Despite sunshine, tough trading conditions persist for UK retail

07 August 2018 Authored by Consultancy.uk

As the British retail sector continues to fight against numerous challenges, a new study has found that stores enjoyed a modest boost to sales value in the summer months of 2018. However, as adverse trading conditions persist, experts have warned the industry that these results could be a mere blip.

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. That represents a significant climb from the 45 seen in 2017’s second quarter, and many companies face an uphill struggle to recover in the second half of a sluggish 2018 – particularly in the retail sector. 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.

Consumer confidence in Britain continues to flag thanks to stagnant wages, alongside a number of pressures resulting from or exacerbated by Brexit proceedings, including a weakened pound and a shortage in skilled labour, 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 May 2017- May 2018

Earlier in the year, researchers from consulting firm AlixPartners found that many retailers were subsequently experiencing falling sales value since the start of 2018, while sale volume has remained relatively flat. Following up on this, the firm has released another study into the British retail sector, which revealed that an upsurge in positive sentiment surrounding a Royal Wedding and the relatively successful World Cup campaign of the England team boosted sales figures from the cold and wet start to 2018, while warm weather saw a spike in footfall during the summer months. These improvements, however, will do little to support UK retailers beyond a short window of time, as adverse trading conditions persist.

AlixPartners found that retail spending bounced back in May, as the sector experienced its strongest performance in close to 18 months. The Office of National Statistics (ONS) reported value and volume growth of 6.1% and 4.4% respectively when compared with the same month last year, driven by a combination of the sunniest and warmest May on record, two bank holidays and the marriage of actress Meghan Markle to the younger son of the Prince of Wales.

Caution

While to some extent this reflects a much needed shot in the arm for the British retail industry, the broader backdrop for the sector remains littered with challenges, which continue to see a number of firms hit financial difficulty in 2018, with the likes of Homebase calling in consultants to help restructure, House of Fraser entering into company voluntary arrangements (CVAs), or Poundworld falling into administration – with more likely to follow.

Unemployment and football breakdown

When considering the most recent figures as part of a trailing 12 months basis, sales volume growth has actually declined over the last 15 months, from 4.5% in March 2017, to 1.6% most recently. Though sales value growth remained between 4-5% across this period, the differential above volume growth is most likely a reflection of the continued spike in inflation experienced by the UK following the EU referendum, as many UK retailers continue to pass on higher import costs to consumers, rather than absorbing them and impacting on their profits.

On top of this, while unemployment remains at record low levels, real wages have scarcely commenced to return to positive growth following long-term stagnation, and earnings growth (including bonuses) dipped slightly to 2.5%. Meanwhile, house price growth recently dipped to the lowest levels in five years and unsustainable levels of household debt continue to weigh down on consumer confidence. Unsecured consumer borrowing rose to £211.6 billion in May which reflects growth of 5.9% when compared to the same month in the prior year, and with heightened speculation that a rise in interest rates could be on the cards in the near future, UK retailers' are cautioned by AlixPartners to remain wary, as the uptick in summer spending may well prove to be short-lived.

In line with this, economic research consultancy PantheonMacro commented on the figures, "The jump in retail sales in May has all the hallmarks of a weather-related blip, rather than a sustainable pick-up in spending."

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