Caught in a web of rapid change

From kathleen barrington: 14 March 2010

By Kathleen Barrington

They say that we tend to overestimate the impact of technology in the short term while underestimating it in the longer term.
I was reminded of that adage when I learned that a receiver had been appointed to one of my favourite bookshops, Hughes & Hughes, last month.
The company blamed its difficulties on a collapse in consumer demand; falling passenger numbers going through Dublin and Cork Airports, where it has a number of concessions; the unwillingness of landlords to cut rents; and competition from the internet.
The media has focused most of its attention on suggestions that landlords such as the Dublin Airports Authority were unwilling to cut rents to help keep the struggling Irish-owned chain going.
And while the question of the impact that high rents are having on retailers is certainly of huge importance, it is arguable that the impact of the internet on Hughes & Hughes’ operation is the more significant business story.
For while it is likely that rents will ultimately fall and that consumer sentiment will inevitably recover at some point in the future, the threat from the internet is unlikely to recede.
The worrying thing about the Hughes & Hughes story is that here was a company which had done a lot of things right to attract customers through the door. My local outlet in Dun Laoghaire was a case in point.
It was housed in handsome premises; it had a huge range of tomes, including plenty of children’s books; it had comfortable seating and a coffee shop to relax in; and it had extremely helpful and knowledgeable staff. But despite those attractions, many members of my book club chose to buy online, both for reasons of convenience and price.
According to senior sources in the Irish book trade, we are not alone. Giant online book retailers such as Amazon and the Book Depository made huge gains in the Irish book market last year.
The online retailers accounted for an enormous 25 per cent of all Irish book sales last Christmas compared with just 6 per cent three years ago.
Like many other forms of retailing, book retailing is a high volume, low margin business operating off profit margins of about 5 per cent in the good times.
Given that the book retailers have high fixed overheads such as rent and labour costs, they are particularly vulnerable to even relatively small declines in sales volumes.
It may have been that Hughes & Hughes was more vulnerable than others, as it acquired some of its outlets at fancy rents at the height of the boom. Nevertheless, the fact remains that even small shifts in consumer behaviour can have quite a large impact on retailers’ profitability.
It is true that consumers are more likely to buy books and CDs on the internet given that these are products that do not need to be tested in quite the same way as, say, furniture or clothes.
But there is mounting evidence that consumers are increasingly prepared to buy even clothes from online retailers. Increasingly, the story is not so much about consumers defecting to the internet as about the impact such defections will have on rents and property values.
In Britain, for instance, the magazine Property Week noted last month that ‘‘retail property Luddites’’ had missed opportunities after figures from the British Retail Consortium showed that non-food, non-store retail sales rose by 14.6 per cent year on year even though British retail sales fell 0.7 per cent over all. The magazine suggested that, ‘‘for property this is a problem that is growing.”
‘‘Secondary high streets, shopping centres and retail parks are already vulnerable because people are travelling further to dominant regional centres rather than the grotty, tired precinct down the road. This seediness, compounded by empty units, makes them more exposed to the online threat, because buying from the comfort of your bedroom is more appealing than being surrounded by tat,” Property Week noted.
It is ironic that Ireland has been building shopping centres in large numbers at the very time when consumers were poised to go online in larger numbers than ever before. Ireland was already, in 2007, the third most densely serviced country in Europe for retail space and was still busily building.
If Irish consumers begin to switch to the internet in larger numbers in coming years, this could be yet another factor affecting high street retailers and by extension high street rents and property values which are already under intense pressure.
It is clear that the problem of the decline in secondary high streets is also emerging here due to the large volume of new shopping centres built during the boom.
Indeed, it was a problem highlighted last week in businessman Feargal Quinn’s new TV series, Retail Therapy, in which he advises independent shops battling the downturn in an overcrowded market. The first business he advised was an independent store struggling to survive in the dilapidated Finglas Main Centre from which several retailers had already fled.
Quinn is a savvy retailer who is passionate about the idea that shops need to be attractive to entice customers in the door. But while there is no doubting the validity of his proposition, it is also true that the attractiveness of its outlets alone was not enough to protect Hughes & Hughes from the impact of the internet, falling consumer demand and high rents.