UK retail industry sees value rise, long-term conditions remain uncertain

Stagnant wages and unsustainable consumer debt means threaten the long-term spending growth of the UK retail industry.

A new report from consulting firm Alix Partners reveals that while the value and volume of UK retail sales growth have seen varying spurts and dips in recent months, there has been an overall rise in the UK retail industry of value to 4.7% and volume to 2.6%. The internet as a sales channel has continued to witness srong year-on-year growth meanwhile, increasing at almost 20%. While volume growth is up considerably on March last year, from 1% to just under 5% however, value growth seems to have peaked, following rapid growth in October last year when it topped 7%, falling to 2.6% by March 2017.

Averaged across the year as a whole however, value growth year-on-year stood at 4.7% and volume growth stood at 2.6%. The changes were, in part, a function of the deep devaluation of sterling, pushing up import costs and, therewith, prices in the UK retail market have seen steady increases.

The research notes that UK retailers have begun to shift the costs of currency changes to consumers, rather than continuing to squeeze their supply chains. The most recent data shows that such moves are occurring across the board, with particularly food affected – around 50% of the sector is sourced from overseas.

The slowdown in volume growth, according to the firm’s analysis, points to an end of what had been a post-Brexit splurge in consumer spending. Now, as real wage growth stagnates in the face of inflation, household debt threatens to become increasingly precarious, while low employment looks set to put a lid on purchasing behaviour.

AlixPartner’s research also demonstrated marked differences between various of subsectors. Food saw a 2.5% increase in value and a 0.3% increase in volume in March, including a 5% increase in online sales – researchers impart the reasons behind the substantial gap on the fact the subsector being impacted heavily by higher import costs, which limited businesses additional profitability drastically.

Department stores saw increases in value of 2.9% and in volume of 1.5% in March meanwhile, though many major competitors continued to struggle with the continuing fall of pre-tax profits. Internet sales grew 13.6% year-on-year for the subsector.

The Fashion sector however enjoyed relatively strong growth, boosted by the collapse of struggling firms, enabling surviving competitors to consolidate their positions, reporting strong trading results. In March, value in the subsector is up 8.5% while volume increased 7.2%, and internet sales increased by huge 28.1% over the course of the year.

Household good providers saw value increase by 2.3% and volume by 1.3%. Competition in the segment remained tight however, with some incumbents branching into other segments to bolster their numbers. Internet sales were up 15.9% year-on-year meanwhile. 

The ‘other-store’ and ‘on-store retailing’ sectors saw considerably different results in March. The former saw value growth of 1.3% while also absorbing negative volume growth of 1.3%. The segments internet sales were up 19.9% year-on-year. The latter subsector, which is predominantly internet-based (more than 50%), saw considerable volume and value growth, at 20% and 16.9% respectively.

Overall value growth stood at 4.7% and volume growth at 2.6% in March, while internet sales across the six subsectors stood at 19.5% year-on-year.

The research notes relatively low levels of unemployment averaged across the country, at 4.7% – a decrease of 1.6% on average on the year previous, corresponding with the Office for National Statistics, which last week reported a 42-year high in employment. The North East continues to experience relatively high unemployment levels, at 6.4%, while the South East has the lowest level, at 3.4%. London has relatively high levels of unemployment, at almost 6%, while Scotland and Northern Ireland have an unemployment rate of 4.5% and 5.2% respectively.

In spite of the general growth in employment however, the research does not suggest retailers should expect a sustained boom in volume, or most importantly value – with real wage growth continuing to be low even in a tightening labour market. With inflation tipped to continue to rise, incomes are set to continue their fall in real terms – most likely limiting purchasing behaviour in the immediate future.

Researchers also noted that consumer borrowing levels may be reaching unsustainable levels, which, echoing the decade preceding the credit crunch of 2008 has created short-term boons for retailers, however the study suggests history may be on the verge of repeating itself, with longer-term negative economic consequences across the board predicted. UK consumer rights watchdogs are subsequently focusing increasingly on whether credit offerings and peoples’ ability to repay are aligned – suggesting retailers may soon see this stream of additional revenue stifled in order to protect consumers becoming overcome by debts.