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May 2018

  • 2018 had certainly not started on a positive note, with retail performance being compared to that of the financial crisis of 2008/2009, but for different reasons
  • Higher costs, lower demand and over capacity were the prevailing trends highlighted alongside the ongoing structural changes the industry faces
  • The RTT members agreed that difficulties in the sector were only likely to continue for the foreseeable, and therefore retailers needed to take an ‘adapt or perish’ mentality

A mere glance at news headlines will paint a rather gloomy and oppressive picture of the health of the UK retail sector currently. As Jonathan De Mello, Head of Retail Consultancy, Harper Dennis Hobbs, put it: “Only three months into the year, many commentators are already dubbing it the Year of the CVA (Company Voluntary Arrangement)”, adding to that “over 12 retailers have already failed this year”.

But just how bad is 2018 likely to get, and is there light at the end of the tunnel? These were the principal questions the KPMG/Ipsos Retail Think Tank (RTT) set to tackle when they met in mid-April 2018.

A look back at recent retail performance:

Reflecting briefly on the first quarter of the year’s performance, the RTT members were in unanimous agreement that 2018 certainly had not started on a positive note. Indeed, Paul Martin, RTT Co-Chair and UK Head of Retail at KPMG, said that “many retailers had predicted a difficult start to the year and had been proven right”. Meanwhile, Dr Tim Denison, RTT Co-Chair and Director of Retail Intelligence at Ipsos Retail Performance, added that the first quarter had been one of the worst for non-food retail that he could remember, “as bad as 2008 and 2009 but for different reasons”, he added.

Looking at the UK’s economic performance in a global context, James Knightley, Chief International Economist at ING said that: “While the UK economy has performed better than the doom and gloom forecasts published in the wake of the Brexit vote, its overall performance must still be regarded as poor when put in an international context.” He added that: “The UK has grown at roughly half the rate of the US and European economies since mid-2016, with the UK’s consumer sector particularly badly hit”.

Of course, the first quarter of 2018 was plagued with bad weather – whether that be the ‘Beast from the East’ which resulted in widespread store closures, or the rather washout Easter. However, the UK retail industry has been undergoing significant upheaval for a number of years now. With this in mind, not all underperformance can be wholly attributed to adverse weather conditions – despite the UK’s affinity to do so.

What are the principle drivers holding the overall sector back?

When considering the principle drivers behind the rather dreary picture more closely, Maureen Hinton at GlobalData highlighted that the “prevailing trends in retail are higher costs, lower demand and overcapacity”, whilst Tim Denison pointed to the “relentless squeeze on gross margins and costs that have beleaguered retailers at a time when sales have been flat”.

Tim added that an “unpalatable soup”, comprising of deflation beset on the non-food sector for years; devaluation of the sterling; fallout of the Brexit referendum, as well as increasing operational costs and progression of omni-channel “has been cooking away in the cauldron for 12 months or more and for some retailers, it is now bubbling over”.

Several of the RTT members made comparisons to the financial crisis of 2008/09, however they were quick to differentiate the set of circumstances retailers were now faced with. Martin Newman, Chairman of Practicology, stated that the main difference between then and now is that: “…pressure on retailers from the migration of consumers online has massively increased. Long leases on stores that can’t maintain footfall and the fierce price and proposition competitiveness online are combining with Brexit and consumer uncertainty to make a perfect storm”.

Indeed, further stressing this point, Jonathan De Mello added that: “Even London’s West End – Europe’s and arguably the world’s strongest shopping areas – is experiencing a circa 10% footfall decline year on year due to falling demand. This – at a time when business rates are set to rise in the West End by an average of £50,000 per retailer – will clearly lead to more failures of retailers heavily invested in the West End.”

Paul Martin also flagged that retailers are currently facing increased costs due to regulatory and compliance-related factors – including National Living Wage, the Apprenticeship Levy, business rates or the upcoming General Data Protection Regulation (GDPR). He also highlighted the growing importance of a retailer’s ability to “resonate with the paying public” today, stressing that “it is more important than ever to have established a customer-centric proposition”.

All this clearly poses a key question: are certain retailers weathering this ’perfect storm’ better than other?

A closer look at retail categories and retail channels: 

Clearly with such a multitude of factors impacting the retail industry from all angles, some players have been better positioned to weather the storm than others. James Sawley, Head of Retail & Leisure at HSBC, stated that 2018 is “not going to get worse for every constituent part of the retail landscape”.

The RTT was quick to highlight the successes of the grocery sector in particular, with Martin Hayward, Founder of Hayward Strategy and Futures, stating that: “Despite the challenges, our supermarket sector has survived largely intact and despite online and discounter threats, the big players are still the big players”. Of course, his comments came ahead of the news that Sainsbury’s and ASDA are considering a merger, in yet another act of defensive consolidation of epic proportions.

Nick Bubb, Retail Analyst, added that food retailers have been: “…helped by a benign food price inflation and margin background, and have outperformed the overall stock market, rising by over 10% overall so far this year”. In contrast, general retail has been under far greater top-line sales pressure – with the number of casualties mounting – but well-managed players, like Next, have coped with the adverse condition helped by having an online presence, he added.

Mike Watkins, Head of Retailer and Business Insight at Nielsen UK, also pointed to grocery sales outperforming non-food categories, but stressed that: “…shoppers are economising but not compromising and this is reflected in the +3.5% growth of FMCG own label sales last year. The shift in sales towards higher margin own label and fresh food categories and the ‘little and often’ shopping behaviour is underpinning food retail performance”. In essence, RTT pointed out that despite the overall lift in food retail, there was also disparity amongst categories of grocery, and there has also been a significant change in how and when customers are choosing to purchase, leaving certain channels more exposed that others.

As mentioned earlier, CVAs have been rife in 2018, with Tim Denison adding that: “Hardly a week has passed this year without news of another retailer announcing profit warnings or plans to re-finance. CVAs abound, contrasted around rent reductions and store closure programmes. From department stores to DIY shed, carpets to clothing, casualties are emerging”. In short, the RTT members highlighted that it was non-food, physical players who were seemingly most exposed to the adverse elements.

Paul Martin flagged that many retailers are heavily loaded with high debt burdens, adding to their exposure. In light of the difficult market conditions “small hick-ups can lead to the failure of these highly leveraged businesses”, he added.

Jonathan De Mello shed further light on this issue, having suggested that many businesses failures observed over the past 10 years have been retailer owned by private equity companies. “In their rush to expand the store footprint to facilitate a lucrative sales or float on exit, a number of private equity businesses have pressured retailers into expanding too quickly; paying higher rents than they should, for sub-optimal locations”, he said. So a retailer’s financing also clearly plays a critical role in its ability to overcome current challenges.

Of course, the pressure of mid-market, non-food retail has been widely reported against the current backdrop of growing competition – both physical and online. Tim Denison added that: “For well-established middle-market retailers, trading on market success of the past, reincarnation is not optional, it’s compulsory.”

So what does the future hold?

Clearly the economic environment has a significant impact on the future health of consumer industries. James Knightley showed concern over high inflation and the squeeze on household spending, which has meant that a growing proportion of consumer spending has been funded by household borrowing and running down savings – a process that cannot last, he stressed.

James Knightley warned: “The risk is that it could come to a halt quite quickly given that the Bank of England (BoE) has reported that the availability of unsecured credit to the household sector fell “significantly” in Q1, as lenders tightened lending criteria for personal loans and credit card borrowing”, which will naturally impact on retail spend.

Added to this, James Knightley also stressed that: “Following recent comments from the Governor of the BoE, Mark Carney, and terrible Q1 GDP, market expectations have swung wildly from virtually fully pricing in a May interest rate rise, to now signalling little or no prospect of it happening. Nonetheless, the BoE continues to hint at future moves to pre-empt an inflationary uptick linked to wages. While there is the possibility of an August hike, I am sceptical that the economy can withstand a series of rises and increasingly believe monetary policy will remain unchanged until Brexit talks are concluded next year.”

On the other side of fence, James Sawley pointed to more promising news that we ‘should’ see the headwinds soften throughout the year. He said: “Inflation is now moderating and wages are growing underpinned by full employment, FX has recovered to circa 5% up on pre-Brexit levels, and consumer confidence has improved in the last few months”.

Looking at consumer confidence the picture was a little bleaker. Maureen Hinton pointed to Global Data’s recent monthly Retail Consumer Sentiment tracker which found that “every region in the country has a negative outlook on the economy, their personal finances and prices over the next six months, while 55% expect interest rates to rise”. Maureen added that “the majority intend to spend less rather than more in retail, except for food and grocery, which is being driven by inflation rather than higher volumes.”

That said, Mike Watkins suggested that if there is any significant fall in consumer confidence to come, it’s likely to prompt caution, not concern, as it would take some six months to be reflected in the likes of food sales. Indeed, he added that an “early spring and the upside of the World Cup are other reasons to be cheerful.”

Of course, at the forefront of many retailers minds will be future trade arrangements, as the geo-political environment continues to unfold. This will undoubtedly impact the health of the sector, with retail highly dependent upon the outcome of trade negotiations in particular. James Knightley, stressed that: “We have to be cognisant of the threat of a global trade war. The UK is the world’s fifth largest trading economy and is vulnerable to damaging trade disruptions in terms of both pricing and slower growth”. Meanwhile, Martin Hayward suggested that: “Consumer incomes look set to grow in real terms and Brexit hasn’t led the sky to fall in”.

Conclusion:

As has been highlighted, many of the drivers of change have been longstanding – it’s only the pace of change that has been accelerated by recent economic and geopolitical events.  When looking at whether the trend will continue, Tim Denison said: “I’m reminded of the words of Lao Tzu in the 6th century who said that those who have knowledge don’t predict; and those that predict don’t have knowledge”. He added: “Those [retailers] that persist in swimming in the seas of sameness and legacy will risk drowning. The boring, the undifferentiated, the unremarkable, the irrelevant stores, disconnected from the needs of today’s shoppers, will perish.”

The vast majority of RTT members believed that the difficulties in the sector were only likely to continue for the foreseeable, and as such retailers needed to take an ‘adapt or perish’ mentality. Paul Martin stressed the need for new blood to be injected into the industry by looking beyond the relatively limited pool of seasoned retail leaders that tend to move around the industry from one businesses to the next.  Meanwhile, James Sawley pointed to the words of Charles Darwin, who stated: “It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change”.

Other RTT members pointed to the futile efforts to overcome the inevitable change. Martin Newman, for example, suggested that “cost cutting in this environment is inevitable, but it’s not enough to save a business that is struggling with fundamental structural changes in its market, as well as weaker consumer demand.”

Meanwhile, pointing to the recent bout of CVAs, Jonathan De Mello, said: “CVAs – once an absolute last resort mechanism – are increasingly being used in 2018 to ensure fitness for purpose in today’s multichannel world, and also as a buffer against the Brexit storm to come”. However, whilst there are notable examples of successful downsizing and restructuring over the past decade, “it is often a case of delaying the inevitable; full administration”, he added.

It’s not all doom and gloom though. Jonathan De Mello highlighted that “there are always winners as well as losers when a retailer fails. From the ashes of retailers failing in 2018, new brands will rise – likely with leaner business models and seamless integration with online and mobile commerce”. Meanwhile, Tim Denison emphasised his hope that “2018 will mark a year in which more retailers embarked on programmes of change rather than suffered collapse”.

 

Part II: In detail – individual views of the KPMG/Ipsos Retail Performance Think Tank members

James Knightley, Chief International Economist, ING

While the UK economy has performed better than the doom and gloom forecasts published in the wake of the Brexit vote, its overall performance must still be regarded as “poor” when put in an international context.

The UK has grown at roughly half the rate of the US and European economies since mid-2016, with the UK’s consumer sector particularly badly hit. Worryingly, high inflation and the squeeze on household spending power means that a growing proportion of consumer spending is being funded by household borrowing and a running down of savings – a process that cannot last forever.

The risk is that it could come to a halt quite quickly given that the Bank of England (BoE) has reported that the availability of unsecured credit to the household sector fell “significantly” in Q1, as lenders tightened lending criteria for personal loans and credit card borrowing.

Following recent comments from BoE governor, Mark Carney, and terrible Q1 GDP, market expectations have swung widely from virtually fully pricing in a May interest rate rise to now signalling little or no prospect of it happening. Nonetheless the BoE continues to hint at future moves to pre-empt an inflationary uptick linked to wages.  While there is the possibility of an August hike I am sceptical that the economy can withstand a series of rises and increasingly believe monetary policy will remain unchanged until Brexit talks are concluded next year.

A softening housing market will have compounded the difficulty for retail activity, particularly for furniture and household furnishings. New home buyer enquiries have fallen for twelve consecutive months, according to the Royal Institution for Chartered Surveyors (RICS), and the situation is unlikely to improve if the BoE does indeed carry through with its threats to raise borrowing costs.

At the risk of turning this into an endless list of negatives, we have to be cognisant of the threat of a global trade war. The UK is the world’s fifth largest trading economy and is vulnerable to damaging trade disruptions in terms of both pricing and slower growth.

In the interest of balance, positive news has come from the labour market. Wage growth has picked up a touch and is currently running at 2.6% YoY and 2.8% YoY when bonuses are included – broadly in line with consumer price inflation of 2.7%. With sterling having stabilised somewhat, we suspect that the squeeze on household spending power will start to ease, with inflation edging lower and wages edging modestly higher. Nonetheless, consumers are unlikely to feel “flush” with cash and we are likely to see increases in spending largely funded by dissaving. Hopefully better weather can help…

Dr Tim Denison, Director of Retail Intelligence – Ipsos Retail Performance

Q1 has been one of the worst for non-food retailers that I can remember – as bad as 2008 and 2009 but for different reasons. Then, sales plummeted in the destructive wake of the financial crisis.  This time around it is principally the relentless squeeze on gross margins and costs that have beleaguered retailers at a time when sales have been flat. Deflation has beset the non-food sector now for five years, with the devaluation of sterling, following the Brexit referendum, adding insult to injury. Operational costs across food and non-food have been difficult to contain. The progression of omni-channel introduces ever more moving parts to retail. And with complexity comes added cost.

The unpalatable soup has been cooking away in the cauldron for 12 months or more and for some retailers it is now bubbling over. We are witnessing fallout from the sustained harsh trading conditions and a persistent focus on sales growth at the expense of profitability. Hardly a week has passed this year without news of another retailer announcing profit warnings or plans to re-finance. CVAs abound, constructed around rent reduction and store closure programmes. From department stores to DIY sheds, carpets to clothing, casualties are emerging.

Will the toil and trouble continue into Q2 or beyond? I’m reminded of the words of Lao Tzu in the 6th century: “Those who have knowledge don’t predict; those that predict don’t have knowledge”. Let me set up stool somewhere in the middle. Those that persist in swimming in the seas of sameness and legacy will risk drowning. The boring, the undifferentiated, the unremarkable, the irrelevant stores, disconnected from the needs of today’s shopper, will perish. For well-established middle-market retailers, trading on market success of the past, re-incarnation is not optional, it’s compulsory. The trip isn’t comfortable, nor easy. Take Tesco. It embarked on its turnaround plan three years ago and is just beginning to see some reward. Lord Wolfson, too, one of Britain’s most respected and successful retailers has recently conceded the need for a significant strategy shift at Next.

Amidst the turmoil, there is some welcome news. By and large, food retailers have had a brighter start to 2018. They have started to pass through lower prices to consumers. Inflation has begun to ease back to wage growth levels. Consumer confidence is on the way up. All these factors should help improve potential levels of discretionary spend, which will build margins and sales and buffer the expense of change in the non-food sector.

At the risk of making a prediction, I’m hopeful that 2018 will be seen as a year in which more retailers embarked on programmes of change rather than suffered collapse.

Paul Martin, UK Head of Retail – KPMG

Many retailers had predicted a difficult start to 2018 and they have been proven right. The sector is currently experiencing a significant upheaval, and if you believe the media hype, it’s facing a battle for survival.  In this context it is important to look at the facts though and also be clear that not the entire sector is in difficulty. Far from it, there are a number of organisations that are delivering successful results. It is predominantly the non-food sector that is suffering the most with an over-supply of demand. This is especially poignant in the clothing category, although again it is important to highlight that here there are also winners and losers.

What are the main drivers?

  1. The sector is suffering from weakened consumer demand and confidence due to macro-economic and geo-political uncertainties. Although inflation is starting to recede and wages are rising slowly, many consumers are remaining cautious and are deferring big-ticket purchases
  2. Retailers are facing increased costs due to regulatory and compliance-related factors such as the National Living Wage, the Apprenticeship Levy, Business rates and GDPR. Although these initiatives are being implemented for valid and important reasons, they are resulting in increased costs, and the requirement of additional capabilities for retailers in a market with already exceptionally tight margins
  3. The sector continues to face a structural shift with almost 20% of all retail sales now transacted online. In a market that is delivering little to stagnant growth and with no market-share to be captured from the independents anymore, many organisations are struggling to reinvent their business model fast enough, or invest in change whilst delivering growth. The historic route to success of opening more physical stores does not work for most organisations anymore and I would argue that most of these businesses have 25-50% too many outlets.

I would also argue that three further points have been responsible for the recent failures of a number of retailers:

  • It is more important than ever to have established a customer-centric proposition. If your business model does not resonate with the paying public, you do not deliver great customer service, and without a differentiated proposition, you are not going to succeed in today’s market (at the size you are currently operating at)
  • Many retailers are heavily loaded with high-debt burdens. In difficult market conditions, like those we are experiencing, small hick-ups can already lead to the failure of highly leveraged businesses
  • I would also argue that many retailers’ management teams are doing too little too late, as the challenges they are facing have not emerged overnight and should have been addressed earlier. The track record of implementing the required changes in a fast and cost-efficient way has been under-whelming in many cases

I predict the difficulties in the sector are likely to continue for foreseeable future, and there will be further casualties. It is seldom one single reason that leads to businesses failing and in current times many of the points raised above points are being experienced by businesses in the sector. This case of “Business Darwinism” will provide space for the more successful businesses to grow though.

Martin Hayward, Founder – Hayward Strategy and Futures

In many ways the retail sector has shown its mettle over the last couple of years, adapting to a fast changing environment and a squeeze on consumer incomes. Yes, there have been casualties, but there is always a need for those that don’t respond to change to be replaced by those that do.

Despite the challenges, our supermarket sector has survived largely intact and despite online and discounter threats, the big players are still the big players. Online has taken more of a toll on other sectors, but the big shifts have mostly played out and some are even rebalancing back in favour of physical shops, as the book sector demonstrates.

Looking forwards, we can expect to see continued volatility in consumer behaviour, but the winds that have propelled online shopping to its current position are starting to subside.

  • The tax advantages/evasion that ‘global’ internet businesses have managed to get away with are under much closer scrutiny
  • The huge volumes of traffic created by home delivery are under investigation
  • The employment practices of the ‘gig economy’, including those for pickers and delivery drivers, are likely to receive further legislation
  • The traditional retailers are getting better at integrating online into a seamless multi-channel offer
  • Consumers still enjoy shopping in good quality environments
  • Consumers and politicians are starting to better understand the pros and cons of using different shopping channels. Just as the consequences of social media are becoming better understood, so too are those of online shopping

More structurally, high street rents and rates are still likely to be an ongoing battlefield, but the retreat of the over-expanded casual dining sector and further political pressure may help here.

Consumer incomes look set to grow in real terms and Brexit hasn’t led the sky to fall in.

As ever, success this year will come to those that best understand their consumers. The retail sector was, for a while, caught in the headlights of change and seriously overwhelmed by online retailers and discounters. Similarly, the consumer was seduced by the apparent ease and value of online shopping.

As the real costs now start to manifest themselves, we shall start to see the playing field level, and then it will become clear that our retail sector has actually evolved rapidly in the face of change.

Maureen Hinton, GlobalData

2018 was always going to be a difficult year for retailers in the UK.  The prevailing trends in retail are higher costs, lower demand, and overcapacity.  Then to add another layer of pain in Q1, along came a credible weather excuse – the ‘beast from the east’ – a cold weather front that led to stores closing as employees could not travel to them, let alone shoppers. And then add a wet Easter. Can it get any worse in the remaining three quarters?

The overall brake on spending is lower consumer demand. GlobalData’s monthly Retail Consumer Sentiment tracker shows every region in the country has a negative outlook on the economy, their personal finances and prices over the next six months, while 55% expect interest rates to rise. The majority intend to spend less rather than more in retail, except for food & grocery, which is being driven by inflation rather than higher volumes.

Retail spending chart

Source: GlobalData Retail

We all have to eat, so food takes priority in spending, but non-food is bearing the real brunt of changing demand. GlobalData is forecasting 1.3% year-on-year growth in 2018 for non-food – but this is being driven by online growth at 6.8%.  When this is stripped out, offline retail will decline by 0.2%. And within non-food overall, the only sector to achieve more than 1.5% growth will be health & beauty, which is benefitting from our current obsessions with our appearance and wellbeing. So any growth is at the expense of competitors.

None of these are new trends, but they are worsening, and combined with increasing operating costs (business rates and employment costs in particular) result in retailers being under even greater pressure, as we have witnessed from the retail collapses in Q1.

The fundamental problem is too much capacity for current demand. It is not that we are all shopping online, but online gives consumers easy access to even more choice, spreading spend yet more thinly. So for some retailers 2018 will become even worse as the year progresses.  Those with high costs and debt combined with weak offers are the most vulnerable.

Though consumers are very pessimistic about the future, their views have changed little over the past year, so there is no reason to expect current demand and spending to worsen unless there are those unpredictable external factors, such as freak weather (really freak, not just a warm September which happens every year), another global financial meltdown or a major cyber security crisis. Therefore the sector will not get any worse – just the outlook for some of the weaker operators.

Martin Newman, CEO – Practicology

2018 has clearly delivered an extremely tough trading environment so far; perhaps the most challenging conditions we have seen since 2009, in the wake of the demise of Woolworths.

One of the main differences between 2009 and now is that the pressure on retailers from the migration of consumers online has massively increased. Long leases on stores that can’t maintain footfall and the fierce price and proposition competitiveness online are combining with Brexit and consumer uncertainty to make for a perfect storm.

Weak businesses have failed, but even the strongest are feeling the pressure. Next is one example. In its latest annual results for the year to January 2018, store sales dropped 7.9% and store profits fell by 24%. Its online profit rise of 7.4% wasn’t enough to make up the difference, and so overall pre-tax profits dropped by 8.1%.

Next has acknowledged that it has too much store space. It is beginning to sublet space in its stores to complementary businesses. Its Arndale store in Manchester will be partially sublet as a trial, covering 40% of the retailer’s rent costs and 22% of its total occupancy costs.

This strategy is one way for a retailer with too much space to improve its bottom line, but unless Next works very hard to find tenants who will drive incremental footfall and interest in its products, then it risks being a cost-cutting exercise with no benefit to Next’s increasingly important omnichannel experience or its top line.

In the medium-term it has a significant number of leases coming up, and it will be interesting to watch how much it chooses to reduce its store footprint by to serve customers who likely shop across multiple channels.

Cost-costing in this environment is inevitable, but it’s not enough to save a business that is struggling with fundamental structural changes in its market, as well as weaker consumer demand. The under-investment in businesses such as Toys RUs – leaving it unable to adapt its customer proposition and experience to match the expectations of modern consumers – should be a lesson to anyone who thinks otherwise.

Mike Watkins, Head of Retailer and Business Insight – Nielsen UK 

2017 was a better year for food retailers, and helped by the return of inflation, value sales growth improved to +2.9%. However, it was the +14% growth in the sales of Aldi and Lidl that lifted the industry and volume sales continued to be weak at many supermarkets until the first quarter of 2018 – finally returning to positive at +0.4% (Nielsen Growth Reporter).

Nielsen expects food retailing to perform ahead of both non-food retailing and many out of home channels in 2018. Shoppers are economising but not compromising and this is reflected in the +3.5% growth of FMCG own label sales last year. The shift in sales towards higher margin own label and fresh food categories and the `little and often` shopping behaviour is underpinning food retail performance.

Nevertheless, disposable income remains under pressure despite inflation easing, so we foresee a continuation of the the `saving where necessary` mindset by supermarket shoppers in order maintain their standard of living. Price competition is likely to intensify, with fresh foods the battleground as weakening consumer confidence leads shoppers to cut back on non-essential non-foods, mirroring the trends already seen in other retail channels.

Shoppers will still manage their budget by shopping smart on each trip or by delaying spend (a risk for larger stores) and using savings, credit cards and loyalty rewards to help fund peak expenses. And shopping around for wherever savings are perceived to be the highest.  These considerations are already included in the strategic plans of food retailers, so we don’t expect any big surprises.

However, disloyal behaviour will continue, so adapting to this will need some creative thinking. The only exception to this trend is online grocery which will approach 7% of FMCG sales by the end of 2018, where the more committed shoppers are becoming more loyal.

There is also a new opportunity to grow sales for supermarkets. This is stealing from out of home and casual dining to capture a bigger share of total food and drink wallet – a growing trend which further supports a slightly more optimistic outlook.

If there is any significant fall in consumer confidence to come – the Nielsen Index of 96 at the start of the year suggests caution but not concern – this may take 6 months to be reflected  in food  sales. Improving weather after a cold and wet winter, early spring and the upside of the World Cup are other reasons to be cheerfull.

So the good news is that there is no anticipated cliff edge for food retailing and Nielsen expects a +3% growth in sales in 2018 which could be slightly ahead of inflation. The business models are in a much better shape than for many non food retailers where there is still excess capacity as the result of the move to online.  For this channel there is a rocky road ahead.

Jonathan De Mello, Head of Retail Consultancy – Harper Dennis Hobbs

2018 has started off terribly for many retailers – even worse than anticipated – to the point where, only 3 months into the year, many commentators are already dubbing it the ‘Year of the CVA’. Whilst that may be hyperbole at this early stage, 12 retailers have already failed this year – including East, Maplin, and Toys R Us (total of 8,000 employees affected across the 12 businesses that have failed). In addition to this, a number of other retailers are reportedly in trouble, with both Carpetright and Mothercare planning CVA’s – hot on the heels of CVA’s by New Look and others – and others supposedly also looking at one. Furthermore, department store staples House of Fraser and – to a lesser extent – Debenhams are in trouble, and Claires may be hit by the wider issues facing it in the US, having recently applied for Chapter Eleven protection. 2018 is shaping up to be potentially the worst year for retail failures since 2008, with rising costs and falling demand coalescing to create a very negative environment for retailers. Even London’s West End – Europe’s and arguably the world’s strongest shopping area – is experiencing a c.10% footfall decline year-on-year due to falling demand (likely Brexit/terrorism related). This – at a time when business rates are set to rise in the West End by an average of £50,000 per retailer – will clearly lead to more failures of retailers heavily invested in the West End, and in particular in the casual dining sector – given many operators in this sector signed up for deals in a highly competitive market when demand was strong. Now demand has fallen – of course without a concurrent reduction in rents – many of these retailers are struggling, and we have already seen the likes of Byron Burger, Jamie’s Italian and Prezzo close large numbers of stores via CVA. In addition to these, I am aware of three other operators in the sector that are soon to embark on their own CVA’s, with no doubt more to follow.

CVA’s – once an absolute last resort mechanism – are increasingly being used in 2018 to ensure fitness for purpose in today’s multichannel world, and also as a buffer against the Brexit storm to come. Though there are some notable examples of successful business downsizing and restructuring over the past 10 years – Game, HMV and Dreams spring to mind – it is often a case of delaying the inevitable; full administration. Many of the business failures observed over the past 10 years have been retailers owned by private equity companies. In their rush to expand the store footprint to facilitate a lucrative sale or float on exit, a number of private equity businesses have pressured retailers into expanding too quickly; paying higher rents than they should, for sub-optimal locations.  Retailers must always seek to expand in a considered manner – ensuring any location they target has the right demographic, competitive positioning and, of course, that the deal is on favourable terms, from a property cost perspective. This is the best way to mitigate the risk of future business failure – but too few retailers seem to engage in such forward planning, and consequently struggle when they reach a certain size, or when their brand becomes less desirable/more mainstream. Given the large volume of private equity owned retailers currently trading, it is very likely that we will see more and more failures as consumer confidence and therefore retail spend continues to fall in the run up to Brexit.

As can be seen from the table below, CVA’s are certainly no guarantee of continued retail success – circa 50% of all major CVA’s between 2008-2018 ended in full administration/liquidation for the brand in question, and of those that continue to trade now, most are doing so from a vastly reduced property estate – and turnover.

List of Major CVA’s 2008-2018:

Retail CVA 2008 - 2018

It is not all doom and gloom however, as there are always winners as well as losers when a retailer fails. JD Sports and Sports Direct for example benefited greatly from the demise of JJB. Similarly, Dixons Carphone’s trade grew rapidly post the administration of arch rivals Comet and Phones 4U, and the plethora of pound shops we have seen since 2008 (and in particular Poundland) undoubtedly profited from the failure of Woolworths. From the ashes of retailers failing in 2018, new brands will rise – likely with leaner business models and seamless integration with online and mobile commerce. Physical retail is here to stay, but we do not need the level of physical retail floorspace we once did, and the types of retailers occupying these physical spaces is changing to match the demands of the modern consumer, who want to interface with a brand any way they see fit – physical, online or via their mobile device.

James Sawley, Head of Retail & Leisure, HSBC

From a banker’s perspective, 2018 has already been an extremely challenging year and it’s probably going to get worse before it gets better. It feels though not a day’s has gone by without a negative news story about either the sector or a specific retailer. 2018 however, is not going to get worse for every constituent part of the retail landscape.

Headwinds ‘should’ soften throughout the year: Inflation is now moderating and wages are growing underpinned by full employment (last month’s ASDA income tracker showed the first positive growth in disposable incomes since Brexit), FX has recovered to c5% off pre-Brexit levels, and Consumer Confidence has improved in the last few months. While this may be the case, increased costs, competition and a slowdown in consumer spending in the last 24 months has inflicted such a degree of damage on the sector’s P&L and Balance Sheet that now we find ourselves counting the number of fatalities. This damage has been compounded by the recent poor weather.

As one of the biggest lenders to UK retail the current volume of administrations and restructurings is clearly concerning, but I am a strong believer of positive change, and in my view the sector is going through a (much needed) revolution. Out of date business models are failing making way for leaner, more efficient and more relevant companies. While the economic situation is accelerating this process, this revolution is being driven by the sector’s most important stakeholder – the consumer. People are voting with their feet and their fingers – Toys R Us’ loss is Argos’ gain. Blue Inc and Select Fashion’s loss is ASOS’ gain. Maplin’s Loss is AO World’s gain. MultiYork’s loss is DFS’ gain.

You can’t have a revolution without some casualties. Survivors will enjoy an increased market share and the consumer ultimately gets what it wants, like any democracy we are voting for tomorrow’s retail landscape by spending money with those retailers who serve our needs best – best value, best convenience, best website, best in store experience, or the best feel good factor. The end game of this revolution will be a more compelling, efficient, and cost effective way of buying whatever a person needs or desires. The path to get there will be painful for shareholders, suppliers, banks and landlords to those who failed to adapt to change. As Charles Darwin said: “It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change”.

Nick Bubb, Retail Consultant

For all the well-publicised problems of Conviviality, New Look, Carpetright, Mothercare, Toys R Us and House of Fraser, the major quoted retailers haven’t performed too badly so far in 2018, despite the weakness in the overall stockmarket (which is c5% down to date).

The Food Retailers have done well, helped by a benign food price inflation and margin background, and have outperformed the overall stockmarket, rising by over 10% overall so far this year. The recovery of the Tesco core business has continued, as evidenced by the recent better than expected final results, and management has been given the benefit of the doubt so far on its major Booker acquisition. After its big rally on the back of the final results, the Tesco share price is now running c12% up to date.

The General Retail sector, in contrast, has been under far greater top-line sales pressure and the casualties are mounting, but big well-managed players like Next have coped with the conditions (helped by its formidable online presence) and the Next share price is actually over 10% up so far this year (significantly ahead of the overall sector, which is running nearly 7.5% down).

It has, however, been a case of picking the right stocks in General Retailing, as the typical picture has not been pretty, with M&S, for example, running the best part of 15% down this year, despite the goodwill in the City for the new management team.

And the stockmarket has been ruthless in punishing any sign of weakness or financial vulnerability. Mothercare and Carpetright catch the eye in this sense, with share price falls of 70%/80% so far this year, demonstrating that there is never a good time to break banking covenants and that CVA’s are not a pain-free way to shrink store portfolios.

Some Non-Food retailers haven’t needed to do or say much wrong to see their share prices tumble in the year to date: thus Dunelm and Superdry are running c20% down, N Brown is 30% down and Debenhams and Footasylum are nearly 40% down.

Yet, if the stockmarket has been shooting first and asking questions afterwards when it comes to second-line General Retail stocks, it has at least shown an ability to reconsider, as shown by the very sharp rally in Card Factory after it issued reassuring noises with its recent final results.

Privately owned Non-Food retailers may feel relieved to be battling away without the fierce gaze of the City looking over their shoulders, but nobody can escape the pain of the continuing migration of sales away from physical stores to Online: this major structural problem is clearly still playing out in disadvantaged sub-sectors like Department Stores and Fashion Retailing (which clearly have over-capacity issues) and it is still not clear how supportive House of Fraser’s Chinese owners are going to be.

For Non-Food retailers not involved in the most vulnerable sub-sectors, the best hope for the rest of this year is that consumers start to feel a bit better off as inflation drops away and spend a bit more freely. The worst case is that consumers tighten their belts instead, as interest rates head up after the May 10th MPC meeting and Brexit uncertainty returns, adding cyclical pressures to the intense structural pressures on profitability…

 

 

 

Members of the RTT are:

  • Nick Bubb – Retail Consultant
  • Tim Denison – Ipsos Retail Performance
  • Jonathan De Mello – Harper Dennis Hobbs
  • Martin Hayward – Hayward Strategy and Futures
  • Maureen Hinton – GlobalData
  • James Knightley – ING
  • Paul Martin – KPMG
  • Martin Newman – Practicology
  • James Sawley – HSBC
  • Mike Watkins – Nielsen UK

The intellectual property within the RTT is jointly owned by KPMG (www.kpmg.co.uk) and Ipsos Retail Performance.

First mentions of the Retail Think Tank should be as follows: the KPMG/Ipsos Retail Think Tank. The abbreviations Retail Think Tank and RTT are acceptable thereafter.

The RTT was founded by KPMG and Ipsos Retail Performance (formerly Synovate) in February 2006. It now meets quarterly to provide authoritative ‘thought leadership’ on matters affecting the retail industry. All outputs are consensual and arrived at by simple majority vote and moderated discussion. Quotes are individually credited.  The Retail Think Tank has been created because it is widely accepted that there are so many mixed messages from different data sources that it is difficult to establish with any certainty the true health and status of the sector.  The aim of the RTT is to provide the authoritative, credible and most trusted window on what is really happening in retail and to develop thought leadership on the key areas influencing the future of retailing in the UK. Its executive members have been rigorously selected from non-aligned disciplines to highlight issues, propose solutions, learn from the past, signpost the road ahead and put retail into its rightful context within the British social/economic matrix.

  

For media enquiries please contact:

Simon Wilson, KPMG Corporate Communications
Tel: 0207 311 6651
Mobile: 07785373397
Email: simon.wilson@kpmg.co.uk

Max Bevis, Tank PR
Tel: +44 (0)1159 589 840
Email: max@tankpr.co.uk

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