BDO partner Sophie Michael looks at the challenges facing the UK high street, where policy makers could help and what lies in store in the future.
The UK high street is facing challenging times. Bricks and mortar retail has just experienced its worst January sales in four years – marking the first negative growth in the crucial January discounting period since 2013. And this comes hot on the heels of a dismal December.
With UK shoppers facing inflation, price increases and political uncertainty in 2017, the lack of consumer spending in the busiest two months of the shopping calendar has left retailers feeling nervous.
Fashion sales were hit hardest in January, down -1% year-on-year after three consecutive weeks of negative sales growth at the end of the month. Sales of lifestyle goods grew 1.2% for the month, partly driven by overseas visitors drawn to the UK by the weak pound. Consumers were also quick to snap up discounted homeware items, increasing like-for-like sales in the sector by 2.9% for January.
But the cold snap in the third week of January drove shoppers away from the high street, dragging overall like-for-like store sales down by -4.46% for the week. The only silver lining for retailers came from online sales, which hit a two-year high for a single month, growing 26.6% in January.
What should retailers do….?
The overwhelming trend for 2017 is going to be uncertainty; whether it be economic, political or in relation to consumer spending habits. But instead of being preoccupied by the external backdrop, retailers ought to ensure they remain agile and focused on product, quality and range to entice customers in store or online and recreate some of that customer loyalty that has been fast disappearing in recent years. As we have seen this month, retailers with a compelling online presence were able to combat falling footfall with strong online sales, particularly in week three, highlighting the need for investment across all channels.
Thinking more specifically, there are four trends in particular that retailers need to think about in the year ahead.
Firstly, retailers need to place greater focus on value-added services in-store. As it becomes more important to differentiate from the online shopping experience and as retailers look to bolster the destination status of their stores, there will be a continued focus on introducing innovative and exciting instore services and events. Nike is a good example here having launched Nike Training Club in its shops and in various parks across London, allowing shoppers to partake in classes ranging from high-intensity workouts, to yoga and training for runners.
Secondly, social media is increasing its influence as a marketing channel. Retailers are becoming more adept at utilising social media to drive online engagement and we are increasingly seeing the adoption of more viral and informal approaches. Burberry has been one of the most pro-active fashion brands at attempting to take advantage of the rapid rise in popularity of social network, Snapchat. Immediately prior to the catwalk of the launch of its Spring/Summer 2016 collection, it sent its millions of followers exclusive photos from behind the scenes, driving engagement in the new range.
Thirdly, delivering the right product is more important than ever especially as retailers are forced to increase prices and online continues to represent a growing competitive threat. Margin pressure will force retailers to consider how best to cut costs, but downgrading aspects such as product, must not be an option or they risk dissatisfying shoppers who will quickly switch to another brand. Focus on improving products via enhanced design and quality, and offering newness in range, will be crucial across all segments of the market to justify the inevitable price rises. Whilst consumers’ discretionary spending power is expected to be restricted in the short to medium term, ensuring that the shopper is presented with an exciting, well curated range can be a key differentiator from the seemingly endless ranges provided online.
And fourthly, the growth in online continues to necessitate investment in IT and logistics, thereby eroding margins and profitability of retailers. Added to this, further costs on the horizon in operating costs from the rise in property rates and the living wage and apprenticeship levy, retailers will be looking to partner more with each other in areas such as supply chain ownership. Taking this one step further, the pressing need to maximise the efficiency of physical space, combined with the significant costs associated with developing a fit-for-purpose modern retail proposition, has led to a recent increase in mergers and acquisitions of complementary businesses; a route that retilers should explore further.
…and how can policy makers help?
But there is a role for policy makers too. It’s clear the high street is under pressure and now could be the time to relook at the vexed question of business rates on the high street.
According to the British Retail Association, in England, the retail industry currently contributes £7.3 billion of rates annually – nearly one-quarter of all receipts – far more than any other sector.
There are two steps that the Government could consider. Firstly, change the revaluation period of business rates to every three years (currently five) to ensure that rates bills reflect changes in the property market and the wider economy. Secondly, take investments made by businesses out of the calculation for valuing properties rather than improvements adding to rateable values.
Like many sectors of the economy, retailers face uncertainty but they also face opportunity as well. By remaining fleet of foot and innovating retailers can put themselves in a commanding position for the year ahead.
Sophie Michael is Partner and Head of Retail and Wholesale at BDO.