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What's really driving the UK retail sector - By Tony Lahert
Behind what appears to be a reasonable performance, retail is a pressurised sector, highly influenced by the power of the consumer. This paper seeks to provide an insight into the UK retail sector and the consumer who supports it by addressing:
• the attributes of retail
• key trends in the sector
• the pressures being faced by retail
• the trends influencing the consumer and the actions they are taking
 Retail sector attributes
Scale - the UK retail sector was worth £272 billion in the last 12 months (April 08 to March 09), and 197,990 retail enterprises operated from 297,850 outlets. Q1 of 2009 saw 116 retailers enter insolvency compared to 74 in 2008.
Economic contribution – the sector accounts for over 19% of the UK economy and employs 11% of the workforce.
Growth – over a period of 15 benign years retail has typically grown by 3 to 4% per annum, nicely keeping pace with cost inflation.
Distribution – Town centres still account for the biggest share at £124b or 34%. This has been aided by the influx of brand convenience stores such as M&S food, Tesco Express and Sainsbury local in recent years.
On line is the fastest going area of retail and currently accounting for £20 billion sales. Forecast to reach £50 billion by 2012. Some surveys have it much larger, but this would include an element of traditional mail order.
 Key Trends
The food sector or more accurately “predominately food” accounts for 46% (£124bn) of overall retail and has seen growth in value over the last 12 months of 5%. Whereas non-food at £149b has grown at a slower rate and is only 1.9% up on the prior 12 months. Critically below the rate of internal cost inflation.
 However volume shows a different story. The Retail Sales Data chart shows the year on year percentage growth in both value and volume for food and non-food sectors. It covers the period from Jan 2008 to March 2009.
Food volumes have fallen in recent months but values have been maintained. The food sector is in effect “enjoying” the much publicised inflationary pressure in food.
Non-Food has had no such “protection” from inflation with retailers having to discount to stand still. Here volumes have been driven by “Sale” activity, but value growth has been flat to negative.
The overall retail trend shown below has a reasonable look  to it, but it is very much the case of “have and “have not”. Food is doing quite well with non-food struggling.
Within non-food, areas such as Ladies Fashion are performing reasonably, whilst home related product categories are very depressed.
This is well illustrated in the John Lewis Partnership figures which are published weekly. As can be seen Home and Technology performing  down by over 10% on last year, with Fashion and Food holding up.
Pressures
There are a number of fundamental pressures now being faced by retail and in particular non-food retail. Top of the list is the inexorable rise in the two biggest costs: staff and space.
Staff costs have risen as a percentage of sales from 10.2% in 2000 to 11.3% in 2007. These are being affected by two legislative drivers; minimum wage where retail is a large employer of lower cost staff and the allowance of longer trading hours.
When Sunday opening first came into play the retail sector did not increase by one seventh. And when John Lewis was forced by market pressure to open on Sunday and Monday their business did not increase proportionality.
Space has been increasing in cost for many years and continues to be driven by the opening of ever bigger and dominating centres such as we saw in quarter IV of 2008:
Liverpool One, Bristol Cabot Circus and London Westfield shopping centres did not increase the size of the market, but retailers have to open in them to remain in the market. And of course they are more expensive. Some interesting facts about space:
- 9m sq ft added (regional centres) in 15 years, which is equal to 1200 football pitches
- UK most expensive in Europe “403 v 260 euro” (per sq mtr)
- Annual increase since 1994 = 7%
The consumer
Lastly let’s turn to the consumer who has sustained this important element of the UK economy over many difficult periods. So what is influencing the consumer?
Retail prices are, largely speaking, helping to create a feel-good factor.
These include mortgage payments and as can be seen due to very low interest rates anyone with a repayment tracking mortgage is actually better off. This is assuming they have kept their job.
Unemployment numbers are rising at what seems to be an unstoppable rate. Now over 6% of the workforce does not have a job. This represents over 2 million people and is set to rise to circa 3 million at peak.
Against the bleak picture of unemployment the annual growth in earnings is falling. Not just due to more people being out of work but because people are being sensible in regard to earnings levels.
Another indicator influencing any consumer feel good factor will be how a consumer is impacted by the current value of their home, clearly their biggest asset. With the number of new mortgages at just 20% of normal levels, house prices continue to be severely depressed. It is therefore a fair assessment to say that new mortgages need to increase before consumers enjoy the warmth of increasing values.
House prices have now fallen in every month since late 2007 with the exception of a blip in January which seems not to have been sustained. Whilst this factor remains depressed it is hard to see any true recovery in the retail sector.
Our best estimates are that the sector will continue in a depressed fashion until end 2010 at the earliest. However, this recession will not make good retailers bad and the good ones will become stronger. In the end, the sector will still be worth over £250b in 2009.
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Having spent over 30 years in retail and holding board positions in the UK, Europe and the USA, for 3 years, Tony Lahert founded Step Solutions in 2001. Step supplies performance improvement and recovery solutions to the retail sector. Tony has tracked the retail sector for many years and publishes each month an update of the trends; Consumer Indicators. www.stepsolutions.co.uk
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