Retail bears brunt of sluggish first half of 2018 with 20 profit warnings

26 July 2018 Consultancy.uk

The number of profit warnings by FTSE-listed retailers has doubled since the same period of 2017, while the UK economy as a whole has seen profit warnings hit a seven year high. The dramatic rise has seen the number of top retailers flagging concerns in the first half of the year at a seven year high, as the sector continues to be plagued by rising costs and subdued spending.

Big Four firm EY has released data revealing that the British economy has endured a turbulent opening to 2018. There were a total of 131 profit warnings in the first half of 2018, thanks to a sharp rise in the second quarter. Q2 saw 58 profit warnings, and while this was down from 73 in Q1, Q2 is the quarter which traditionally sees the lowest number of retail profit warnings. That it represents a significant climb from the 45 seen in 2017’s second quarter will undoubtedly be a cause for concern, as many companies face an uphill struggle to recover in the second half of a sluggish 2018 – particularly in the retail sector.

Number of profit warnings by quarter

This continues a 2017 of two halves for the UK. The British economy grew faster than forecasted, and UK quoted companies issued 276 profit warnings, the lowest total since 2013, something reflected in the lowest number of retail store closures in seven years. However, after mid-summer, the market saw an increase in restructurings and profit warnings that reflected a rise in cost and demand pressures building across a significant portion of the economy, thanks to Brexit and wage stagnation, among other challenges.

Retail feels pinch

According to EY, the number of profit warnings by FTSE-listed retailers has doubled over the past year, as the sector has been acutely hit by rising costs and subdued spending. This has seen 20 profit warnings in the sector during the first half of 2018, double those issued at the same time in 2017 – which eventually saw 24 for the whole year. Indeed, these alarming figures are snaking toward more than 40% of FTSE retailers issuing profit warnings – which has not been the case since the 2008 financial crisis, despite the double-dip recession of 2011.

Percentage of FTSE General Retailers and UK listed companies issuing a profit warning

A number of well-known retailers have issued profit warnings in 2018, including Debenhams, Moss Bros, Carpetright and Card Factory. On top of this, there has been a spike in retail administrations and restructurings, with a growing number of firms opting to use a Company Voluntary Arrangement (CVA) to close stores, and preserve broader brands. Non-listed retailers such as New Look and House of Fraser have also used CVAs, leading to thousands of job losses. Such a process must be approved by landlords, who have been expressing anger at the high number of CVAs taking place in the sector, particularly in the case of House of Fraser.

EY’s report said CVAs were "just one part of the solution" for distressed businesses,” before adding, "To stay in this ever-changing game, retailers will need to invest more and take more risks. But many lack the capital and wherewithal to move forward. Thus, we expect to see a continuing divergence of fortunes in 2018, especially if landlords continue to toughen their stance on CVAs. Most well-planned and structured CVAs should get approval; but landlords are starting to take a tougher stance and there are few levers left for retailers to pull. Securing funding and credit insurance look increasingly problematic."

Top 5 causes

According to EY’s analysis, five key trends are highlighted for the rise in profit warnings. The foremost of these is poor sales which are short of forecasts, something which prompted such a statement from professional services firm Capita in the spring. 36% of warnings were the result of this factor. Delayed or discontinued contracts were also cited in a number of warnings, something which is not out of the ordinary.

Top 5 reasons for profit warnings Q2 2018

A number of profit warnings were triggered by a more surprising factor, however. 14% were connected to adverse weather conditions, with the infamous ‘Beast from the East’ storms said to have offset consumer sentiment and made logistical processes a nightmare, while a sustained heat wave in the UK during the summer looks set to have put more people off attending the high street in the summer months.  

This was followed by two issues, both on 12%. Operational issues, as cited by the likes of GinFestival.com – which failed to convert to an e-commerce platform, costing the company unsustainable sums – were joined by increasing costs and overheads, which are partially at least linked to the flagging value of the pound, making it more difficult to import and export goods for many companies in Britain.

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Project management industry adds £156 billion of value to UK economy

15 April 2019 Consultancy.uk

Project management has grown into one of UK’s largest areas of business over the past decade, amid the increasing ‘projectification’ of work. With the gross value added to the UK economy by project management estimated to be £156 billion, this trend is likely to continue in the coming era.

Despite the huge success of project management in recent years, until now there has been relatively little data available on the size of project activity. As a result, there has been a great deal of debate on things like the number of people involved in the sector, the number of projects, and how it contributes to economic output. Due to this need for clarity, APM, the UK’s professional body for project management (the largest organisation of its kind in Europe, with 28,000 individual members) commissioned economists from PwC to shed light on the industry's economic impact.

The research concluded that the profession makes a more significant contribution to the UK economy than the financial services sector. 2.13 million full-time equivalent workers (FTEs) were employed in the UK project management sector, generating £156.5 billion of annual gross value added (GVA). In comparison, the financial services sector contributes £115 billion, and the construction industry adds £113 billion.

Gross value added to UK economy

Commenting on the discovery, Debbie Dore, Chief Executive of APM said, “Project management runs as a ‘golden thread’ through businesses, helping to develop new services, driving strategic change and sector-wide reform.”

Who is a ‘project manager’?

To reach these estimates, PwC’s researchers used detailed models to map out the value of project management activity. They ultimately defined relevant ‘projects’ as “temporary, non-routine endeavours or rolling programmes of change designed to produce a distinct product, service or end result… [with] a defined beginning and end, a specific scope, a ring-fenced budget, [and] an identified and potentially dedicated team with a project manager in charge.”

Building on this, they then went on to define what the act of project management actually is. The job consists of applying “processes, methods, knowledge, skills and experience” so that clients can meet their objectives and bring about planned outputs or outcomes. The analysts added that this includes “initiating the project, planning, executing, controlling, quality assuring and closing the work of an identified and dedicated team according to a specified budget and timeframe.”

Importantly, it should be noted that the profession is not exclusive to only roles explicitly labelled as ‘project manager’, but to any role where specialist project management skills are used. This means that across sectors these roles can have very different titles, from the self-explanatory contract managers of procurement, or the campaign managers of advertising, to the likes of festival co-ordinators in the events sector, and many more. The roles in question also span all strategic levels of the profession, from strategic to tactical and operational positions.

Gross value added of project management profession

From a sector perspective, the financial and professional services, construction and healthcare industries make up almost two-thirds of the total project management GVA. At the same time, understandably, the UK Government has a huge project portfolio, which further drives the size of the GVA the sector contributes, thanks to megaprojects like HS2 and Crossrail.

Commenting on this to the report’s authors, Oliver Dowden, Minister for Implementation remarked, “Project delivery is at the heart of all Government activity, whether it’s building roads and rail, strengthening our armed forces, modernising IT or transforming the way government provides public services to citizens. Getting these projects right is essential if we are to ensure that we build a country that works for everyone.”

Throughout 2019, 26 major government projects were delivered, representing a fifth of the overall Government Major Projects Portfolio (GMPP) of 133 projects. According to the IPA annual report 2017-18, these represented a whole life cost of £423 billion. In addition to this were a plethora of smaller scale projects, and those in early development.

Elsewhere, with the increasing digitalisation of the economy impacting entities of all shapes and sizes, IT and digital transformations tended to dominate the projects of the UK scene alongside new product development projects, with a respective 55% and 46% of organisations in the research sample having undertaken these types of project in the past year. At the same time, this varied across sectors, and unsurprisingly, in the construction and local government sectors, fixed capital projects were the main project type undertaken.

Outlook

Looking to the future, 40% of business leaders expect project management will grow in the coming years due to the increased use of projects – or the ‘projectification’ of the UK. In a trend that has been witnessed elsewhere, organisations have to rapidly and continuously change in the digital age of business, driving the need for project management.

Outlook for project management services

An increased focus on value over cost – especially in the construction sector – and a forecast increase in the number of international projects are predicted to be key drivers of growth, according to the expert contributors. However, this will not happen in the absence of challenges; more than half of organisations expressed concern over the perceived impact of political uncertainty in the UK. Skills and capability shortages were also cited as a potential barrier by a third of organisations.

With regard to budgets, meanwhile, a third of those surveyed by PwC said they expect the size of project budgets will increase in the coming three years, while 40% anticipate a growth in project size. As the profession continues to mature, and as the recognition of the importance of good project management grows, it is expected that a greater proportion of project work will gain more distinct attribution to the profession itself, giving more recognition and appreciation to the role of the project manager.

Speaking on the findings of the study, Sandie Grimshaw, a Partner at PwC, concluded, “The project management profession is relatively new compared to some other professions, such as lawyers, teachers and doctors. However, as project management is a core competence vital to organisations in the UK, the profession is critical and will continue to grow in stature.”