IT'S THE HIGH STREET'S OWN FAULT!

BLOG 192

IT’S THE HIGH STREET’S OWN FAULT!

I’m getting fed up with constant complaints from retailers that it is everyone else’s fault that so many retailers are in financial difficulty.

There are apparently two major culprits; business rates and online retailers.  These are often combined in the same breath; business rates creates unfair competition because they are not payable by online retailers.

An article in the Evening Standard last month quoted Dave Lewis, the CEO of Tesco plc, as saying, “Rates have become a rising tax on investment while profits have fallen.  It’s a drag on growth.  It’s a drag on competitiveness and [there is] no longer a balance between taxation and sales.  We need an online sales levy so that the burden of tax can follow the sales”.

What rot!  Rates are a tax on occupation.  They have never been correlated to sales and there is no rational reason why they should be.  Rates have been around since 1572 (or so Wikipedia tells me) and were introduced to support the local poor.  They used to be payable by both individuals and local businesses.  However in 1988 the then government felt that the rating system for individuals gave little incentive to participate in democratic decisions as only the head of the household paid rates.  Accordingly they introduced the Community Charge payable by all adults so that everyone would be conscious of the costs of providing local services.  Whilst that may conceptually have been a good idea, the Thatcher government did not have sufficient appreciation of popular sentiment to realise that the Opposition would rechristen it “the Poll Tax” and create the political climate that would consign it to history, to be fairly quickly replaced by the Council Tax in 1992.

Rates continued to provide businesses’ contribution to local services but with one difference.  Mrs Thatcher was concerned that in some areas local Labour councillors might be tempted to increase business rates to allow them to reduce the Community Charge, so decided that business rates ought to be fixed centrally and there should be some mechanism to redistribute funds to local authorities with little business occupation.  But the principal of rates remained; it is a contribution by local businesses to maintain the local services that bring customers to their doors.

I recently saw a TV interview with John Allen, the Chairman of Tesco and current President of the CBI.  He spoke far more sensibly than his CEO.  He first acknowledged that business rates is an important source of finance for local authorities, but thought that it needs changes to remove disincentives.  Not to protect shops.  But he pointed out that if a business carries out work on its property to make it more environmentally friendly, that work will increase the rates bill, which is daft.  He is right.  He also thought that 5 yearly reviews are not frequent enough.  Because of that many businesses are paying more in rates than is fair.

He is right there too.  The squeals from retailers whose rents increase on a review mask the smiles of those whose rates go down – and who have been overpaying for up to five years.  Because the calculation of business rates imposes a flat amount per £ of rental value (poundage) on all non-residential buildings in England (with some exceptions).  As property values change, this results in some businesses obtaining a windfall (because they are rated on a value up to 5 years old), not at the expense of the government but at the expense of other businesses whose property values have fallen.  However a rating revaluation is a costly exercise which makes annual reviews impractical.  The government does phase in increases which eases the burden of those whose properties have increased in value, but largely pays for it by phasing in reductions too so that those whose values have fallen are forced to subsidise their richer competitors whose property values have increased.  That is clearly not a fair system.

John Allen also feels that local authorities should be given some flexibility to reduce business rates when an area falls on hard times.  That also seems sensible, but probably not practical while the poundage is fixed centrally.

He doesn’t blame either rates or online retailers for the woes of the High Street.  He accepts that the High Street needs to change to make it an attractive place to visit.

That of course is the reality of the High Street’s woes.  People no longer want to shop there.  They want to shop in out-of-town retail malls where there is lots of car parking space so they can load their shopping into their cars as they go.  They want to shop in big stores where they have a wide choice and where there is space to lay out everything attractively.

Tesco have got it right.  They give the consumer a choice.  You can shop online and Tesco will deliver your purchases to your home.  You can shop in a superstore and take your purchases home with you.  Or you can shop on the High Street in a Tesco Express, where you will pay a bit more because the economics of a High Street outlet differ from a superstore, but the shop is more accessible.  They recognise that many people do not do their weekly shop in the High Street, but value the existence of a High Street Tesco for casual or urgent purchases.

Interestingly, John Allen did not see the future High Street as a shopping destination.  It is entertainment or dining that will draw people to the future High Street, albeit that they may well want to shop when they get there.  But most probably won’t want to shop there for the big items that are difficult to carry home.  That reflects what has been happening for some time in the USA where the big stores have not entirely abandoned the High Street but have made sure that they are in the shopping malls too.  British Home Stores and Debenhams are not names I saw regularly in shopping malls on travels around the UK.  Perhaps that was their real problem.

ROBERT MAAS