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Spotlight on the UK retail sector

Proxima
May 24, 2011 7:02:00 AM

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Microscope

I have recently read with great interest the latest Ernst & Young ITEM Club report, which forecasts UK consumer spending growth rates slowing to 2.0% p.a. until 2020, which (no doubt) will have major implications on UK retailers top-line growth figures

In the 10 years leading up to the recession, consumer spending was a key driving force behind overall UK economic growth. UK retailers were beneficiaries of the strong £GBP, high consumer confidence and increasing disposable income - with a lot of supermarket giants building their go-to-market strategies on hard promotional activities focused around pricing (huge discounts, BOGOFs and bundled packages) - fighting for more market share by selling more units.

Margins were kept high particularly within bigger retailers (such as supermarkets) primarily due to their economies of scale, enabling these bigger retailers to negotiate large discounts from their primary suppliers of Goods for Resale (GFR or Directs) in exchange for a greater volume of business.

Times were good… However in 2008, the world felt the start of what was greatest economic downturn since the recession of the late 80s / early 90s - with retail being the among the first sector to feel its full force.

Increasing inflation and declining consumer confidence began to impact top-line growth for many UK retailers. Fearing for loss of market share, many responded with more aggressive promotional activities and cost reduction strategies taking the form of store closures and heavy redundancies - and between 2008 and 2009 we saw some of our much loved and respected brands starting to close their doors:

  • Woolworths (all 807 stores, thousands of jobs lost)
  • Adams (111 stores, 850 jobs)
  • Marks & Spencer (27 stores, 1,250 jobs)
  • Whittard (130 stores)
  • Morgan (575 stores)
  • Passion for Perfume (46 stores, 185 staff)
  • Goody's Family Clothing (282 store closures, 9000 jobs)
  • …and many more (there have been profit warnings in Q1, 2011 for 14 retailers in the UK  “the 'third highest ever recorded, and the highest level since Q1 2008'.”)

Following on closely from store closures and ‘'quick-cash'’ releasing initiatives, retailers began to investigate how else margins could be improved or stabilised through a closer scrutinisation of their supply networks.

Not only were retailers feeling the pinch, so too were their primary (direct) suppliers and major links down the supply chain. Commodity fluctuations, currency movements and outstanding payables (debt), meant that suppliers also needed to improve or maintain their existing margins to stay afloat - and as such, those who were able to weather the knock-on impact from their primary customers (retailers) difficulties, are now facing increasingly challenging decisions surrounding retailers demands for price reductions - with limited room to lower their prices any further, retailers and suppliers are now fighting out who will absorb the most cost.

In summary, UK retailers face real challenges, with disposable income 'continuing to fall well into 2012, and it will be 2013 before consumer spending reaches pre-recession levels', how can UK retailers look to safe guard themselves over the coming 2 years?

Proxima Group

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