Sunday, June 03, 2018
A nation that no longer values its shopkeepers
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

Whatever else 2018 brings it is already on course to be a year to forget for Britain’s retailers, closely followed by casual-dining restaurant chains. It may not yet be retail Armageddon but a year that has already seen the disappearance of Toys R Us and Maplins and a string of profit warnings and store closures – including the announcement of a programme of more than 100 closures from Marks & Spencer – is gaining notoriety for all the wrong reasons.

As someone who has patronised Marks & Spencer since the days of St Michael – the label not the saint himself – it grieves me to see this British icon retrenching. A town centre is never quite the same again after it loses its M & S, as the people of Stockton and Darlington, those famous railway towns, as well as Northampton, Newmarket and Walsall, will soon discover.

The Centre for Retail Research lists 16 medium to large retail business failures in April this year alone, with more jobs potentially affected, over 13,000, than in the whole of last year, and twice the number of stores and employees affected as in the whole of 2015. In recent months the curtain has come down on established furniture retailers such as Multiyork and Warren Evans. Carpetright is struggling, as are Mothercare and House of Fraser.

Behind the big name difficulties, of course, lie very many thousands of smaller failures of family-owned retailers, restaurants, wine bars and the rest, each one a story of broken dreams. Every empty high street property is somebody’s minor tragedy.

The CBI, in a survey, described “a tale of two service sectors”, with business and professional services doing fine but consumer-facing firms struggling against a backdrop of falling sales volumes over the latest three months.

In that respect, the current struggles are not hard to explain. Growth in retail sales, unexpectedly strong even 18 months ago, has petered out. Latest figures show no growth in retail sales over the latest three months. The annual rate of growth of retail sales volumes has come down from a high of 6%-7%, and a typical rate of 3%-4%, to less than 1.5%.

Consumer confidence perked up slightly last month but is lower than it was in 2015, which was the best year since GfK-NOP began surveying it in the 1970s, and reflects deep pessimism among households over the outlook for the economy.

Anybody in the furniture or carpets business, meanwhile, is suffering from what appears to be a permanently lower level of housing transactions. The Bank of England reported that mortgage approvals in April were at their lowest level this year and their second lowest since August 2016, though unsecured borrowing picked up, while the Nationwide building society said house prices fell again last month for the third time in four months.

What the numbers do not full explain, however, is why now? Why is it that we are now seeing what the independent retail analyst Nick Bubb describes as a “perfect storm” affecting Britain’s high streets and shopping malls.

After all, while retail sales are weak, they have been weak before; very obviously in the recession of 2008-9 but also again from 2010 to the early part of 2013, under the impact of falling real wages and George Osborne’s 2011 hike in VAT to 20%. Consumer confidence is weaker than it was a couple of years ago but higher than in that earlier period. The housing market has never got back to pre-crisis levels of activity.

There are many issues affecting retailers and other consumer-facing businesses. They bear much of the £30bn annual brunt of business rates which, despite Treasury attempts to soften their blow, are a fixed cost that can mean the difference between survival and failure for many high street firms.

They, as many warned at the time of its introduction, have seen an increase in labour costs as a result of the government’s switch from the national minimum wage to a higher national living wage, now £7.83 an hour for those aged 25 and over.

Sterling’s Brexit slump has also squeezed margins, in some cases taking them below viable levels. The pass-through from the pound’s fall to inflation has been lower than feared, because firms lack pricing power and have had to try to absorb higher import costs. The latest shop price index from the British Retail Consortium shows that overall shop prices last month were 1.1% lower than a year earlier. Food prices were up by 1.2%, non-food prices down by 2.5%.
Faced with higher costs such price falls are difficult for many retailers to bear.

The strongest answers to the “why now?” question, however, comes from two factors. One is that the renewed slowdown in consumer spending is, for many consumer businesses, the straw that breaks the camel’s back. They had thought the toughest times were behind them and that their best days lay ahead. Now a grimmer reality is taking hold.

The Bank of England, in its May forecasts, predicted that consumer spending growth in coming years will be half the rate prevailing before the EU referendum and a third of that achieved in the 2000s. Business had geared up for something like a return to normal in terms of spending growth but the outlook has deteriorated. Weak income growth in prospect and households have run out of room to draw on their savings.

The result is overcapacity, particularly in the casual dining sector, hence all the talk of a “crunch” and the plethora of restaurant closures. The latest is Carluccio’s, on track to close up to 30 restaurants. It is also, as the larger firms are discovering, overcapacity in their retail estates. An industry geared up for strong growth is having to adjust.

The other key factor, of course, is the rise of online retailing, where sales value in growing at an annual rate of 11.7%, according to official figures, and which now account for more than 17% of all retail sales.

Online businesses escape the severity of the business rates’ burden faced by high street store and, in a nasty pincer movement, also constrain their ability to raise prices. If online retailers do not get conventional stores one way, they will get them the other.

Bricks and mortar retailers who have embraced online, some successfully, have to abide by the norms of the internet, which often means free delivery. And, by building their online presence, they often cannibalise their traditional, physical businesses. In a dog eat dog world, some of the dogs are from the same litter.

The government could level the playing field, mainly via tax, but chooses not to, because ministers have decided that anything that deprives consumers of low internet prices would be unpopular. So they preside over the hollowing out of our high streets. Bubb, a veteran analyst who has followed the retail sector for many years, thinks we are nearer to the start of this adjustment than the end of it.

Adam Smith, in The Wealth of Nations nearly 250 years ago, had some acerbic words, to the effects that: “To found a great empire for the sole purpose of raising up a people of customers pay at first sight appear a project fit only for a nation of shopkeepers. It is, however, a project altogether unfit for a nation of shopkeepers but extremely fit for a nation whose government is influenced by shopkeepers.”

These days, Britain’s shopkeepers would love to have rather more of that influence. In its absence, many only see a struggle ahead.