The news that the clothing retailer Next is the latest High Street stalwart to suffer falling profits should surprise nobody. The company noted in its recent results that 2017 was the most challenging year it had faced for “25 years” and that 2018 was also expected to be a “another challenging year”.
Retail is a huge part of the UK economy, accounting for £366bn in 2017[1]; there are not many European countries where Boxing Day is considered a prime day for scoring a retail bargain. The sector as a whole has been in the eye of the storm since June 24th 2016 (the day after the Brexit vote) and while it may have taken until the end of 2017 for a lot of the numbers to really go south and businesses to fail, we, like Next, are not expecting the pressure to ease any time soon.
How 3 elements create the perfect storm for retailers
The average retailer is the archetypal middleman; they do well in the good times but can get run over in the lean times. The post-Brexit landscape is more lean than good but moves in consumer spending, tastes, logistics and margins have all come together in recent years to form a perfect storm affecting the consumer, the market and, crucially, margins.
The consumer
We are into the twelfth month of real wage declines and yet we wonder why retailers are in trouble. Consumers are being told that Brexit may hammer their incomes, that benefit improvements are unlikely, that monthly bills are going up and that interest rates may be hiked soon and – again – we wonder why shoppers are keeping their hands in their pockets? Data from Visa shows that spending so far this year is at its lowest level in 6 years.
The market
Technology has fundamentally changed how we shop, when we shop and what we expect from our retail experience and that’s epitomised by Amazon. Amazon seems to be unstoppable and the speed and breadth of its offering has been the single largest change in shopping habits in the past 5 years in the UK. Similarly, the Amazon marketplace that allows retailers to sell to consumers is an online High St as much as anything. Next-day delivery is a standard thing as our free returns. This is not your dad’s High St.
Margins
Save for luxury goods, most retailing businesses operate on perilously thin margins and there have been a number of factors that have eaten into these earnings in recent years. The most obvious has been the fall in the pound – down around 15% against the euro and 16% against the USD since the Brexit vote – and the higher costs of imported goods as a result. Similarly, oil prices have risen which in turn raises the costs of logistics operations and highly manual, low automation businesses will have been hurt by higher minimum wage requirements too. The poor wage picture means that businesses are unable to pass these higher costs as they would want.
Is there any good news for the UK High Street?
Changes in business conditions are always seized upon by the low margin industries and the ones that succeed are those that are able to adapt to the new environment with the fewest pain points; the advent of Netflix and decline of Blockbuster is a great example.
The recent Brexit transition deal takes the boot off the neck of the international supply chain community for a few crucial months and could be enough to prompt enough investment or reorganisation to keep the sector moving forward as we get closer to the eventual date we leave the EU.
Similarly the most recent inflation and wage numbers suggest that the pressure on consumer’s pockets may be finally coming to an end, although issues of consumer credit – i.e. how much spending has been put on credit cards – will remain for years to come. A survey compiled last year by the price comparison website Comparethemarket.com suggested that every Briton holds a debt of around £8,000 not including mortgages[i].
Retail is not an easy game at the best of times but a sector that makes up the majority of UK SMEs is under severe pressure as we move through 2018.HH
[1] https://www.ons.gov.uk/businessindustryandtrade/retailindustry/datasets/poundsdatatotalretailsales
[i] https://www.theguardian.com/money/2017/oct/30/average-uk-debt-at-8000-per-person-not-including-the-mortgage