UK Retail Sector Outlook Q1 2016

UK Retail Sector Outlook Q1 2016

  • Total value of UK retail sales were £339 billion in 2015.
  • 8% of all VAT-registered businesses in the UK are retailers, with the total number currently at 192,000 in 2015.
  • The retail industry employed over 2.8 million people in 2015.
  • In 2015, there were 290,315 retail outlets in the UK.
  • More than a third of consumer spending goes through shops.
  • The retail sector generates 5% of the Gross Domestic Product of the UK.
  • Sales over the internet accounted for about 12% of total retail sales in 2015.
  • Retail Internet sales are estimated to be growing at 10% per annum, totalling around £40 billion in 2014.

Source: ONS, Eurostat, Retail Economics analysis

Activity in the UK retail sales sector cooled in February as conditions remained challenging and hopes of a strong start to the year faded.  Following a poor pre-Christmas period for UK retailers which was largely attributed to unseasonably warm weather, expectations were for a gradual pick-up going into 2016 and a strong set of January figures seemed to reinforce this. However, February’s figures were much softer according to the British Retail Consortium (BRC), with sales rising by 0.1% on a like-for-like basis from a year ago (on a total basis, sales were up 1.1%).

After January’s acceleration, February’s slowdown put the three-month average growth in line with the 12-month average of 1.8% growth. Total retail foot-fall was down by 1.1% in February, with much of the decline due to a reduction in high street shoppers, which were 2.9% lower than the same month in 2015. Shopping centres also welcomed fewer visitors, down 0.6%, but retail parks reported an increase of 2.5%, partly as a result of additional attractions such as restaurants and entertainment, and, in a sign that the housing market remains buoyant; there was also robust demand for larger items such as furniture and white goods. Overall, every area of the country except Greater London and the south-west experienced a downturn in the number of shoppers coming through retailers’ doors.

Looking forward, it appears that the industry is going through a potentially challenging period. In the short-term there is potential fallout from the EU referendum and a much vaunted overhaul of business rates in this year’s budget. Business rates, which generated around £28bn for the Treasury last year, are forecast to rise by £500m this year, and to rake in £32.4bn by 2020. Adding to these costs are the introduction of other government schemes such as the national minimum living wage which takes effect in April and the new Apprenticeship Levy, designed to fund 3m new apprenticeships. 

The BRC claims that the rate rises combined with the additional costs of these initiatives would mean retailers have to find an extra £14bn over the next five years. The impact of a ‘Brexit’ is less quantifiable but potentially more profound.  The uncertainty in the build up to the referendum may affect consumer confidence, which is already fragile, and may also deter investment plans by large multi-nationals. A letter signed by almost 200 business leaders campaigning to remain in the EU was endorsed by many prominent retailers including the bosses of Asda, Marks & Spencer,Dixons Carphone and Kingfisher, however, the campaign to leave is not without its own high profile names, such as the boss of Next.  An Investec article recently advised that an ‘out’ decision would “likely be a negative for UK retail demand” in the medium term, because of the uncertainty created by two years of exit negotiations as well as the potential for weaker GDP growth. Investec has identified the possibility of deteriorating shopper demand, sterling weakness, rising labour costs, changes to trade deals and long-term investment decisions as the key issues surrounding a potential UK exit. But the broker also noted that these were likely to be surmountable given that the sector had faced a lot of these issues in the past and was currently in good shape.

Looking out further, the gradual shift from traditional bricks and mortar stores to a comprehensive online presence is likely to dominate the strategic plans of many retailers, with requirements for more sophisticated technology and logistics in order to combine the personal service of traditional retailing and the convenience of using technology.

On aggregate, these factors will place a significant burden on retailers in the next few years. The BRC has warned that the sector is facing up to 900,000 job losses and the closure of thousands of shops in the next decade as structural change takes place, however, those that remain will be more productive and higher earning.

Fixed Interest Review Q1 2016

Fixed Interest Review Q1 2016