Despite sunshine, tough trading conditions persist for UK retail

07 August 2018 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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Lack of high street openings sees UK retail in precarious state

11 March 2019 Consultancy.uk

Changes in consumer behaviour, particularly in favour of online shopping, are starting to take their toll on shop-fronts in the UK, while stagnant wages are hitting peoples’ willingness to go out for food and drink. As a result, the rate of closures is more than four times that for the same period in 2017, although largely reflecting of a lack of new openings.

The retail market has fallen under a cloud of uncertainty in the UK; consumer confidence has dipped, while wages have continued to malinger in negative territory. Retailers are also under pressure from disruptive technology, as consumer sentiment shifts to more online shopping and at-home leisure. While retailers have been able to weather the storm for the past years, transformations, low consumer spending and technology have begun to take their toll.

New analysis from PwC explores the current market conditions in the UK for retail shops, focused on net openings and closings. The market changes in the UK have seen the net closures to date hit 1,123 in H1 2018 across the UK’s top 500 high-streets. The rate of closures was considerably above openings for the first half of 2018, at 1,569 openings and 2,692 closures. Compared to H1 2017, more than four times as many shops closed than opened.

Openings and closures for retail industry

The study considered the most prominent areas to see a reduction in openings and net closures across the retail landscape. Overall, fashion stores were the hardest hit in absolute terms, with a total of 104 closures for H1 2018, followed by public houses and inns, which saw 99 closures in the same period. Electrical goods stores saw a net -44 decline, with a total of 8 openings for the period. Meanwhile charity shops were in a state of relative flux, with 80 openings to 117 closures. The firm notes that service sector shops, including estate agent, banks, recruitment agencies and travel agents, among others, too have begun the process of moving online.

Not all areas of retail saw closures, with coffee and ice cream shops seeing a small net increase in openings over all. Book stores – predictions of their total obliteration appear to have waned – saw a net 18 openings, while supermarkets drew the highest overall growth relative to closures, at 18 opened and 6 closed.

Regional figures for the UK

Not all areas have seen the same level of closures, with the Greater London area and the South East the hardest hit by the current wave of closures, at -268 and -197 net change, respectively, compared to -23 and -25 closures for the same period in 2017. The middle of England too saw considerable closures, with the West Midlands clocking a net -89, and Yorkshire and the Humber down -117 stores overall.

Commenting on the figures, Lisa Hooker, consumer markets leader at PwC, said, “Openings simply aren’t replacing closures at a fast-enough rate. Specifically, the openings across ‘experiential’ chains, such as ice cream parlours, beauty salons and vape shops, haven’t been enough to offset closures in the more traditional categories. Looking ahead, the turmoil facing the sector is unlikely to abate. Store closures already announced in the second half of the year due to administrations and CVAs already will further intensify the situation.”

Related: Artificial Intelligence offers $340 billion opportunity to retail sector.