Retailing Will Never Be Quite the Same Again
With the Eurozone crisis ongoing, consumer confidence falling and concerns about continuing austerity measures, prospects for 2013 look less than encouraging. Penelope Ody examines the figures.
In those pre-2008 halcyon days retailers were on a roll. The message to shoppers was “spend, spend, spend”, credit cards were maxed, and consumer confidence was boosted by rising property prices, job security, and a government that declared an end to “boom or bust”.
As we head into 2013 life is very different. The UK may have moved out of recession, albeit minimally, in the third quarter of 2012, but consumer confidence is still wavering. After hitting a six month low in October the GfK index for November showed an unexpected recovery: “This comes despite uninspiring economic news recently,” says Nick Moon, Managing Director of Social Research at GfK. “The improvement is especially dramatic following such a stagnant summer and will be welcomed by retailers as the figures show that people are increasingly optimistic about how the economy will perform over the next 12 months. This could be because consumers now think things can’t get any worse or it may be for more positive reasons.”
“Consumer confidence has remained relatively depressed for much of the last four years,” adds Helen Roberts, Senior Director of Retail & Shopper Research at GfK. “On the basis of the last recession, the recovery was well under way before consumer confidence really started to pick up again and we expect a similar thing to happen this time.”
Much will obviously depend on Christmas sales. “Surveys suggest that people will be careful over Christmas spending,” says Professor Joshua Bamfield, Director at the Centre for Retail Research, “but they will probably push the boat out as usual and we’re expecting a 1.5% increase on 2011 figures, so not quite as bad as last year.”
Sales figures and retail surveys for November were mixed with the CBI seeing some signs of an upturn while the BRC-KPMG Index confirmed the current mood of consumer caution. After October’s figures showed the worst sales growth for 11 months, like-for-like sales values in November grew 0.4%, according to the BRC-KPMG study. “Sales growth slowed as November unfolded,” said Stephen Robertson, Director General, British Retail Consortium , “suggesting that customers are taking care not to spend too much too soon. Over-all, the emphasis continued to be on value with consumers looking at lower priced gifts. The same caution hit online sales, which delivered their third worst performance of the year.”
In contrast, the CBI’s quarterly distributive trades survey suggested that retailers were showing signs of optimism in November with almost half of the 140 firms questioned reporting that year-on-year sales volumes were up. The survey group remained relatively cautious about the over-all outlook, however: “The increase in employment, along with expectations for improvement in the business situation over the next quarter, point to a welcome boost to the sector,” said Anna Leach, CBI Head of Economic Analysis, “but the fact that retailers are still reluctant to authorise new capital expenditure shows that there is some way to go before activity on the high street is back to normal.”
For retailers heading into 2013, much will depend on Christmas. If shoppers have tightened their belts then heavy discounting in the Sales may boost turnover, although at the obvious expense of margin. As the case of Comet well demonstrated in October 2012 it takes very little to push a highly geared business into administration or insolvency and many will be depending on seasonal sales to cover December’s quarterly rent bills.
As David McCorquodale, Head of Retail at KPMG says: “It appears that consumers know they have to spend before Christmas but are holding off for as long as they can to see if there might be bargains available. Retailers, meanwhile, are trying to hold firm to maintain margins.
Professor Bamfield also points out that 31 retail companies failed in 2011 with the loss of 2,500 stores. In the nine months to September 2012 the corresponding figures were 47 retail companies and 3,673 stores. “Last time it was as bad as that was 2008,” he says. “It seems that companies had been holding on by their fingertips and the continuing downturn finally caused them to fall.”
Analysts talk of the “zombie economy” with businesses making just enough to service their debt and tick over, but with nothing left to invest in growth. Others apply the “zombie” model to consumers: households with interest-only mortgages surviving each month with the help of pay-day loans. As Mark Thomas, business strategy expert at PA Consulting – who coined the “zombie” tag back in 2009 – has said: “People who need pay day loans just to pay for their food are not in a position to provide any kind of stimulus to the economy at all.”
A key problem for consumers is, of course, that throughout 2012 wages have not kept pace with inflation: the Office of National Statistics suggests that for the year to August 2012 average pay increased by 2% while inflation during that period ranged from 5.2% in October 2011 to a low of 2.4% in July 2012. Latest figure (October 2012) is 2.7%.
2013 & BEYOND
Looking to 2013 and beyond much will also depend on what happens in the Eurozone. Latest forecasts from the IMF suggest that GDP for the Eurozone will increase by 0.2% in 2013 while for the UK it will rise by 1.1%; inflation is likely to be running at, respectively, 1.6 and 1.9%. The IMF also points to “overstretched private and public balance sheets” weighing on UK demand and thus hindering growth.
Views of the UK recovery are also mixed: the CBI is slightly more optimistic with a forecast of a 1.4% increase in GDP in 2013 rising to 2% in 2014, while it expects inflation to average 3% RPI in 2013 falling to 2.4% in 2014. Joshua Bamfield is less bullish: “We expect 2013 to be flat so the earliest retailers may see things improve could be 2014: there is no great relief in sight,” he says. Verdict Research also sees minimal improvements in the economy in 2013.
“Household spending will improve, but concerns over the economic recovery and unemployment will mean very constrained expenditure,” says Honor Westnedge, Senior Analyst. “We therefore do not expect to see a significant return to growth until 2015.”
The current emphasis on value and discounting noted in the BRC-KPMG November study also suggests a continuing change in shopper attitudes. “Voucher-culture has become part of British retail,” says Helen Roberts. “Had the recession been short-lived, then this behaviour may well have been short-term but after four years of this behaviour it is now surely a way of thinking that is here to stay.”
While over-all retail prospects remain comparatively gloomy, online continues to be slightly more optimistic. Estimates for online sales vary considerably by market sector: over-all 1212.5 per cent is commonly quoted but as Andy Mulcahy, Head of Communications at the IMRG points out, this often includes newsagents and petrol stations in the ”retail” category, neither of whom have much business online. “We currently put the figure at 17 per cent including online travel,” he says, “with 14 per cent year-on-year growth, but it could be much higher than that for some businesses. It is difficult to predict 2013 but we certainly expect growth to remain in double digits for the next couple of months.”
BEHAVIOUR & CONSEQUENCES
Mobile and smartphones are playing a major part too – blurring the channel boundaries with “showrooming” or enabling shoppers to order online from in-store. “Smartphone usage in the purchase process will continue to grow and increasingly empower the shopper by giving them total transparency of the marketplace and ever greater flexibility to buy on their terms not the retailer’s terms,” says Helen Roberts. “Currently we put this sort of usage at approximately 30% of all smartphone users."
Separating out just what proportion of sales are purely store or purely online is becoming ever more difficult. However, a survey conducted by IMRG, Portaltech and eDigitalResearch in November of 150 leading multichannel retailers suggests that 20 – 40% of sales could already be online for some chains. "We asked them to predict online sales by 2014," says Mulcahy, "and the average was almost 50% across all digital channels and including click and collect. This 50% is made up of 36% online, 9% mobile and 4% social; the other 40% was store and then 10% call centre and catalogue.
“Obviously once you get to half of a retailer's sales being made online that has major implications for strategy and we're seeing a revolution in retailing on a scale that could compare with the Industrial Revolution," says Mulcahy.
Certainly there are already signs that major retailers are responding to this digital shift closing outlets and focusing on online operations. Announcing Arcadia’s annual results in November, for example, owner Sir Philip Green put continuing focus on overseas and online expansion. Arcadia’s web sales had increased by 22% year-on-year with free click-and-collect while 60 stores had been closed and Sir Philip warned he could close 260 more, unless landlords renegotiate leases.
“Other retailers are talking about cutting 50 – 60% of their estates by 2018,” adds Professor Bamfield, “although that may just be a negotiating ploy as they try to persuade landlords to reduce rents. Back in the ‘70s and ‘80s when retailing was struggling there were plenty of banks, building societies and travel companies to take on high street outlets and keep rents high. Now it is different and there only seem to be charity shops and coffee bars willing to fill the empty spaces.”
Professor Bamfield estimates that the 300,000 retail units trading in 2011 will fall to around 250,000 by 2016. Sectors likely to see the most retrenchment include fashion, DIY, electricals, books and entertainment. “In 2013 we can expect major moves to revamp the high street,” he says, “We may see local authorities encouraging more independents, to try to move away from clone towns where the same multiples dominate. Perhaps the future for some shopping malls will be to knock them down and replace them with housing. There will certainly be some hard choices ahead.”