28 December 2017
- The UK’s retail growth is expected to flatline at best, with consumer spending the key area of weakness
- The divide between food and non-food retail will become more pronounced as inflated food pricing draws spend away from other discretionary items
- With the retail industry facing continued headwinds, there is a critical need to re-evaluate business models and the strategies used to gain market share
The UK’s retail industry will flatline at best in 2018, according to the latest predictions from the KPMG/Ipsos Retail Think Tank (RTT).
Behind the anticipated lacklustre performance, its members point to continued headwinds in the form of geopolitical and macroeconomic obstacles; an increased number of regulatory compliance issues and ongoing structural change within the industry.
The RTT members believe that consumer spending will be the key area of weakness for the sector, with disposable income squeezed by stagnant wage growth and elevated inflation – albeit real incomes are expected to improve in the second-half of 2018, as inflation eases. In the meantime however, the divide between food and non-food retail is expected to become more pronounced, with non-food sales dented by inflated food prices.
This ‘perfect storm’ of factors may even see the industry reach a pivotal point in 2018, with increased levels of defensive consolidation and creative collaboration – as well as the inevitable fall out of casualties – the likely outcome in the ongoing fight to survive.
A look back at 2017:
2017 was unquestionably a challenging year for retail. Indeed, Dr Tim Denison, RTT Co Chairman and Director of Retail at Ipsos Retail Performance, stated that the year “won’t go down in the UK retail annals as a memorable one, simply because the challenging narrative barely made a detour”.
James Knightley, Chief International Economist at ING, shed more light on the rather dreary picture, stressing that: “Whilst 2017 painted a rosier picture for global counterparts – complete with growth being revised higher across the developed and emerging markets, asset pricing hitting new highs, volatility declining and some perceived political risks fading away – the picture in the UK was in stark contrast”.
Referring to global economic growth figures, he added: “Business surveys suggest that the US could expand 3% in real terms, whilst the European economy may grow by more than 2%. In the UK however, growth is likely to be just 1.4% – the weakest outturn since the depths of the financial crisis in 2009, when the economy contracted 4.2%”.
Martin Newman, CEO at Practicology, further reinforced the challenges faced by the sector in 2017 when he pointed to the recent Autumn Budget. He said: “We’ve had a downgrade for the growth of productivity, we’ve also had the Institute of Financial Studies forecast that average UK earnings could be lower in 2022 than when the financial crisis hit in 2008”. All this, he concluded, will add to less disposable income for the consumer.
Added to this, James Knightley also highlighted that: “The Bank of England is keen to see a slowdown in the pace of consumer credit growth, having cited potential financial stability risks”. Indeed, 2017 marked the first interest rate rise in over a decade, which will most likely see an end of retail growth coming at the expense of rising consumer credit.
Against the backdrop of questionable growth in the sector, Paul Martin, RTT Co Chairman and UK Head of Retail at KPMG, suggested that “winning market share will remain a core focus for businesses”, with significant consolidation and partnerships between retail players in 2017 pointing to this fact.
Jonathan De Mello, Head of Retail Consultancy, Harper Dennis Hobbs, said: “2017 has very much been a year of consolidation”, with Amazon’s acquisition of Wholefoods, Tesco’s acquisition of Booker, the Co-op’s takeover of Nisa some momentous examples. However, the fight for market share was not restricted to just retailers, as Jonathan pointed out when he also highlighted the mergers between property giants Unibail-Rodamco and Westfield, as well as Hammerson and Intu.
With the Hammerson and Intu merger creating by far the biggest shopping centre owner in the UK, Nick Bubb, Retail Analyst, suggested that: “With major shopping centres huddling together defensively…2018 could see more defensive M&A activity in Non-Food retailing and corporate activity in general”.
Meanwhile, Jonathan added that such mergers may create opportunities for retailers looking to expand quickly, however more established retailers with large property portfolios may face less favourable bargaining positions – given the size and strength of the entity they are negotiating with.
Prospects for 2018:
The RTT believes that the year ahead will encompass both a continuation of the ongoing issues, as well as the introduction of new challenges for the sector to grapple with. For one, there was widespread agreement amongst RTT members that the structural changes currently faced by the industry will step up – if not come to a head.
Looking first at the disruptive nature of online retail, Paul Martin said: “The UK retail sector continues to undergo fundamental structural change. With online now reaching close to 20% penetration (28% in non-food) of all retail transactions, the store-based business model (in its extent today) is threatened”. That said, the think tank also flagged that growth in online sales is showing signs of maturing.
Martin Hayward, Founder of Hayward Strategy and Futures, added that whilst rapidly growing online retailers have haunted the established store-based industry, the rate of online growth is beginning to slow. He pointed to well integrated multi-channel businesses proving popular with consumers and also highlighted how online ‘pure players’ are beginning to open physical stores.
Perhaps most poignant, Martin Hayward suggested that: “As the multichannel marketplace matures, fundamental truths need to be addressed by the industry as a whole, including understanding the real cost of home delivery”. Whilst consumers have been conditioned to expect free delivery at the expense of the retailer, Martin believes that 2018 may mark a shift on this front – with the likely outcome being that the cost is increasingly passed onto the consumer in one form or another.
Regulatory and compliance issues were also cited by the RTT members as a major concern for 2018, given they often add to a retailer’s cost pressures. Paul Martin said: “We already experienced a flurry of regulatory and compliance related topics playing an important role for the retail sector”, with many RTT members pointing to the National Living Wage and Apprenticeship Levy as prime examples.
In May 2018, the General Data Protection Regulation (GDPR) – designed to strengthen data protection for all individuals within the European Union – will mark another hurdle for the industry to overcome. The RTT suggests that the regulation will increase the challenge of retailers knowing who their customers are, but equally they believe it could offer a timely restart and opportunity to work with their data, enabling retailers to review what customer insights they actually have at their disposal.
Linked to this, Paul Martin suggested that “reputational risk is becoming increasingly important for the C-suite” – as noted in KPMG’s 2017 Global CEO Survey. However, as well as impacting reputation he also stressed that the penalties are often financially severe. In the case of GDPR, non-compliance is “non-negotiable”, with penalties as high as 4% of global revenue in some instances.
Naturally Brexit was also a key consideration for the RTT members when discussing the prospects of retail in 2018. The think tank members expect to see close correlation between the outcome of Brexit negotiations and the overall health of the industry, with a ‘soft’ Brexit resulting in meagre growth, and a ‘hard’ Brexit potentially seeing the market contract.
Further reinforcing the fact that consumer confidence is at the heart of the retail industry’s overall health, Martin Newman added that: “Continued uncertainty around Brexit and its implications is undoubtedly affecting consumer confidence, which is clearly on the wane”. The RTT believed that details on a future trading agreement, as well as a transitional period, will be the key areas of focus for retailers. They also believed that in the face of prevailing uncertainty, retailers should remain cautious and continue their contingency planning.
Conclusion:
Whilst the overall prospects for 2018 clearly pivot around the fate of multiple moving parts, James Sawley, Head of Retail & Leisure at HSBC, suggested that: “As the headwinds facing the sector continue, there will no doubt be winners and losers leading to further administrations and consolidation”. As discussed, much of the fight in the coming year will be for market-share and remaining relevant to consumers.
As an example, Mike Watkins, Head of Retailer and Business Insights, said: “Nielsen are expecting another year of around 3.5% growth for the grocery industry with discounters again the fastest growing channel and increasing market share to over 14%.” Similarly, Martin Newman said that “value retailers will take on greater significance over the next year, while at the other extreme, luxury brands will quite clearly weather the storm”.
Looking at the likely losers however, Paul Martin pointed to mid-market clothing, along with other larger discretionary purchase categories, as the main victims of a squeezed consumer wallet. Meanwhile, Nick Bubb suggested that the department store sector look poised for a shake-out, given reported financial problems of various players.
In such an unforgiving environment, Tim Denison suggested that “retailers will be working manically behind the scenes re-inventing the ways in which they deliver that all-important customer-experience”. Indeed, the RTT members highlighted that many retailers will be revisiting their business models in light of the era of retail ‘platforms’ disrupting the status quo. As Mike Watkins remarked: “Business models are under threat and its now the case of investing for the longer term in order to remain relevant”.
Part II: In detail – individual views of the KPMG/Ipsos Retail Performance Think Tank members
James Knightley, Chief International Economist, ING
Globally, the news just kept getting better as we progressed through 2017, with growth being revised higher right across developed and emerging markets, asset prices hitting new highs, volatility declining and perceived political risks fading away. 2018 looks as though we will see an even better global growth picture with business surveys suggesting the US could expand 3% in real terms while the European economy may possibly grow by more than 2%.
Unfortunately, it is a very different story for the UK. The consensus amongst economists is that the UK will grow just 1.4% in 2018 – the weakest outturn since the depths of the financial crisis in 2009, when the economy contracted 4.2%. Only Japan (1.3%) and Italy (1.2%) are expected to post weaker numbers in the developed markets.
Consumer spending is expected to be a key area of weakness as the ongoing squeeze to spending power from low wage growth and elevated inflation continues. Economic and political uncertainty is also likely to persist, making households wary of over exerting themselves.
Furthermore, the Bank of England is keen to see a slowdown in the pace of consumer credit growth, having cited potential financial stability risks. They have made banks hold more capital against unsecured borrowing and have raised interest rates. The result is that households will need to run down more of their savings if we are going to see any meaningful increase in spending. Nonetheless, people have jobs and asset prices are high, which should provide a decent base and mean that spending probably won’t contract.
Brexit will remain the main threat – both to the upside and the downside for growth risks. If progress can be made on future trading arrangements and a transitional period is agreed to smooth the Brexit process then this could lift business sentiment. This could lead to a reversal in the slowdown in UK job creation and may also make businesses more amenable to offering pay rises. It would also likely lead sterling to rally, which will dampen imported inflation. Consequently we could see favourable developments on real incomes in this positive scenario.
However, there is clearly the risk that Brexit politics turns even more toxic and could in the extreme lead Theresa May’s government to fall. This opens up a new array of potential scenarios, but in the near term would create huge levels of uncertainty over prospects for the UK and would see asset prices and sterling come under downside pressure. The combination of spiking inflation, worried households and businesses and a political vacuum as Britain heads for the EU exit doors, would be deeply damaging for the UK retail sector.
In the end we hope that sense will prevail and an outcome that minimises the negative economic implications for all participants can be agreed. Unfortunately, the experience so far suggests this is unlikely to be a smooth process.
Dr Tim Denison, Director of Retail Intelligence – Ipsos Retail Performance
In many respects 2017 won’t go down in the UK’s retail annals as a memorable year, simply because the challenging narrative barely made a detour throughout the year: strong employment, weak pound, rising inflation, falling disposable incomes, Brexit uncertainty, resilient shoppers and squeezed margins.
Yet it was a seminal year in at least one regard evidenced by the acquisition of Whole Foods by Amazon, albeit a full two years after Alibaba’s strategic alliance with Suning, China’s leading electronics retailer. While consumers don’t discriminate between channels – “shopping is shopping, whenever and wherever it’s done” – the practicalities are very different and joining technology companies and retailers at the hip, combining expertise, may define the future of retailing. So expect to see more such M&As and partnerships announced this year, as online marches towards 25% of non-food sales in the UK and retailers grapple with finding and investing in the “right” technologies – ones that genuinely improve the customer experience rather than solve problems that shoppers don’t have.
The quest to offer a personalised shopping experience remains elusive. The signs are that that may change in 2018, if retailers jump on the back of the ever-rising popularity of messaging platforms. Successful trials involving Facebook Messenger, with retailer apps from the likes of Sephora and American Eagle, together with the announced launch of Apple Business Chat and testing of WhatsApp business exchange features, could provide the necessary momentum to see retail chat tools break through this year. This assumes that consumers won’t mind retailers operating in spaces previously reserved for conversations with friends and family.
Chat isn’t the only new communication tool likely to make its mark in retailing in 2018. So-called “conversational commerce” is in its nascent state, but the fact that EchoDot (which houses Alexa) was Amazon Prime Day’s top seller this year indicates that shoppers are open to linking up with retailers using this new, convenient medium.
Inevitably there are downsides to the continued investment in technology. Job losses ensue. 20,000 went in 2017 and more than this can be expected this year. The rise in the minimum wage rate alone will add an extra 1.7% onto the sector’s operating costs, if left unaltered. Cost control will inevitably remain front-of-mind in the board room, on the shop floor and in the warehouse.
2018 may not be shaping up to be a stellar year either from a retail sales perspective, but it may edge up to realise 1.5% growth. Growing certainty of the outcome of Brexit negotiations and falling inflation will help the cause. Footfall, too, should see the annual decline narrow from 4% in 2017 (expected) to 2.7% in 2018. However, although the market may continue to be subdued, retailers will be working manically behind the scenes re-inventing the ways in which they deliver that all-important customer experience. From a technology perspective 2018 won’t disappoint, just as the best of the Christmas TV adverts never do.
Paul Martin, UK Head of Retail – KPMG
2017 has been a difficult year for many retailers and in times of change and market disruption there have naturally been winners and losers. This is unlikely to change significantly in 2018. The trend of limited to no retail growth is set to continue in 2018, and winning market-share will remain a core focus for those businesses poised for growth. For those at the other end of the spectrum, it could even mean survival. Three key themes will remain top of mind of for the sector in the coming year:
- Geo-political and macro-economic challenges
- Regulatory and compliance related themes
- On-going structural changes to the sector
Even though it seems the UK has moved on from the first phase of Brexit negotiations and can now start discussing what a transitional period and subsequent future trade deals could look like, retailers are recommended to stay cautious and continue their contingency planning as uncertainty prevails. Sterling continues to be worth significantly less than before the referendum, and with a large proportion of both food and non-food products being imported, prices for many items have increased – in some cases over 20%. With inflation continuing to rise (albeit a fall in H2 of 2018 back to 2% is likely) and wage growth stagnant, the consumer is feeling the pinch. This will result in reduced consumer spending over the course of 2018.
Over the last couple of years we have already experienced a flurry of regulatory and compliance related topics playing an important role for the retail sector. The national living wage and apprenticeship levy being two prime examples. 2018 will see additional themes move to the forefront of the agenda. The Global Data Protection Regulation (GDPR) to name one of the most important, is due to be implemented in May. Failing to comply is non-negotiable and fines of up to 4% of global revenue can be imposed. We are observing reputational risk becoming increasingly important for the C-suite, as highlighted in KPMG’s 2017 CEO Outlook Survey, with operational and reputational rsik coming top of CEO’s worry list. Although these regulatory and compliance related topics are – in most cases – of pivotal importance to safeguard organisations and broader society, they are adding additional complexity and cost pressures to retailers.
Finally, the UK retail sector continues to undergo a fundamental structural change. With online now reaching close to 20% penetration (in non-food 28%) of all retail transactions, the store-based business model is threatened. Although stores will remain the most important channel for many years to come, their role will unquestionably continue to change. The UK has a sizeable over-supply of physical retail property, which depending on the category may be between 5% and 25%. In a stagnant market this issue will need to be addressed by many businesses, otherwise this could lead to increased business failures throughout the year. Another trend that will continue to gain momentum in 2018 will be the platform business model. We are observing an increased number of retailers interested in either building, buying or collaborating with platforms. The platform business model, as highlighted in KPMG’s recent omni-business research paper, is the natural evolution from the pure-play and market-place business model and is likely to supersede the omni-channel business model many retailers are currently striding towards.
In summary, Food and Health & Beauty are the two categories that will likely continue to top the leaderboard in 2018, although inflation will continue to represent a large part of their growth. Non-food, especially mid-market clothing and some of the larger discretionary purchase categories, will find it much more difficult to be on the winning team.
Martin Hayward, Founder – Hayward Strategy and Futures
For the last few years the spectre of rapidly growing online retailers has haunted the established, store based industry. Conferences are now managing to fill whole agendas with analyses of how brilliant Amazon is, and at this time of year, predictions of continuing carnage amongst retailers are fashionable.
Online share of shopping continues to grow, but for a number of reasons we are now entering a new phase of the evolution and need to begin a much calmer, more considered analysis of what needs to happen next.
- The rate of online sales growth is slowing – the rate of online growth has been spectacular for some time and whilst still significant, there are clear signs that this growth is now beginning to slow
- Well integrated multi-channel businesses are increasingly popular with consumers – the relatively recent development of much more efficient click and collect models, together with instore returns, are helping retailers to protect share
- Online pure plays are beginning to open physical stores as they understand that a lot of purchase satisfaction requires a sensory, tactile experience
- Retailers and landlords are getting better at creating experiences that attract and keep shoppers
Against this backdrop of a maturing multi-channel marketplace, where the benefits and symbiotic roles of different channels are better understood by both retailers and consumers, there are now some more fundamental truths that need to be addressed by the industry as a whole.
- Understanding the real costs of home delivery
- Financial – there is widespread belief that a lot of home delivery is uneconomic, yet the battle for share dictates that it is better to lose money than lose share. Consumers are arguably becoming conditioned to expect free delivery at the expense of the health of the retail market and the real costs must be better understood to ensure future decisions are based on fact.
- Traffic, pollution and congestion – the marauding white vans of home delivery are creating large amounts of traffic unnecessarily – it is not environmentally economic to deliver small items by van.
- Tired neighbours – anyone living near to an online enthusiast is probably tiring of taking in their parcels
- No fun – it is likely that the thrill of being able to get something rapidly is beginning to pale. As stores get better at replenishment and same day pick up, it is likely that shoppers will venture out with confidence again.
- Creating a level taxation playing field – the industry has to be more vocal about the extraordinary tax evasion that international internet businesses indulge in. VAT, Corporation taxes and employee taxes are being denied to the government by tricky international structures that are bad for the country and bad for our retailers.
- Better understand attribution – there is still much work to do to understand the relative role of instore experience, advertising and other influences on online sales and vice versa. It is crucial that we better understand these interactions to help justify expenditure and better manage profitability.
- Treatment of employees – again the industry needs to be more vocal about the poor jobs that many internet retailers create. Warehouse roles that involve endless picking with limited breaks and delivery jobs subcontracted to the ‘gig economy’ denying employees protection or benefits
As we enter 2018, it is time for a much more educated discussion about the pros and cons of online retail. The consumer needs to be helped to understand the real costs of their choices.
In tandem, as our existing retailers continue to respond and evolve their multi-channel offers, the consumer will increasingly enjoy their urge to forage and socialise in nice environments with confidence that they will always find and get what they want. Nobody in the UK needs to spend more time inside, staring at a screen, waiting for a van to arrive – the thrill will wear off.
Maureen Hinton, GlobalData
UK retailers have become used to facing yet another difficult trading year. Over the past decade, ever since the financial crisis of 2008, times have been tough for retailers. Austerity, rising costs, shifting consumer demand, have all been making life hard, and then, just as retailers were acclimatising to a new world order, along comes Brexit. The devaluation of the pound pushing up prices and the uncertainty surrounding future trade arrangements are new and very unwelcome factors for retailers to manage.
Against this latest backdrop expect to see more casualties, just as we did a decade ago. While disruptors like Amazon, using new technology, have designed a business that is entirely customer focused, there are legacy retailers, like Toys R Us, that have ignored changing consumer demand and left it far too late to adapt. They are encumbered with expensive, unprofitable, property, and shrinking demand.
Indeed, all retailers are faced with shrinking demand, not just from consumers having less money to spend but their preference to prioritise leisure spending over buying more products. And with consumer confidence weak because of future economic uncertainty, there is a reluctance to spend on big ticket items. So, as we all have to eat, it is non-food retailers that are feeling the greatest burden, and will produce the majority of casualties.
Meanwhile expect to see more consolidation as retailers look at ways to cut their costs, reach a wider audience, and become more efficient businesses.
Martin Newman, CEO – Practicology
With all the economic indications at play currently it’s clear that it’s going to be a challenging year for the retail sector in 2018.
Post budget, we’ve had a downgrade for the growth of productivity, we’ve also had the Institute for Fiscal Studies forecast that average UK earnings could be lower in 2022 than when the GFC hit in 2008. If this is true, this is going to manifest itself with consumers having both less disposable income as well as moving from a ‘spend it’ to a ‘save it’ mindset.
The continued uncertainty around Brexit and its implications are undoubtedly affecting consumer confidence, which is clearly on the wane. In October GFK research forecast consumer confidence to have slipped from -9 to -10. Trading economics are forecasting -12 for the last 2 months and into 2018. This will drive more caution when it comes to discretionary spend. Add to this the rise in interest rates, inflation and the increasing trend of millennials opting for experiences over buying things, and retailers could well be in for a perfect storm in 2018.
Despite the headwinds, there will be winners. Value retail will take on even greater significance over the next year, while at the other extreme, luxury brands will quite likely weather the storm. In part buoyed by the continual influx of tourist shoppers from the Far East.
Those with the biggest challenge in the year ahead will be the retailers stuck in the middle. Those with a homogenous product and price proposition or a lack of clarity over their value proposition, purpose and relevance. Many of whom also find themselves with too many under-performing stores in their portfolio.
It’s fair to say that we’re seeing a changing of the guard in retail. In the US, the market capitalisation of Amazon is pretty much double that of the next eight largest retailers combined, including Walmart, Macy’s JC Penney, Sears, Best buy, Target et al. In the UK, Asos’ share price has recently overtaken that of M&S.
Retailers are also struggling with the cost to serve customers, whose expectations for service levels have been re-set by Amazon, Asos and the like. This makes the requirement to get closer to existing customers all the more important.
Retailers need to drive customer lifetime value and to do so, focus more on forward facing KPIs such as customer satisfaction and less on pure commercial KPI’s. If they get the inputs right around customer experience and service, the outputs will take care of themselves.
Mike Watkins, Head of Retailer and Business Insight – Nielsen UK
The UK continues to be one of the most confident markets in Europe but uncertainty about the final terms of Brexit and falling real incomes is unsettling shoppers, who are now feeling nervous about spending. This change of sentiment started to impact consumer spend towards the end of 2017, with Nielsen research showing that only 47% of shoppers now believe it’s a good time to buy things they may want or need, which is a 2 year low (Nielsen Global Consumer Confidence Survey).
Whilst this is not good news for `big ticket` and some clothing retailers, food retailing remains the most buoyant sector and this is expected to continue in 2018. With inflation peaking and volumes slowly improving, Nielsen are expecting another year of around +3.5% growth for the grocery industry, with discounters again the fastest growing channel and increasing market share to 14% (Nielsen Total Till). This growth will be helped by an accelerated new store opening programme but will also come from remodelled stores selling more fresh foods, which accounts for 45% of the shopping basket purchasing of all shoppers in the UK.
The change from monthly shopping at large stores to weekly shopping at smaller stores and supplemented with online (big and infrequent) and convenience shopping (little and often) will continue. This is how most shoppers buy food and drink for consumption at home and the trend will help multi format and omnichannel supermarkets.
We can also expect a third wave of disruption – the first two were value retailing and e commerce. The consolidation underway in wholesale will continue and could reach food service and the fragmented out of home channel. With supermarkets battling for a bigger share of a shrinking pie, and shoppers keen to blend their leisure time with food purchasing, we have probably reached a tipping point. Consumers are in control.
With households changing spending habits in order to save on household expenses, in terms of food-related cost-cutting activity, switching to cheaper grocery brands is still the most popular activity followed by cutting down on takeaway meals. This suggests that a `dining in at home with a lower priced takeaway` could be one of the more profitable growth opportunities, particularly for any supermarket with scale, credentials in food preparation, provenance and customer service.
For all retailers however, it will be the better use of technology – mobile, in-store, digital platforms, subscription services, and advertising – that will help reduce costs in the supply chain and increase loyalty to store and online. Business models are under threat and its now the case of investing for the longer term in order to remain relevant.
Jonathan De Mello, Head of Retail Consultancy – Harper Dennis Hobbs
It is impossible to predict retailer performance for 2018, without first looking at Black Friday 2017. Black Friday – as with 2016 – was very much an online phenomenon; the main difference being that, in 2017, despite the majority of the high street engaging in Black Friday discounting, footfall actually dropped over the Black Friday weekend across the UK when compared with the previous year. The effect of this could be profound on some physical retailers who, forced to discount at a time when they should be selling at full price, still have overheads to cover such as payroll, property costs and business rates, when compared to online pure plays that benefit doubly from increased demand and much lower costs. The real test for physical retailers will be quarterly rent day on the 25th of December – will they have made enough cash to cover this cost, or will it be the rather large and unwelcome straw that breaks them? Multiyork and Feather and Black could not last to December, and there are rumours about other retailers that may soon face a similar fate. Toys R Us closing a tranche of UK stores (albeit down to more global issues than UK), and M&S deciding to halt the construction of a number of new stores that were in the pipeline, highlights the issues retailers are facing, with many seeking to operate leaner business models – and frankly fewer physical stores – prior to the onset of Brexit proper.
Both the increased discounting culture we are seeing in the UK, as well as fears over Brexit (which has severely damaged consumer confidence) could be playing a part in the channel shift from bricks and mortar to online, where products are generally cheaper. With an increase to the Living Wage recently and not enough done about business rates in the recent budget (bar the move from RPI to CPI), physical retail faces very challenging times. Simply put, not enough has been done by the government to level the playing field between physical and online retailers.
2017 has very much been a year of consolidation, and 2018 is likely to continue this trend. In 2017 we saw consolidation between Amazon and Whole Foods, Tesco and Booker, and the Co-Op and Nisa – this on the back of Sainsburys’ seminal acquisition of Argos in 2016. I would expect Amazon to continue acquiring and investing in physical retail globally, and it is a matter of time before they either materially expand Whole Foods in the UK, or more likely buy a major UK/European grocer. Consolidation has not been restricted to retailers however, with a major merger between property giants Unibail-Rodamco and Westfield, following on from Hammerson and Intu’s merger last week. In the case of Hammerson and Intu, their merger will create by far the biggest shopping centre owner in the UK. With combined assets including Trafford Centre, Bull Ring and Lakeside to name a few, the new business will control some of the UK’s best shopping centres. This creates opportunity for new retailers in the sense that they can get access to a number of schemes quickly as they look to expand, but for those more established retailers with large property portfolios, this merger could affect their bargaining position on rent review given they would be dealing with a much larger, stronger entity. Simon Property Group – the largest owner of shopping centres in the USA – have recently taken on the mighty Starbucks for lost rent given the closure of Teavana stores (owned by Starbucks). Could this merger between Hammerson and Intu – or Unibail and Westfield for that matter – embolden them to do something similar, should a retailer decide to close stores due to poor trading in their centres? My view is that this is unlikely as it is still very much a retailer rather than landlord’s market in the UK, but it is still food for thought!
Nick Bubb, Retail Consultant
The return of Food price inflation in 2017 was not as helpful to the big supermarkets in stockmarket terms as might have been expected, and the Food Retailing sector overall performed disappointingly. Despite a late rally, the share prices of the “Big 3” (Tesco, Sainsbury and Morrisons) ended the year trading at slightly lower levels than a year before, with the best performances in 2017 coming from the second-tier players like Booker, Ocado and Greggs.
The single best performing sector player in 2017, however, was the drinks wholesaling group Conviviality (which is listed on AIM). And the neglected industry of wholesaling was something everybody had to learn more about in 2017, after the surprise Tesco bid for Booker at the end of January and Morrisons’ move to exploit its fresh food manufacturing operation by developing a wholesaling offshoot under the Safeway brand.
The Tesco Booker deal is still grinding through the regulatory mill, but the CMA was remarkably unconcerned about the competition issues and gave the Tesco Booker merger its blessing, despite the repercussions already being felt in the convenience store industry, after the shock collapse of the wholesaler Palmer & Harvey.
If diversification has been the response of the big supermarkets to the disruptive rise of the discounters Aldi and Lidl, with wholesaling moves the big focus in 2017, perhaps 2018 will see a renewed focus by the supermarket chains on the eating out/takeaway food market, given the competitive threat that this represents.
2017 was an increasingly tough year for Non-Food retailers, but the General Retail sector only underperformed the UK stockmarket slightly overall, despite the growing pressures on Marks & Spencer and Next and the challenges posed by the relentless growth of Online shopping.
Performance was very polarised, however, in General Retailing with the stockmarket winners in 2017 including WH Smith, B&M and Sports Direct and the losers including Dixons Carphone, Pets at Home and Debenhams: a pretty disparate bunch. JD Sports and Boohoo.com were early stars in the first half of the year, but faded through the second half.
With the major shopping centres huddling together defensively, in the form of the planned Hammerson and Intu Properties merger, 2018 could see more defensive M&A activity in Non-Food retailing and corporate activity in general seems likely to be the key focus within the sector.
The Department Store sector looks to be heading for a shake-out in 2018, given the reported financial problems of House of Fraser, and the young fashion sector may not be far behind, given the reported financial problems of New Look. New Look is also involved, indirectly, in the spectacular collapse of the scandal-ridden South African linked Steinhoff International, which is almost certain to lead to the break-up of its UK retail empire in 2018.
And with the London housing market showing distinct signs of cooling and interest rates on an upward trend, it will be interesting to see if the recent warning from the well-known fund manager Neil Woodford about a stockmarket bubble, with multiple lights flashing red, is borne out.
James Sawley, Head of Retail & Leisure, HSBC
From a banker’s perspective, we will naturally be watchful and vigilant regarding the outlook for the retail industry in 2018. As the headwinds facing the sector continue, there will no doubt be winners and losers leading to further administrations and consolidation. I see the environment for consumer spending not getting worse, but then not getting better either. Inflation will naturally unwind as the GBP devaluation impact falls out the CPI numbers, and will likely stabilise around the 2% mark, while wage growth, currently also c2%, should be buoyed by full employment. Technically therefore the consumer is no better or worse off.
In 2018 I believe confidence will be the main driving factor. As Brexit negotiations unfold, headlines will drive sentiment and hence purchasing decisions. Consumer confidence is key, but so is business confidence, companies need greater clarity on the UK’s place in the world before expanding and investing, which in turn drives employment prospects and willingness to spend. At a category level, I do foresee a continuation of the trend that non-discretionary items such a food will continue grow in value terms (driven largely by inflation) at the expense of non-food spending.
On the FX front, the positive impact of news on progress in Brexit talks on GBP is evident, and indeed cable has recovered from 12 month lows. While this lends some relief the current rate remains materially off historic budget rates. As pre and post Brexit currency hedges completely phase out, it’s going to be challenging to pass these additional costs onto the already fragile consumer. I believe in 2018 retailers will continue to protect themselves against further volatility and to help manage that all important margin (the key threat for 2018).
Retail is not alone, in my day job I also cover the hospitality sector where a moderation in consumer spending, combined with FX and cost headwinds, is also being felt by operators in their margins. Key to success (or survival!) in 2018 will be a forensic and relentless focus on the bottom line, backed by a strong balance sheet. When so many factors impacting a retailer’s P&L are outside of our control (rent, rates, NLW, tax, FX etc), a focus on product, service and costs will be imperative. Companies with efficient and flexible supply chains and operating models, those who stick to their knitting in serving their core customer, and those with scale and international exposure will likely outperform.
On a more positive note for 2018, savings from the change in how business rates are indexed will hopefully offset planned increases in National Living Wage (NLW), and the year might also present itself as a good year to strike new and better deals with landlords, as retailers and casual dining brands scale down their operations.
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.
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