UK retailers continue to suffer from the high street crunch

16 July 2018 Consultancy.uk

Tough choices face the UK regarding Brexit, as negotiations plagued by governmental in-fighting continue to create economic uncertainties for people and businesses across Europe. At the same time, new technologies are threatening to disrupt the state of play further, presenting a generally challenging picture for the UK high street.

As the culmination of the two-year Brexit negotiation window swiftly approaches, the UK Government is still unable to offer a tangible outcome, beyond the dreaded No Deal scenario. Having broadly been flummoxed by the negotiating team from Brussels, the vague British strategy has largely been to suggest that the proverbial ball is constantly in the EU’s court, as opposed to answering questions posed by those who oppose Brexit. Meanwhile, a supposedly air-tight deal to secure unity between member of the UK Government itself on Brexit was rocked by a number of major resignations, including Foreign Secretary Boris Johnson and Secretary of State for Exiting the European Union David Davis, both of whom have long been spoken of as harbouring ambitions of displacing the beleaguered Prime Minister Theresa May to assume the office for themselves.

With the on-going drama seemingly yielding no concrete scenarios for the country to plan for besides an absolute worst case scenario, the public at large has been left in a state of confusion as to what their own futures hold. While consumer confidence in Britain continues to flag thanks to stagnant wages and a weakened pound, a shortage in skilled labour also looks set to be compounded, as educated EU nationals consider a mass exodus from the island nation with an ageing population. Amid this chaotic backdrop, businesses face the prospect of finding out at the last minute what the outcome will be – potentially meaning they will be left marooned in a country facing huge export and import tariffs, low consumer demand, and a critically sparse talent pool – rattling logistics planners and investors at many organisations.

Value and volume growth

As many companies try to figure out what their next move will be, a new report from AlixPartners has weighed up the most recent figures from the Office for National Statistics into sales and volume changes year-on-year as a whole, to estimate what may be in store for specific sectors of the retail economy in post-EU Britain. The study shows that year-on-year growth over the past 12 months was actually relatively positive, trending up slightly to just under 2% in terms of volume and just under 4% in terms of value.

The problem for many retailers is that sales value has still fallen since the start of 2018, with January on 4.5%, while sale volume has remained relatively flat. The year started off relatively cold and wet, which affected footfall, although improvement in online sales boosted the industry, as did a Royal Wedding and a relatively successful World Cup for England, both of which saw happier consumers return to stores, albeit for a short window of time before optimism faded away once more.

Subsector growth

Non-discretionary spending on food saw a 3.5% increase, although there is a shift within the industry to discounters, such as Lidl and Aldi. The sector was shaken up recently with the proposed merger of Sainsbury’s and Asda, as consumers become more picky about their buying behaviour.

Problems

Department stores such as Maplin have already faced continued problems relating to a shift toward e-commerce, hitting high street purchases. The segment say 0.7% increase in volume, while online shopping increased by 25.2%. Meanwhile fashion has seen a decline in volume, a fall of 1.5%, as consumers pay closer attention to their pocket and what’s already in the wardrobe. Online sales saw 24.4% growth, although returns in the segment remain a costly problem.

Subsector growth

Household goods saw strong value growth of 3.6%, but DIY and outdoor retailers were punished – Australian company Wesfarmers’ foray into the UK has been a costly debacle and saw Homebase sold to restructuring giant Hilco. Online sales in the segment have been relatively mute. The ‘other stores’ segment saw above average growth to volume figures at 1.8%, and just under par value growth of 3.2% - while internet growth for the segment was slow at 6.8%.

Pure play online companies saw solid growth to their figures, with volume up 6.4% and value up almost 10%. The segment benefitted from increased popularity of online shopping, as well as prevailing weather conditions. Boohoo was a standout player in the segment, with sales up by 53% for the three months to the end of May.

Unemployment and footfall breakdown

Unemployment in the UK continued to fall, with a further 46,000 jobs added in the three months to March. At 4.2% it is the at the lowest level since 1975. However, while an increase in employment has added potential consumers to the market, the continued stagnation of wages means that consumers across the board are scaling back their spending on luxury items as hard times approach.

The researchers also found that not all areas are reporting the same boost to employment. Northern Ireland is effectively enjoying full employment, at 3.1% unemployment, while the South East is close behind at 3.4%, however the North East still noting unemployment of 4.9%, which has resulted in a vicious cycle of a 2.1% decline in retail footfall, something which will almost inevitably lead to job losses. The nation’s capital also has surprisingly high levels of unemployment at 4.9%. Thanks to London’s reputation as a consumer hub for the UK and for tourists, footfall in the capital still increased a staggering 19.3%. However, reflecting strong demand for shopping in its iconic retail sector. The problem is that post-Brexit, some of this spending relating to travelling shoppers may well dry up.

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Consumer goods start-ups grow interest from venture capital

23 April 2019 Consultancy.uk

Funding the latest consumer goods start-up has been a real money-spinner for venture capitalist firms, with a number of $1 billion companies – or unicorns – having emerged in the space in recent years. New analysis has explored the resulting corporate consumer products activity in the acquisitions space.

Consumer products have enjoyed years of strong growth as new markets opened in developing Asia. China in particular has enjoyed strong growth across a range of consumer good types as the country’s middle class expanded. Private equity firms have been keen to pick up targets in the space as they expand their portfolios to include additional local capacity as well as customers in new markets.

As a result, a study from Bain & Company has found that interest from PE firms in the consumer product space grew sharply in 2018, hitting 6.1% of all invested capital for the year, and making it the third most sought-after category. It is now only behind financial services (23.9%) and advanced manufacturing and services (13.9%).

Corporate venture capital investment

The ‘M&A in Disruption: 2018 in Review’ research found that growth in the segment reflects key changes in the segment as a whole. This is particularly true of insurgent brands, which often leverage local expertise in order to take on international giants in domestic markets.

Short change

The market changes have led to shifts in motivations for consumer goods company investments from PE firms. The number of strategic investments stood at 50% in 2015 compared to deals that increased scope. This has shifted significantly, with 34% of deals focused on strategic outcomes in 2018 compared to 66% for scope. The move towards scope reflects companies seeking out fast-growing products that enable stronger revenue growth streams.

Acceleration in scope-oriented M&A in consumer products

However, there were other motivations for deal activity in the space. Activist investors have put pressure on companies to expand their portfolios in recent years, with the trend expanding from just US targets to Europe.

Further trends

The other key shift in the space regards outbound deal activity. The study found that outbound deal activity has increased significantly in the Americas (up 363%) with total deal volume up only slightly (15%). Key deals included Coca-Cola and Costa, Procter & Gamble and Merck’s consumer health unit, and PepsiCo and SodaStream. In the Asia-Pacific region, outbound deal activity rose 195% while total deal activity fell sharply, by -36%. The EMEA region saw both a sharp decline in outbound deal activity, at -68%, as well as lower overall deal activity, which fell by 32%.

Cross-regional deal making

Deal-making in the current environment is increasingly fraught with uncertainties, as business models change on the back of new technologies, new consumer sentiments and wider market changes from new entrants. As such, acquisitions are increasingly useful as possible hedges on changes in market direction. As such, companies are increasingly pressed to take a future-back position, making sure to incorporate a vision of how the company needs to look in five years into acquisition strategy.

The firm notes that certain acquisitions which enhance a remembrance of a nobler mission, revive a sense of entrepreneurialism and engage directly with consumers may be necessary qualities in acquisitions that transform a company to fit market expectations in the coming decade. While going forward, focus on innovation, partnering with retail winners, reducing cost base and constantly reallocating scare resources will be necessary to protect market share in areas where insurgent local and strategic competitors are active.

Related: Private equity asset growth top priority for 2018.