PatelMiller Retail Predictions 2019: What will this year bring? Instalment 1

Instalment 1

2018 has been a woeful year for Britain’s high streets. By November 2018 1,800 store closures had been announced, up from 629 for the same period last year. Will 2019 bring more of the same and if so, what do retailers need to do to weather the next 12 months?

We have developed 6 predictions for 2019 with our market knowledge and we have had the chance to discuss them with retail leaders at our last round table. In amongst these predictions came a clear message that not only is the retail climate harsh, but diversity of leadership and genuine trading talent is in short supply. These could be the very things that save a retailer from the brink; or turn good into great.

We will focus on 2 predictions per blog. Look out for instalment 2 coming soon…

Prediction 1: Consumer confidence – A short break from the gloom

Consumer confidence has been steadily declining since mid-2018. The UK GfK consumer confidence index held at -14 in January 2019, its lowest since July 2013 as concerns about Brexit negotiations persist. Uncertainty is set to remain well into the second quarter of 2019.

Retailers are already feeling the bite. In December The Office for National Statistics reported that sales volumes contracted by 0.9 per cent, slightly worse than City of London analysts had been expecting. Many are predicting 2019 to continue in the same vain. The Financial Times, The Guardian and The Independent all blame Brexit uncertainty for these declines and believe that consumer spending will remain depressed in 2019.

Yet if you investigate the Financial Times’ own survey results (figure 1), almost 40% respondents believe they will be better off at the end of 2019.

Regardless of which way Brexit goes, we believe there will be some clarity in 2019 and this taste of certainty will create an uptick in consumer confidence giving retailers a short reprieve. However, the long-term trend will ultimately depend on how the UK exits from the EU and the impact it has on employment, prices and disposable income. Whatever the deal, the UK is set for a bumpy 2019.

Smart retailers will continue to focus on what they do best and on combating underlying industry trends such as lower footfall, rising costs and increased online competition. Contingency Brexit plans of course need to be made, but with so much change afoot in the retail market, companies cannot afford to take their eye off the ball – and their customers.

Prediction 2: Retail restructuring – The continuing shake-up

Until recently, retailers have been operating in a largely benign market. Between 2009 to 2016, UK retail sales rose steadily and retailers whose offering wasn’t razor sharp were able to survive in a growing market.

However, at the end of 2016 the tide began to turn. Increasing cost pressures due to a weakened pound, wage pressures, Brexit uncertainty and declining footfall as one in five purchases are done on-line have led to a sales stagnation in the traditional bricks and mortar retail market.

As a result, 2018 has been an unprecedented year for store closures, CVA’s and restructuring. A new study by law firm RPC has shown that the number of retail sector mergers and acquisitions has grown by 15 per cent as companies try to make up for struggling sales. Last year’s announcement of the Tesco-Booker and proposed Asda-Sainsbury’s merger is a good example of food retailers looking for economies of scale to make up for slowing sales and rising input prices.

At the other end of the market, ailing retailers who are heavily tied into physical space and are struggling to deliver under the market pressure are being bought up and consolidated, with Mike Ashley taking the helm. Ashley is strategically buying businesses offering very different price points, allowing him to extend the life of his products. Starting with Flannels, a product moves to House of Fraser then Sports Direct, each time receiving a new discount and a new set of buyers. He is also buying businesses that offer complementary services to his customers and acquiring as many freeholds as he can to act as leverage in his public war against landlords and to sure up the position of his growing high street empire.

In 2019, we expect to see an acceleration in restructuring in retail as more players succumb to market pressures and those with access to the required capital take advantage. Analysis by the Centre for Economics and Business Research reports an 18 per cent increase in global accounts receivable. Retailers are now taking six months to pay suppliers and working capital management is becoming more of a challenge. As more retailers fall into insolvency, we expect to see financially stable retailers looking for a cheap deal that offers them options for long term growth.

To continue reading Retail Predictions 2019, look out for instalments 2 and 3.