Survival of the Fittest
Last week it was reported that UK retail sales had taken an unexpected dip in September. This was accompanied by claims that warmer than normal weather could be to blame, or people overspent in August so cut back for a month. However, in addition to the speculation about it being a short term phenomenon, is the very real possibility that the reason is actually due to a dent in consumer confidence which has sprung from the uncertainties surrounding Brexit.
On the day of the Brexit poll I attended a Seminar titled ‘Retail & Town Centres: Where next? put on by the RTPI which included a talk by Mohammed Chaudhri of Experian Decision Analytics. His talk was about the prospects for the UK economy and the retail sector, it looked at how the economy had faired since the recession, explained why there had been a slowdown in 2016 and looked forward to a post Brexit time. The crux of his analysis was that;
- post-recession the retail market had been artificially buoyed by the housing market. House prices had increased so people felt secure spending and borrowing money;
- then, the referendum brought in some uncertainty so retail spending had slowed down
- post referendum it was predicted that we would remain in the EU so spending would pick up again but at a slower rate than 2015.
There was no attempt to plot what could happen should we vote to leave the EU. The reason for this? He simply did not know what might happen.
So now that the great British public have voted to part ways with Europe and the dust is settling on the decision is there any more of a clue about how the retail market might be affected?
Also in the press last week was that the number of people taking out mortgages in September was the lowest figure since January 2015. There was a 21% decrease in the number of mortgages approved in September versus August. So are people starting to doubt the stability of the housing market and staying put rather than upsizing?
If they are they are not letting it change the amount that they are borrowing by other means because the total amount of consumer credit for the year to date has increase 6.5%, the fastest rate of growth for nearly 10 years. Which is odd because the headlines from Verdict Retail’s consumer confidence tracker is that views towards the economy, personal finances and future retail spending plummeted to a 12-month low in June following the referendum. Almost 6 in 10 consumers expect the UK economy to worsen over the next 6 months and logically it was the younger generation (who tended to vote remain) that were more pessimistic than the older (Brexit) generation.
So, are the young generate right to be pessimistic? Is the confidence in the housing market weakening is consumer borrowing just being slower to respond to the change and will the retail consumer market follow suit? Arguably yes.
In recent years consumers in the food retail market have enjoyed very low inflation and even deflation in some areas as grocers have engaged in price wars that have seen operating profits on average drop from 4.8% in 2011 to 2.1% in 2015.
In a post-Brexit world where the UK’s complex emancipation will have implications for free-trade, freedom of movement and agricultural subsidies, we are likely to see increased inflation associated with increased import costs in the short to medium term. Grocers have already slashed their operating costs and profit margins as much as they are able to so they will have no option but to increase prices.
The pressure on prices has been delayed as the negotiations, retail markets and the public come to terms with all matters Brexit but they are inevitable in the next 6-12 months. And this phenomenon is not isolated to the food and drink markets. A weak pound and increased import tariffs will mean that some clothing and footwear operators will have to re-evaluate their supply gains to stay competitive.
Undoubtedly though, the unexpected Brexit vote will have the greatest impact on the homewares sector as the potential negative effects on the housing market touched upon earlier weigh heavily on people’s investment plans.
As people start to employ a ‘wait and see’ attitude towards big spending decisions particularly at home, transactions for furniture, floorcoverings and large electrical items are likely to see a step change. Whilst a slowdown in the grocery and clothing markets is predicted associated with people reducing costs, this time of uncertainty is likely to translate into a decline in expenditure on big-ticket items.
Whilst no one is able to predict how the UK is going to come out of the other side of the Brexit vote, what everyone is agreed upon is the short to medium term uncertainty and associated price increases. This in turn will place added pressure on retailers across the board at a time when their margins are low and therefore careful management is a necessity to weather the storm.
Looking forward to the second half of the financial year, NJL for one will be taking careful note of how consumers behave over traditionally busy periods in the lead up to Christmas, and the knock-on effect for retailers that may already be feeling the strain, and how or if they adapt to survive.
Images courtesy of:
'Evolution of man' by Bytemarks via flickr
'UK Sterling bank notes and coins' by Mark Hodson Photos via flickr