What is really wrong with the UK retail sector and why is it in such trouble?

Many major retail chains seem to be in trouble. This week Marks & Spencer said it will close down 100 stores as profits tumble. This follows Mothercare’s announcement last week of 50 store closures.

House of Fraser is restructuring. Debenhams’ profits have collapsed. And earlier this year Toys r Us and Maplin crashed into administration.

Restaurants also seem to be under the cosh, with Jamie’s Italian, Prezzo and Byron all shuttering stores.

Some of these businesses, such as Debenhams, have blamed the snow this year for their problems. But is this simply a lame excuse?
Do the stress on the UK’s High Street and retail parks reflect a struggling British consumer? Or is the rise of online shopping to blame? Or punitive taxation in the form of business rates?

What is really going on with the retailing sector? And why does it seem to be in crisis?

Is it down to the weather?
The “Beast from the East” certainly played a role in depressing activity the first quarter. The Office for National Statistics estimates that retail sales in the three months to April were up by just 0.1 per cent with the snow storms in March clearly deterring many shoppers.

But the UK retail sales slowdown was in evidence before the bad weather. There are clearly longer-term trends at play too.

Marks & Spencer, for instance, has been trying for years to turn around its clothing department.

Is it the weakness of the overall economy?
Consumer spending, which accounts for 60 per cent of GDP, was clearly hit by higher inflation last year.
Inflation shot up above 3 per cent in 2017, as the slump in sterling in the wake of the Brexit vote was passed through. Average wages, meanwhile, were flat, putting a real terms squeeze on households.

Richard Hyman, a veteran retail advisor, argues that the UK consumer has been struggling ever since the financial crisis a decade ago, although that weakness had been temporarily disguised by low-interest rates and one-offs like PPI compensation payments from banks. “I’ve been warning about this [crunch for retailers] for 15 years. The writing has been on the wall,” he says.

“It’s quite simple: there’s not enough spend and too many mouths to feed.”

It certainly seems to be true that there too much capacity in some sectors, not least casual dining.

Some privately-owned businesses, such as Toys r Us, have also tended to have quite a lot of debt on their balance sheet.

“If you’ve got a lot of debt and suddenly your top line comes under pressure because the consumer comes under a bit of pressure then it unravels quite quickly,” says Jonathan Pritchard, an analyst at Peel Hunt.

Is the internet to blame?
The latest official data shows that internet sales as a share of total sales are around 17 per cent. That’s up from almost nothing fifteen years ago.

That rush online will undoubtedly have hurt many high street shops, particularly department stores. It will also have been a factor in the demise of the likes of Maplin.

“Online retail hasn’t made the pie any bigger – it’s just been cannibalising it,” says Mr Hyman.

However, there’s no reason why existing bricks and mortar retailers can’t sell online too. And some – such as Next – have done so reasonably successfully. But the reality is that many have underinvested in their online offering. M&S admitted this week that its website is still too slow.

What about taxes?
Many high street firms criticise punitive business rates and complain that the likes of Amazon pay less because they operate from out-of-town fulfilment centres and thus pay lower rates.

Business rates are due to rise for many firms in April.

But this is because rates are linked to rents and rents have risen in many areas since the last valuation exercise. That implies that some retailers, who are bidding up rents, still see opportunities for profit.

The retailing analyst Nick Bubb criticises the Government for failing to come up with a “proper online sales tax” to replace business rates which he characterises as a “tax on high street property”.

Yet the tax issue is likely to be more a symptom than a fundamental cause of many firms’ difficulties.

And it’s important to bear in mind that not every retail business is struggling. The problem is that the successful and quietly effective ones tend not to attract so many headlines.

“The conditions are not impossible,” argues Mr Pritchard of Peel Hunt. “There’s plenty of retailers doing well enough.”

Source: https://www.independent.co.uk/news/business/analysis-and-features/uk-retail-sector-sales-ms-house-fraser-trouble-online-amazon-business-rate-a8367081.html

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