Sector Foresight
February 2010
Retail
High Street Retail
Factors such as the contracting global economy, advances in technology, proliferation in the number of shopping channels, increased focus on food retailers in moving to non food products and an increasingly well-informed, mobile and deal-searching consumer base are altering the means, modes and manner in which consumers shop.
This disruptive landscape has challenged the traditional retail industry business models and forced companies across the sector to search for new and innovative ways to satisfy a rather fragmented and value-conscious consumer base whilst mitigating against any number of external influences from the economic downturn to weather conditions all leading to margin pressure.
Trading conditions 2009
Discounting policies, aided by the drop in commodity prices, low interest rates, government economic stimulus packages and the 12 month VAT cut, have helped retailers weather the storm.
2009 will stay in our minds as the year the High Street visibly shrank. High profile public interest insolvencies were as well documented as the innovative Company Voluntary Arrangement (CVA) rescue process. We anticipate that the CVA will continue as a robust mechanism to dominate this sector for the following reasons:
- Operational and debt restructuring takes effect
- Management stay in control
- Addresses significant closed store landlord liabilities impacting solvency
- Allows funds to be made available to landlords approximately equal to an average of 6 months rent per store
- Allows alteration of rental terms
- All other creditors are paid in the normal course of business
- If listed, shares are not suspended
- Any potential insolvency avoided
At the end of 2009 one in five shops on some of the UK regions’ High Streets were empty, equating to 135,000 empty shops. Without the pioneering work in the CVA area these High Streets would be suffering from at least a further five boarded up retail chains, not to mention the consumer/employee job losses.
The whole of the retail landscape needs to be understood, in the past 20 years the UK has added an extra 88 million square feet of space, conversely, in the past 20 years on-line sales have increased from a zero base to a forecasted £56 billion in 2010. The consumer is changing the retail landscape and retailers have little choice than to adapt if they wish to survive.
Christmas trading
Many retailers went into Christmas with reduced stock levels to avoid the colossal discounting as witnessed in 2008. Initial data and comment covering the Christmas period was encouraging and pointed to companies exceeding the grim pre Christmas forecasts. Early signs are that the season was “stronger than we dared hope”, according to the Director General of the British Retail Consortium. However, it should be kept in mind that only public companies will publish trading results, and those with a positive story are more eager to release their figures to the media. Furthermore, these are the same companies that have benefitted from diminished High Street competition – according to Verdict, £14 billion has been freed up for retail survivors to grab. In addition, the VAT hike in January probably pulled forward some consumer spend.
It can therefore be stated unequivocally that the entire retail landscape remains uncertain. Caution will remain key in 2010.
January 2010: Snow
The impact of the severe weather conditions on January shopping trips placed further pressure on retailers. Generally in such conditions, consumers “shop to lists” and focus on getting in/out of stores as quickly as possible, if they can get there at all. Reports indicated a drop of up to 35% footfall in some regions. For many retailers this came at the same time as their key post-Christmas sale period and as such, many retailers will need to continue running promotion campaigns to make up for lost ground. Just recently one retailer has blamed the snow impact for having to enter administration.
As always, where there is a threat, there is also an opportunity. Outdoor wear, thermal underwear and local independent retailers enjoyed a surge under those extreme conditions. Online sales grew 14.6% higher than a year ago.
Stephen Robertson, Director General, British Retail Consortium has just stated that “…this is the worst January sales growth in the 15 years we have been running our survey”.
Figures just released from the British Retail Consortium indicate a 0.7% like for like fall in sales in January.
2010: Clouds of uncertainty
There are so many variables that could affect this year’s trading: house prices could fall again, higher taxes, higher interest rates, the weakness of sterling, producer price inflation still rising not to mention the fickle consumer. The continual threat of the “rainy day” is still encouraging saving or paying down credit card debt and discouraging spending. On the plus side: utility costs are lower, and rent in tertiary shopping sites is lower, with the highest falls seen in shopping centres.
Capital Economics issued a stark reminder in December, anticipating the next Government’s public sector cuts and tax rises, predicting that the worst year for consumer spending will be 2011 when some commentators have estimated 2.5% of household’s annual income growth could be at risk. It is more than likely that the 2011 threat will commence in 2010 if we are to believe the speed at which some public spending may be cut. According to CEBR the most affected UK regions will be Wales & Northern Ireland, closely followed by the NE - in excess of 60% of the Welsh and Northern Irish GDP is made up of public spending .This serves to re-emphasise the need for retailers to continue to focus on operational excellence and cost reduction programmes to enable them to cope with the ongoing economic challenge.
Notwithstanding the recent decline in unemployment numbers, everything seems to be pointing towards the second dip in a ‘W’ shaped recession, once the next parliament comes to power.
The beginning of the year has witnessed two retailers entering administration for the second time within a two year period, hopefully this is not the start of a worrying trend.
Winners will be those meeting customer demands:
Value retailers
Supermarkets trading in non-food items
On-line/multi channel offering
Overseas tourist purchases of UK brands and designer goods
Successful retailers will need three vital attributes:
Flexibility
Visibility
Sustainability
Cash will remain key in 2010. Helen Dickinson, KPMG UK Head of Retail has recently commented that the focus on cash will remain critical again this year and retailers must continue to improve their oversight and integration of costs, cash and forecasting – particularly as the multi-channel model becomes more important. Retailers will need to ensure they have sufficient banking facilities in place which will require continual re-evaluation should trading fall below plan. Close management of currency exposures will also be crucial.
Cost saving initiatives which many retailers implemented last year will need to be reviewed regularly as costs will have inevitably started to creep back up again. Margins, the most influential driver of retail health in 2009, will also need close attention and the Retail Think Tank predicts that successful retailers will be those that find innovative ways to do this.
Should you wish to discuss any matters, or if you simply want assurance that your clients are doing everything that they could be doing, please do not hesitate to call your local KPMG contact, Chris Laverty or Richard Fleming .
KPMG Restructuring credentials
Feedback & Comments
To provide feedback/comment on this Sector Foresight, or to suggest other sectors you would like us to cover, please e-mail us at: hayley.willans@kpmg.co.uk
