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High Street Woes

Duff & Phelps

Posted: 27 Nov, 2018

There are few sectors where the effects of the faltering UK economy have been more starkly visible than the retail sector. It seems that every day the media presents another story about a high street name facing financial difficulty.

There are a multitude of factors playing into the softening consumer demand, but the biggest issue of all is that consumers simply have less money.1

While the UK hasn’t left the EU yet, the effects of the decision to leave is having a significant impact across the economy. It is perhaps being felt most severely in the retail market. The depreciation of sterling has had a significant impact on retailers’ bottom lines, pushing up the prices of goods imported from overseas and hitting their purchasing power. Analysis from the British Retail Consortium (BRC) has indicated that global food commodity costs have risen by an average of 17% since 2016, indicating the pressure on retailers’ supply chains.

The rate of inflation has also grown steadily, raising the price of basic household goods and leaving many families, particularly those on low incomes, with significantly less disposable income. This is being felt in many markets, including the automotive industry and leisure sector, but retailers are more susceptible than most to fluctuations in both consumer spending and the global supply chain.

Along with reducing the amount of money in consumers’ pockets, Brexit may be impacting both business and consumer confidence. Many consumers are perhaps anticipating a period similar to what followed the financial crash of 2008, of job losses and companies going into administration. Therefore, they are saving money for a rainy day.

Since 2011, the banks have paid out over £28 billion in compensation for mis-sold payment protection insurance (PPI).2 This has resulted in what some economists call “helicopter money,” large sums of cash distributed to significant swathes of the population. Coinciding with the UK finally emerging from one of the toughest economic periods in living memory following the financial crash, it is easy to understand why people who were suddenly handed a large windfall may have had the confidence to spend it on themselves, rather than saving it.

In addition to the dangers that Brexit and the end of PPI pose to the retail industry, there is a potentially more destructive, more systemic and essentially irreversible threat to the market: the rise of online shopping. This may not yet be at the level where it is really eviscerating the traditional retail market incumbents. After all, many brick-and-mortar retailers have developed sizeable online presences. However, the rate of growth will concern retailers.

Adding to the pressure on brick-and-mortar retailers’ margins is the increase in business rates brought in by the government in 2017. This has had a profound effect on the health of high street, with figures from the BRC suggesting that retailers may find themselves with an additional £273 million to pay. With many independent retailers already in a precarious position, this could lead to further cash flow pressures.

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