the norm in lots of supermarkets and their inclusion will almost certainly increase.
Behind the scenes, hard-pressed retailers are also putting pressure on landlords to reduce rents. So several have entered a legal process called a Company Voluntary Arrangement. This allows them to negotiate rents down or walk away from onerous leases and has a knock on effect with more solvent retailers.
I am optimistic when I see change on our high streets because it tells me that Schumpeter’s “creative destruction” is alive and well. A new coffee shop is a symptom of a new business replacing an old one: almost a statement of confidence in the future. Similarly, I am not surprised that many of the new businesses are coffee shops given their high profitability. The only surprising thing is that we are prepared to pay such high prices for cups of flavoured milk.