The challenges faced by the retail sector over the past 18 months have been well documented, with the impact of enforced closures and social distancing measures being countered by burgeoning demand in online shopping, against a backdrop of ongoing product and labour shortages.
With a critical six months on the horizon, the Interpath Retail team outlines some of the key issues and opportunities that lie ahead – starting with some of the recent trends and structural changes within the sector.
Digging into the data
In recent weeks there has been significant attention on the bounce back in sales following the loosening of social distancing restrictions. According to recent data from the British Retail Consortium, clothes shops reported sales growth of more than 100% in the month of May, as going out returned with the reopening of indoor hospitality.
Yet in such unusual times, it’s important to keep these headline-grabbing year-on-year growth numbers in perspective.
The chart below displays UK retail sales value for non-fuel retailers indexed with calendar year 2018 as 100. The data is not seasonally adjusted and therefore picks up the seasonal monthly peaks.
While there were some very weak months and performance variations across the sector, as a whole 2020 total retail sales values increased by 0.4% year-on-year. Although this isn’t quite as sensational a figure as those headline monthly jumps, this performance remains testament to the operational resilience, agility and flexibility of the UK’s mature retail sector.
Temporary shifts to structural change
In the near-term, retailers will continue to benefit from pent-up demand following the ending of lockdown and the gradual easing of social restrictions.
Trading over the summer should also be boosted as a result of millions of staycation consumers, while the ongoing ‘Summer of Sport’ may provide a further fillip.
Nevertheless, retailers in locations popular with inbound overseas tourists such as Central London, Edinburgh and York are likely to find demand somewhat muted, and the issues caused by stock and delivery delays could yet serve to take the edge off overall trading performance.
The prospect of significant, if potentially transitory, input cost inflation coinciding with the curtailing of Government support schemes may also serve to crimp the consumer’s real spending power.
As the sector seeks a return to business as usual, the COVID-19 pandemic has accelerated some of the industry-wide issues that have been brewing for the best part of a decade. At its core, the sector remains over-spaced and retains too many stores in sub-optimal locations - even if the performance of out-of-town retail parks during the pandemic has potentially redefined this latter cohort.
The loss of incremental revenues from the move to online shopping has transformed marginally profitable stores into loss-making ones, in many cases unsustainably so.
The sector remains lumbered with expensive lease liabilities as well as balance sheet leverage that may hamper free cash flow (FCF) generation.
At a more micro level, range reset programmes typically now include a larger focus on rationalisation as a means to reduce business complexity and therefore improve margin as well as cash performance.
It is also worth noting some further changes on the horizon which food retailers in particular should be considering in the context of operational and commercial impact:
- High Fat Sugar and Salt (HFSS) goods – new legislation will have a significant impact on the grocery & convenience retailing sector via the restriction of promotions and space usage. For some retailers, their entire merchandising strategy may need to be reconsidered.
- Plastic packaging – in April 2022, the UK Government is expected to introduce a plastic packaging tax, followed by a deposit return scheme (DRS) for drinks containers. Although such schemes are common across much of Europe, the logistical obligations for UK retailers will be significant.
How Interpath can help
At Interpath, we have extensive experience working across the retail sector. Born from the Big Four, but with a unique data-led approach, we have deep operational expertise in commercial, procurement and supply chains, as well as working capital and profitability improvement.
If you’d like to find out more about our insights in the retail space, please drop us a line.