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Retail faces toughest ever year

Retail faces toughest ever year

UK retailing faces one of its toughest ever years as the sector attempts to come to terms with a dangerous cocktail of intense competition, space saturation, consumer apathy and slowing spend.

According to research from Verdict Consulting, a specialist division of Verdict Research the coincidence of these trends will mean that on a like-for-like basis, retail spend will contract in 2008 causing a significant number of causalities.

Retailers: the space race

Over the past ten years the economic environment has been benign and its impact on retail has been positive. Even so, the retail sector has become increasingly competitive. In large part this has been due to the expansion of retail space which has given consumers more choice in where to shop and has spread consumer spend more thinly between a greater number of retailers and shopping locations.

Since 1998, net of closures, an additional 49m square feet of retail space has come into play. Although this is a substantial amount - the equivalent of well over 1,600 average sized Tesco supermarkets - solid growth rates for consumer spending made such growth economically viable.

However, going into 2008, the amount of retail space due to open shows no sign of abating despite the fact that retail spending is set to slow dramatically.

Over 2008, an additional 9m square feet of space (net of closures) will open. While this new space is likely to trade well, it will do so to the detriment of existing retail space.

When the growth of the internet is taken into account, the amount of spend available for existing retail space will actually contract.

Neil Saunders, Consulting Director at Verdict, said, “Unfortunately for retailers, the laws of supply and demand are absolute: demand from consumers is falling at a time when retail supply in the form of new space is increasing.

“The bottom line is that there just isn’t enough growth to go around between existing physical retailers, new space and the internet. Something, somewhere, has got to give.”

Consumers: the big squeeze

One of the reasons for sluggish demand is the state of consumer finances. For the past ten years consumers have been willing and able to spend. They have been helped, in part, by low interest rates, high levels of confidence and rising house prices.

All of these things have allowed shoppers to live beyond their means and have allowed sustained and healthy levels of retail growth.

However, these golden growth drivers which have underpinned retail growth are now becoming tarnished.

Credit is no longer easy to come by, confidence is low and there is significant pressure on disposable incomes. Indeed, costs for households are outstripping income growth by some margin. The upshot is that the consumer will cut back on retail spending. 

“The UK consumer is going to feel the pinch in 2008,” comments Saunders, “and this means one thing  for the foreseeable future, the era of solid year-on-year growth for retail is over.

Verdict Research forecasts that over the next ten years retail spending will grow by an average of 2.8% per annum, compared with an average of 4.9% over the last ten years.

On a sector basis, the picture is more mixed but compared to last year almost every sector in retailing will witness a slower rate of growth.

The result: retail crunch

The upshot of slowing demand and increasing supply will have a dramatic and widespread on retail. While some successful players will still grow, the outlook for others will be less positive with a squeeze on margins likely across most sectors.

The number of retail bankruptcies will likely increase and many retailers, over the longer term, will examine their store portfolios and will try to close unprofitable branches and underperforming space.

Neil Saunders comments, “We are not predicting disaster for the retail economy as a whole but there are undoubtedly rough times ahead which will sort out the winners from the losers - and not all of those losers will survive.”

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