- Supply chain problems are a global challenge but UK retailers are being hit particularly hard and the impact could hinder the sector’s recovery.
- Brexit has compounded global labour shortages, which has exposed the UK’s reliance on overseas workers in its supply chain.
- It could be between 12 and 18 months before the UK retail supply chain returns to normality.
- The crisis presents an opportunity for the sector to restructure operations, with a focus on automation and localisation.
The global challenges caused by subsequent months of shipping delays have led to significant concerns in the UK retail sector, with further disruption caused by Brexit and the HGV driver shortage adding to a considerable supply chain headache for retailer operators.
While the recent sight of queues at petrol forecourts was relatively short-lived, for many consumers it painted a worrying picture of the UK’s resilience to global supply chain challenges. This concern would have been compounded by media reports of potential shortages of products and empty shelves in the run-up to the festive period. At the latest KPMG/Ipsos Retail Think Tank meeting, members discussed how serious the current supply chain crisis is, the implications for retail’s Golden Quarter, and what steps retailers can take to alleviate these problems in the future.
Background to the current crisis
Several complex and intertwined influences can be blamed for the current disruption to supply chains, including the long-term effect of the Suez Canal closure, a surge in the price of shipping containers, and the impact of cargo ships and containers becoming bottlenecked at ports around the world, including Felixstowe in the UK.
The factors behind the crisis are broad and complex and, while many people may think this is a UK- centric problem, similar newspaper headlines can be read across the world which emphasises the global nature of the situation. While this is a worldwide issue, UK businesses do not always have the scale or purchasing power of some of the big international players. Wal-Mart, for example, is hiring fleets of ships to ensure goods are continuing to flow.
RTT members agree that the lasting impact of the COVID-19 pandemic means that globally businesses are struggling with port and manufacturing closures and pent-up consumer demand being released around the world. However, members do expect to see disruption ease as the effects of COVID-19 reduce, and normal trading patterns return, but these factors will hinder the UK retail sector’s recovery.
Members of the RTT agree that, while the crisis is a global phenomenon, the UK was being hit particularly hard. International factors are clearly exacerbating the problems seen in the UK, but Brexit is a core factor that explains the UK-specific challenges around the supply chain. The reduction in European workers is hitting the logistics, fulfilment, and agriculture sectors particularly hard, combined with a significant increase in demand for products, energy, transport, and labour.
Jonathan De Mello, Equity Partner, CWM Retail Consulting, explains: “The crisis is being felt more acutely in the UK due to the additional disruption caused by Brexit, which has left one in six, or around 100,000, HGV driver vacancies unfilled. The pandemic is also somewhat to be blamed, but the shortage has been compounded by the departure of European workers.
“Elsewhere in the supply chain, warehouse roles are proving to be so hard to find that retailers are being forced to offer incentives to prospective workers including offers of £1,000 joining bonuses to new warehouse staff just one example.”
RTT members agree that a long-standing reliance on an abundance of cheap overseas workers has left the retail sector particularly vulnerable to the combination of HGV driver shortages and a significant uptick in the demand for labour.
Martin Hayward, Founder, Hayward Strategy and Futures, explains: “The current crisis was always going to happen, and the UK retail sector has had a long time to prepare for this. For too long the retail sector has lived off the seemingly inexhaustible supply of cheap foreign labour wherever and whenever it was needed. This, along with an expectation that the state should use the benefit system to top up low wages, has disincentivised UK workers from pursuing careers on the shop-floor or in logistics.”
Although the Government introduced a temporary visa scheme for HGV drivers to ease supply chain issues, RTT members feel it was unlikely that European drivers would be returning to the UK in great numbers. Nick Bubb, Retailing Consultant, Bubb Retail Consultancy, added: “Brexit has clearly resulted in the UK suffering the most from the shortages of lorry drivers seen across other countries. In light of the poor working conditions and facilities in the UK, Brexit red tape at the borders, and the increasingly hostile environment for immigrants, we should not be surprised that there has been no great rush for European drivers to return.”
These factors have combined to create a significant challenge for retailers ahead of their busiest quarter of the year and have raised doubts about their ability to guarantee levels of stock in the run up to Christmas.
RTT members agree that although the UK retail sector has seen strong growth over the course of 2021, the challenges around supply chains and wider structural changes are starting to impact growth at the worst possible time.
Paul Martin, UK Head of Retail at KPMG, said: “With Christmas trading representing such a critical period of the year for the sector, many retailers are understandably being very careful about their messaging. Getting this wrong could either trigger panic buying behaviours or consumers switching their retailers of choice. This should not hide the fact though that behind the scenes availability concerns across multiple categories are being vividly discussed. There has been widespread media reporting of various shortages over recent weeks and a number of product categories could be impacted in some way. It remains highly likely that shortages will be seen over the Christmas period and could continue beyond, most likely well into 2022.”
James Sawley Head of Retail & Leisure, HSBC UK, agrees, adding that a number of retailers are only achieving an intake of around 60% of their budget ahead of the peak Christmas period which could put profit margins under pressure.
“There is some evidence that peak disruption is behind us with Chinese manufacturing and freight starting to move again. Shipping cost indices such as the Shanghai Containerised Freight Index (SCFI) and the Freightos Baltic Index recently declined slightly following 20 conservative weeks of growth, so the movement of goods and costs are improving. In the long run, in the capitalistic world we live in, companies will tackle the turbulence – prices of goods will rebalance when there is money to be made.
“However, I cannot see these issues being resolved in time for Christmas. Strong demand from consumers who are sat on pent up savings are keen to enjoy a more normal festive period after last year’s hiatus will place even greater strain on availability.”
In the food sector, retailers have performed above expectations with boosted at-home consumption due to COVID-19 restrictions resulting in year-on-year sales growth. However, both the rising cost of living and unexpected supply shortages could have a significant impact on buying behaviour over the Christmas period.
Mike Watkins, Head of Retailer and Business Insight UK, NielsenIQ, explains: “Food sales have seen a growth of 1.8% year-on-year, but the NielsenIQ OSA (on-shelf availability) monitor for the ‘big four’ supermarkets shows that ‘out of stocks’ are now twice as high compared to the same time before the pandemic, which follows a loss of more than £2billion in sales from product availability issues during the first nine months of the year.
“Some consumers are already buying ahead for Christmas and retailers will be prioritising categories, creating a perfect storm over the next couple of months and with food sales growth now slowing at the end of October, availability will be key to keep sales momentum in Q4.”
The idea that a “perfect storm” has hit retailers ahead of the coming quarter is shared unanimously by RTT members. Rising energy bills, inflation and supply chain delays have compounded the challenges faced over the last 18 months to threaten serious disruption at a time when operators in the retail sector had hoped would be start of the sector’s post-pandemic recovery.
What are the potential solutions?
While the immediate focus around the supply chain crisis was on the festive period, RTT members agree that it could take some time for the complex circumstances to be resolved, adding long-term concerns to what could have been a very strong end to 2021.
RTT member predictions with regards to the time it will take for retailers’ performance to return to a level of normality range from between 12 and 18 months. However, members suggest that the current crisis could be the catalyst for a long-term restructuring of the sector.
A new approach which puts localisation and a stronger boardroom understanding of retailers’ supply chains, combined with investment in automation and staff development, could help the industry to regain control of its manufacturer and supply and reduce its reliance on overseas workers.
As the current crisis has highlighted UK retailers’ exposure to the instability of international markets, RTT members agree that a greater emphasis on localised supply chains could stimulate UK manufacturing and supply chains.
As pandemic-enforced lockdowns forced consumers to shop closer to home, alongside a wider re- evaluation of values and lifestyles, it has been suggested that mass consumption and globalisation has reached a tipping point. However, it is important to note that, at a time of inflation and a sudden surge in energy prices, increasing costs due to localisation could hit the living standards of many UK families.
Maureen Hinton, Group Retail Research Director, GlobalData, said: “It was only a few decades ago that M&S had carrier bags proudly stating that 90% of its products were made in Britain. However, we have seen a shift in consumer expectations, with much stronger demand for more choice combined with an ongoing search for cheaper products resulting in sourcing moving offshore and globalisation now being highly prominent in retail. If the UK government can get a grip on localisation, the sector could gain greater control of its manufacture and supply.”
- Improving boardroom understanding
Although the current supply chain crisis has pushed the issue of logistics and fulfilment up the list of priorities at board-level, there is agreement among RTT members that the issue has been overlooked for too long and needed to be at the top of the agenda in order for the sector to develop effective solutions.
For business leaders in the UK retail sector, visibility, board decision-making, a better understanding of data, and improving workplace culture are the four key strategic levels that can be utilised to mitigate against the worst disruption and limit future impact.
Most organisations don’t understand the range of their supply chains – including the product flows between suppliers, as well as the suppliers to their suppliers. It’s essential to get a better understanding of the whole supply chain from end-to-end.
It will also be vital for retailers facing availability pressures to be honest about the profitability and size of product ranges. While the largest retailers will be better placed to get through this, thanks to their scale and spending power, the mid-market retailers could be hit hardest. Gaining access to good data will help retailers to decide which orders to prioritise. Ultimately, the supply chain has to become a C- suite level topic.
- Investing in the retail workforce
The retail sector also needs to invest more time and money into making a career in retail a more attractive proposition, with hopes that the current ‘war for talent’ could help the sector move beyond the gig economy model and develop more long-term career options.
The current crisis has emphasised the importance of the retail workforce and RTT members agree that this is a great opportunity for the sector to rethink its employment model and value proposition to ensure it can attract and retain staff.
It is accepted that, while the sector is facing the huge cost of failing to build long-term career paths – instead of relying on cheap labour – the industry should look to develop better jobs and careers. Putting greater emphasis on customer service skills in the education system, alongside the current focus on developing skills for manufacturing or professional industries, would also help to upskill the retail workforce.
While this investment in staff would cause some short-term discomfort, retailers would benefit from improved retention and more streamlined succession planning, as well as the bonus of potentially increasing sales because of better customer service.
Alongside making the industry a more attractive proposition for workers, automation is highlighted as a key area to help the industry reduce its reliance on cheap labour and free staff to focus on more productive activities than shelf-stacking or stock checks.
Martin Newman, The Consumer Champion, said: “Frontline workers have been treated very poorly for so long, with a lack of succession planning, inadequate training and fire and re-hire policies just some examples. What’s more, the staff that are working on the shop-floor are spending most of their time doing manual or administrative tasks, such as filling shelves, rather than focusing on customers. Automation will help staff to focus on what they used to do, which is selling.”
Historically, the availability of cheap labour has reduced the requirement of the industry to invest in the automation now increasingly prevalent in other sectors, such as manufacturing. However, the RTT agrees that the subject now needs to be revisited to future-proof retail against future crises.
Andrew Firth, Insight Director at Ipsos, added that the retail sector was starting to adopt an approach to other sectors. He said: “We are seeing parallels in retail to what other sectors have been doing for years. Contact centres are one example where automation has played a key role in reducing the reliance on human operators for simple tasks, allowing them to focus on delivering a great customer service. Ocado, for example, has invested in a UK start-up that develops autonomous vehicles, with the aim of introducing AI-powered, self-driving systems which can work across its fulfilment warehouses and the last-mile, delivering groceries to customers’ doors.”
The supply chain crisis is being felt across the world as bottlenecks at major ports and shortages of shipping containers combine with upticks in demand for products, labour energy and transport. While many countries are feeling the effects of these challenges, there is no doubt that UK retailers are being hit particularly hard due to their lack of scale and buying power. This is further confounded by the Brexit reducing the number of European HGV drivers and other workers in the logistics and fulfilment sectors.
RTT members also point to UK retailers’ reliance on cheaper overseas labour resulting in in the sector becoming an unattractive proposition for domestic workers. This has meant UK retailers and hauliers starting to offer new incentives to help attract workers in the ‘war for talent’.
Although increasing energy bills and inflation are expected to hit consumer confidence over the coming months, high demand is expected in the build-up to the festive period. When combined with the supply chain crisis, RTT members agree that we could see significant stock shortages over Christmas.
It is hoped that the current crisis could act as a catalyst for a major restructuring of the sector. A move towards localisation could help to drive the expansion of UK manufacturing and supply, while the current focus on the retail supply chain should elevate the issue to become a key consideration in boardrooms.
Ultimately, the retail supply chain faces uncertainty in the short and medium term and UK retailers are particularly exposed to the impact of any additional challenges. However, RTT members agree that the situation does provide an opportunity for the sector to reconsider the status quo and help to place UK retail on a more solid foundation in the long term.
PART II In detail – individual views of the KPMG/IPSOS Retail Performance Think Tank members
Nick Bubb, Retailing Consultant, Bubb Retail Consultancy Ltd
The UK economy and the Retail sector are facing so many crises this autumn that it is hard to distinguish between the impact of supply chain problems and the general energy and fuel crises and labour shortages, but the stockmarket has taken a dim view of proceedings and, not helped by an increasing number of profit warnings, the share prices of many Non-Food retailers have come under significant pressure.
The mood of the market has shifted significantly over the last month, as the heady days of the strong Non-Food sales recovery seen in the summer start to fade from the memory and a more troubled autumn trading background has become clearer. Back on September 16th John Lewis, for example, surprised the City by reporting a notably strong recovery in first half sales and profits, whilst on September 29th Next shrugged off worries about September trading with a better than expected update and full-year profits upgrade with its interim figures. But either side of the Next interims, other less well-managed retailers (and the Online pure-play retailers in particular) have been reporting a tougher outlook.
One of the first Non-Food retailers to warn that supply chain problems were undermining Christmas sales and profit hopes was the recently floated Online fashion retailer In the Style, on September 24th, but they were quickly followed by warnings from Boohoo on September 30th, AO.com on October 1st and, most recently, ASOS on October 11th.
Those observers who felt that many Online pure-play retailers were cynically rushing to float on the stockmarket earlier this year, on the back of last year’s lockdown-induced sales boom, before something went wrong…will feel vindicated by the recent slump in share price performance, notwithstanding their strong initial post-IPO gains. The fact that THG (The Hut Group) is now below their 500p IPO price has been well publicised, but amongst the more recent floats (excluding Deliveroo), In the Style has been the worst, with the shares trading at only 120p versus a 200p IPO price, but Made.com is nearly as bad (135p, versus their 200p float price), whilst Moonpig is down from the 350p IPO price to 310p and Music Magpie is down from 193p to 171p.
In Food Retailing, the gaps on shelves don’t seem so far to have affected supermarket spending and Tesco put a brave face on things with its interims on October 6th, claiming that it was going to be able to cope at Christmas. But Tesco has the scale and clout to get priority from suppliers and delivery companies, which is not a luxury available to every player in the industry. There is some evidence, for example, that the US private equity consortium led by Fortress lost its nerve in the auction for Morrisons because of the supply chain problems in supermarket retailing.
As for how bad the problems will get and whether they can be resolved, the incompetence and anti-business stance displayed by the Government of late does not provide much encouragement. Recruiting the former Tesco boss Dave Lewis as an adviser on logistics was a good, if belated, PR move, but the brutal way in which the sensible plan of the highly respected Next boss Simon Wolfson (for a tax on Overseas job visas) was slapped down by the Prime Minister was disturbing.
Other countries are clearly suffering from shortages of lorry drivers, for structural reasons, compounded by the impact of the pandemic, but Brexit has evidently resulted in the UK suffering the most. And it should come as no surprise that European lorry drivers are not rushing to come back to work in the UK, given the increasingly hostile environment for immigrants, the poor facilities for lorry drivers in the UK and the Brexit red tape at the borders.
The country may be able to “muddle through” and avoid a “winter of discontent”, despite the worry about possible energy shortages and the ability of our fragile “just in time” economy to keep the petrol stations well stocked. But it is clear that everybody, in both the private and the public sectors, will find higher supply chain costs feeding through into higher prices, with higher wages for a few failing to provide sufficient compensation. And there is an increasing risk that higher inflation feeds through into higher interest rates, so retailers have a testing few months ahead of them.
Maureen Hinton, Group Retail Research Director, GlobalData Plc
The supply chain crisis is universal and serious, and UK retailers are not alone in suffering. However, the impact is likely to be felt longer in the UK than elsewhere because of a combination of factors; the fact we are an island nation with a reliance on shipping and freight; Brexit and the impact on labour and trade generally; rising energy costs; and poor planning from the government.
While businesses globally continue to suffer from the impact of the pandemic, with further port and manufacturing shutdowns as the Delta variant spreads, exacerbated by Western economies opening up, and high pent-up demand being released, the general conclusion is that this is a disruption that will ease back to usual trading patterns as the pandemic subsides – but the factors listed above will hinder the UK’s recovery.
Having had Christmas cancelled last year, UK consumers are ready to spend on Christmas this year, and retailers have been preparing, and hoping, for a bumper Christmas. But rising costs will put up prices, and delays in the supply chain will limit choice, so we are likely to see the shape of sales change, with consumers stocking up on presents and supplies earlier, paying more, but buying fewer items.
In the longer-term UK retailers will have to invest even more in technology and automation in their supply chains and operations to reduce costs and increase efficiencies and bring more manufacturing and supply on shore to gain greater control. Only a few decades ago M&S had bags proclaiming that 90% of its products were made in Britain, but the search for cheaper products and more choice led to sourcing offshore and globalisation.
There is now a greater interest in localisation which, if the government gets a grip, could stimulate UK manufacturing and supply, but consumers will have to be prepared to pay more and, while the pandemic has led to a re-evaluation of values and lifestyles, there are many low earners who cannot afford to pay more for their general shopping.
Mike Watkins, Head of Retailer and Business Insight UK – NielsenIQ
Food retailers have so far in 2021, traded better than expected with year-on-year sales growths of +1.8% with only Convenience stores in decline due to the Lockdown comparatives (NielsenIQ Total Till 36 weeks to 11/9/2021). Larger stores continue to benefit the most as some consumption is yet to shift back into hospitality, leisure, and travel.
However, two new concerns are starting to affect shopper sentiment which will inevitably have an impact on retailers in Q4 and in 2022. The escalating cost of living and the unexpected supply shortages, which has the potential to change shopping behaviour in the run up to Christmas, like March 2020 when pandemic purchasing led to a significant (albeit temporary) disruption to sales.
The NielsenIQ OSA (on shelf availability) monitor for the big4 supermarkets shows out of stocks are currently twice as high as before the pandemic. These retailers alone have already lost more than £2bn in sales during the first nine months of the year because of product availability issues due to supply chain shortages and the availability levels have been falling again in recent weeks. To put into context, the `lost sales` are equivalent to a week’s trading at these retailers or around 0.2% off the top line industry growth year to date.
The HGV driver shortage, alongside labour and commodity issues in other parts of the supply chain, has led to supermarkets deprioritising certain bulky items such as bottled water to ensure continuity of supply in other key categories and soft drinks have been one of the worst affected categories with availability slumping to below 90%, compared to around 98.5% normally. And is a key category over Christmas.
With no immediate resolution in sight the prioritisation of ranges will escalate as Christmas moves closer with shoppers already buying ahead and stocking up, thereby creating the perfect storm for a supply chain already under pressure. Not only are retailers prioritising categories and suppliers prioritising retailers, but we can expect shoppers to prioritise shopping trips this Christmas. This will help large stores at the expense of smaller stores but importantly, will mean extra spend shifting to online as it is more convenient to choose alternatives online when a favourite product is unavailable in store.
Another consideration is that the level of promotions usually rises around the Christmas period, although, it’s questionable whether supermarkets can ramp up stock levels to boost demand. The levels of promotional spend are still close to an all-time low at 20% down from 22% a year ago (NielsenIQ Homescan FMCG) so this is another lever that manufacturers will be unable to use this year to help hit sales targets.
With continued availability concerns and falling disposable income as energy costs increase and inflation rises, there could be a short-term boost to supermarkets as shoppers forward buy in November to help spread the cost. However, if shoppers do buy early to avoid the risk of disappointment retailers will need to make sure that the available ranges resonate with increasingly price concerned shoppers.
Looking ahead, NielsenIQ shopper research suggests rising prices typically lead to shoppers buying less rather than switching to cheaper products. However, continued out of stock situations mean shoppers have no choice but to buy different items, with private label the probable winner as there will be depth and aswell as breadth of alternatives offered by the supermarkets. The turbulence in the supply chain is now adding uncertainty to what a few weeks ago, looked to be an unexpectedly strong end to the year.
James Sawley, Head of Retail & Leisure, HSBC UK
From a lenders perspective the current supply chain crisis is worrying. Retailers are exiting COVID trading restrictions with fragile balance sheets and eroded profit margins, only to find themselves trading in a buoyant consumer led economy (albeit with a number of sectoral headwinds), but not being able to meet demand due to availability issues and suffering margin compression due to increased supply chain and fulfilment costs. This should be the rebuilding phase but we’re already seeing a number of profit warnings off the back of supply chain challenges, as lower volumes hit operational leverage. Banking covenants and liquidity are again being tested.
The reasons for these challenges are broad and complex. COVID, Brexit, climate change and politics all play their part in yet another perfect storm for the retail sector. This is also not a unique problem to the UK as some may lead us to believe, every newspaper in the world is exhibiting similar headlines and therefore any nation celebrating Christmas will be affected by these global issues. Sadly, the UK I suspect will not be at the front of the global queue. Where we have clients in the UK reporting issues securing manufacturing capacity and container space, our US counterparts report brands in the US getting bumped up the queue due to their massive scale and buying advantage. Walmart for example have enough scale to charter their own fleet of ships!
I cannot see these issues abating in time for Christmas. A number of retailers are only achieving an intake of c60% of their budget in the critical stocking up months ahead of peak, coupled with increased cost of seasonable warehouse staff and logistics, we expect profit margins to be under pressure. The key tailwinds to offset some of these negatives are, firstly, strong demand from consumers still sat on pent up savings and looking to enjoy time with family this Christmas after a one year hiatus, and secondly, with limited availability, discounting will be highly selective giving some relief to gross margins.
While in some ways things are improving, the question is are they improving quickly enough? Shipping cost indices such as the Shanghai Containerised Freight Index (SCFI) and the Freightos Baltic Index both declined modestly this week, following 20 consecutive weeks of growth, suggesting a sign that shipping imbalances are starting to unwind and the cost is coming down. The coincidence with China’s Golden Week may have had a part to play in the decline however. I’m confident that the current landscape, no matter how dire it can at times get painted, will unwind. In a capitalistic world, market forces and profit seeking companies will ultimately tackle market imbalances and prices (human and capital) will normalise. Given the interconnected and complex nature of what’s causing the current challenges, I expect this will take at least 12-18 months.
Martin Hayward, Founder – Hayward Strategy and Futures
It was always going to happen, and the UK retail industry really should have thought more strategically about the longer term, and invested in their staff a long time ago.
For too long, the profitability of the UK’s mass market retailers has relied heavily upon two factors:
- Expecting the state benefit system to top up low wages
- A seemingly inexhaustible supply of cheap foreign labour
These two approaches have kept wages low in the sector, and disincentivised UK workers from pursuing careers on the shop-floor or in logistics.
Despite the proponents of Brexit being clear that one of the key reasons for the exit was to improve wages for UK workers, too many retailers are feigning surprise that their vacancies are not attractive to UK workers.
The answer is simple.
It’s time to make retail a career again. Invest in staff, pay a living wage and stop hoping that the revolving door of cheap and expendable staff will return.
The implications for the shopper will be significant. Inevitably, prices in the mass market will need to rise. Realistically, most mass-market goods have been too cheap for too long, with prices subsidised by using state benefits as a top-up and exploiting cheap foreign labour, either as employees in the UK or in factories abroad.
This is longer sustainable.
At a time when over-consumption, single-use clothing and food waste are all major issues for the environment, making the real cost of goods more apparent will be no bad thing. (Food expenditure currently accounts for only 10.5% of UK household expenditure (ONS Family Spending in the UK 2020) compared to over 30% in the 1980’s. For economists, it may be time to assess whether Engel’s law has reached an inflection point?).
For all of the virtuous messaging from retailers’ communications departments about their commitment to every trendy cause going in their Environmental, Social and Governance (ESG) programs, the one area where they have shown collective blindness is the way they treat and reward their own staff.
Shoppers will enjoy a better service from properly trained staff and retention rates will increase. (ONS data shows that retail staff turnover at an eye-watering 40% per annum is second only to food service in the UK).
The implications for UK retail staff will be positive. Wages will rise and jobs will have to potential to become careers again.
It will take a while for the system to correct itself, with the current bottlenecks also exacerbated by the Covid lockdown that delayed training and certification, but it will be worth it as retail becomes a career again and the real cost of goods is reflected in their prices, which is good for workers, producers and the environment.
Martin Newman, The Consumer Champion
As we emerge from Covid and the pandemic and get back to some sense of normality, we are facing into a perfect storm. A significant uptick in demand for products, energy, transport, and labour has led to all sorts of issues not least with supply chains.
Not all the issues are UK centric. Factories in China are lying idle, they are experiencing power cuts and long delays at ports. All of which are exacerbating the supply chain crisis in the UK.
The potential 4% rise in inflation by the end of 2021, being forecast by the Bank of England, and the seemingly incessant news coverage of inflation, supply chain issues and the 250% increase in the cost of gas since January has meant that consumer confidence has begun to wane. While many consumers have amassed significant savings over the past 20 months, they are beginning to adopt a more cautious approach to their spending in the near term.
The sudden and rapid rise in gas bills will only act to push inflation higher. As a result, many UK families face the very real risk of a fall in their living standards.
The current supply chain issues highlight the exposure of the UK’s retailers whose goods are manufactured in the far east and other international markets to the risks of not sourcing locally. It only takes a cargo ship to run aground in the Suez Canal for a potentially catastrophic supply chain issue to derail the plans of retailers never mind the myriad of current challenges from a shortage of HGV drivers to increased complexity at borders because of Brexit.
Add to this the massive surge in costs in shipping containers of products to the UK, which have increased by over 400% in just over a year, to cargo ships and containers being stuck in a bottleneck at various ports.
Not only could all of this have a very dampening effect on Christmas trade and retailers’ performance it could well take the best part of two years for us to get back to normal.
Retailers would do well to find new sources of supply nearer to home whether that’s in the UK itself, which would likely have an impact on cost price, or those more accessible than China.
Jonathan De Mello, Equity Partner, CWM Retail Consulting LLP
The supply chain crisis is a global phenomenon – with supply chain disruption triggered by the pandemic and worker shortages in several key industrial sectors. Lack of CO2 for example – which is crucial to food packaging and supply — was a consequence of a worldwide rise in energy prices. This crisis has been more acutely felt in the UK however, due to the additional disruption Brexit has caused. There are c.100,000 HGV driver vacancies in the UK, meaning 1 in 6 driver jobs are unfilled. Whilst the pandemic is partly to blame, the Brexit-related exodus of European workers is undoubtedly the main culprit. Labour shortages are so bad in some sectors, that companies are offering joining bonuses to potential workers – both AO.com and Pets at Home for example are offering £1,000 signing on bonuses to new warehouse workers.
As a result of supply chain staff shortages, major retailers’ stock levels are at their the lowest since 1983 according to the CBI – awful timing for retailers as we move closer to Black Friday and the crucial Christmas trading period. Grocers have been hit hardest by supply chain shortages, as well as wholesale suppliers of building materials, household goods and office machinery. Restaurants have also been hit – with McDonalds forced to take milkshakes and bottled drinks off its menus, and Nando’s temporarily closing 45 outlets because of a shortage of chicken wings. This is despite no shortage of produce from UK farms – it is due to a lack of lorry drivers, warehouse staff, staff in retail distribution centres, and in supermarkets to put products on shelves.
As a direct consequence of this crisis, retailers are desperately seeking to secure additional warehouse space – with the goal of substantially increasing inventory to maintain supply to customers. 13.2 million square feet of warehouse lettings were transacted in the past 3 months nationwide (compared with 15.8 million square feet across 2020 as a whole), with major retailers such as John Lewis and Asos taking new space. Despite significantly higher cost of acquisition, 660,000 square feet of these lettings were in London – highlighting increased demand for ‘last mile’ logistics capability. Availability of warehouse space is at the lowest level ever recorded – with logistics property companies such as Prologis and M7 now looking to now acquire retail parks with a view to partial or full conversion of these into warehousing, given historically low industrial yields vs relatively high retail yields.
As this additional warehouse space comes into play – coupled with increased warehouse automation (reducing reliance on human labour), and recent government moves to ease supply chain pressures, this crisis should hopefully not be an overly prolonged one – but it will certainly impact retailers in the run up to Christmas at a time when they can ill afford it. Loss of revenue in addition to rising costs will impact profitability considerably, and – from a landlord perspective – will likely mean increased rental default; potentially even a further extension to the rent moratorium which is due to expire in March 2022. With retail rent collection still lagging c.15% behind other property sectors according to Re-Leased data, this could well tip some particularly debt-laden landlords over the edge, following the administration of Intu in 2020, and news this week that Hammerson have put all their head office staff on consultation – this following the recent resignation of their Managing Director.