A healthy and growing retail sector is vitally important to the future strength of the UK’s economy. In 2016, the UK retail sector generated over £358bn in sales revenue, employed more than 2.9 million people and contributed nearly 6 per cent of the UK’s GDP. However, many retail businesses are now operating under significant pressure and facing multiple and varied challenges, as a combination of increasing costs and waning consumer confidence and demand.

In order to understand how retailers can address the challenges they are facing, it is crucial to acknowledge the external pressures driving these challenges and to predict how they might shape trends in the sector in both the short and medium term. It is also paramount that distressed businesses understand the range of restructuring tools that can be deployed to support them.

In this first instalment of our three-part series looking at the current state of the UK retail sector, we will consider the challenges that our retailers are facing.

Why the cause for concern?

It’s true that retail sales have held up against the odds in the past year. Net sentiment, calculated by subtracting those who think they will be worse off from those who think they will be better off in the next 12 months, has until recently remained high.

However, consumers have said that they are planning to spend less overall this Christmas, with 31 per cent of adults saying they will spend less vs. 11 per cent saying they will spend more, according to PwC’s September 2017 Consumer Survey. As inflation has begun to grow faster than wages, we expect big ticket purchases to be one of the first casualties of tightened purse strings. This has already been borne out by a number of high profile profit warnings across the furniture sector and the recent announcements that Multiyork, and Feather and Black have entered administration.

Reduced consumer spending capacity

Much of the challenge facing the industry is currently being driven by the squeeze on consumer spending capacity. The retail industry is fuelled by consumption, but for consumers to continue to enjoy the same level of consumption as they have in previous years, their spending capacity must keep up with, or exceed, price increases. In an economy with such low-levels of unemployment (the UK currently has a 42-year low of 4.3 per cent unemployment), conventional economic theory tells us that wages should be increasing rapidly, as companies are forced to offer better salaries in order to attract workers.

However, although year-on-year monthly wage growth has been continuously positive since mid-2014, it has been relatively slow and has trailed the Consumer Price Index (CPI) inflation rate since the last quarter of 2016, resulting in a decrease in real wages for the UK population throughout 2017. This has left consumers with less disposable income, forcing them to consider changes to their spending habits to compensate for their reduced purchasing power.

Consumer credit

Of course, it is possible for consumers to enjoy an increased level of consumption in the short to medium-term through credit. The total volume of consumer credit in the UK has grown continuously since 2011 – it now exceeds £200 billion – and this growth has softened the impact of a declining real wage on retailers. However, the Bank of England has warned that lenders could be over-exposed in light of growing concern that an unsustainable credit bubble has started to form. Consumer credit was described as a “pocket of risk” by the Bank’s Financial Policy Committee.

Key areas of concern that the Bank singled out were credit cards. Credit card providers offering long term 0% promotional offers, where new business is only marginally profitable, face losses if model assumptions turn out to be optimistic.  According to a recent survey, lenders are listening to the Bank of England’s warnings and are planning a squeeze on consumer credit on a scale not seen since the 2008 financial crisis.

Currency fluctuations

The precipitous fall in the value of sterling since the UK’s vote to leave the European Union has left retailers facing significantly higher bills for imported goods. Such is the scale of increases in import costs that they have often amounted to more than retailers are willing or able to absorb themselves, leaving many with no option but to pass them on to consumers in the form of higher prices.

On the plus side though, the weakness of Sterling in the past year has made the UK more affordable for foreign visitors. The Office for National Statistics (ONS) has reported a particular surge in US tourists, increasing by over 20 per cent this year. Shopping centres, flagship department stores, luxury retailers and high streets in key tourist destinations will be the biggest winners.

Consumer confidence

Consumer spending is a function of having the capacity to spend and the inclination to do so, with spending often a reflection of confidence in the future state of the economy. In addition to recent attitudinal surveys, the majority of which have shown recent declines in consumer confidence, the recent stagnation in activity in the housing market and a slow-down in price increases (and even a fall in some areas) is seen by many as a worrying indicator of reducing consumer confidence and a precursor to significantly curtailed consumer spending. All of which points to future misery for many in the retail sector.

Christmas is coming

Despite the challenges, there will still be the inevitable last minute rush to our high streets this Christmas, particularly to supermarkets as shoppers stock up on food. This year, with Christmas falling on a Monday and with the restricted opening hours on Christmas Eve due to Sunday trading regulations, there’s even more likelihood of a rush on Saturday 23 December.

For online players, their reputations will lie in the hands of their logistics partners and their ability to deliver to customers on Saturday 23 December and Christmas Eve. Delivery innovation has raised consumers’ expectations from some-day to same-day in many areas. With the growth in delivery options, improved reliability of deliveries and increasing penetration of click and collect, we believe this will mean that the internet is the best performing channel for retailers this Christmas.

Watch our free webinar for retail businesses looking to navigate the perfect storm of challenges here.

Look out for part-two of this series in the New Year, where we’ll look at the latest trend predictions for UK retail in 2018, followed by part-three, which will consider the restructuring options for distressed retailers.

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.