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U.K. Retail: Traversing the shifting trends

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Key Highlights
  • Overall trend in the U.K retail sector has been that of slow growth, consisting of periods of slump, recovery and flat performance

  • Brexit has led to ambiguity about the future trading frameworks among retailers and caution among buyers, with the latter holding back even during holidays such as Black Friday

  • Online sales has shown strong performance, accounting for nearly 18 percent of total sales in 2018, while there has been a sharp rise in store closures simultaneously

Overview

U.K.'s retail industry is coping with the same challenges from ecommerce disruption as the rest of the world. The industry is also facing ambiguity due to the political situation and Brexit. Collectively, this has caused a momentary slowdown in the industry.

The sharp rise in the number of store closures between the first half of 2017 and 2018 alongside record online sales in August 2018 points at the growing significance of online stores. The category of clothing and department is witnessing more growth online as compared to food, with growth trend of the latter remaining flat in the last four years. While U.K. shoppers are gravitating towards online shopping for items such as clothes and shoes, they seem to still prefer the traditional way of shopping for food.

The uncertainty around Brexit has led to retailers grappling with questions about the future and customers showing patterns of conservative spend. The retail sector Gross-Value Added (GVA) declined in the month following the Brexit referendum. While the sector recovered, growth has been flat in 2018, with customers being cautious even during peak shopping periods such as Black Friday.

2019 is expected to witness a slow growth, given the six-month delay in Brexit, continued ambiguity in the political situation, rising costs of import and supply chain pressures. However, once the new trade framework is defined and stabilized, a faster pace of growth can be expected between 2020 and 2023.

WNS DecisionPointTM deep dives into trends in the U.K. retail sector, and explores the factors impacting growth and future outlook.

INTRODUCTION

Retail Sector and the U.K. Economy

The retail sector is an essential backbone of the U.K. economy. With a total contribution of GBP 91.6 Billion to the total U.K. GDP in 2017, it accounts for over 5 percent of the U.K. economy.1 The retail sector has gone through a prolonged period of disruption. Shifting consumer behavior, increase in online stores, and shopping and uncertainty in economic outlook brought on by Brexit are some of the key factors impacting the way retailers deal with consumers and plan their business strategies for the future. We assess the current swings in the retail sector and forecast the course of the sector in the wake of current political and Brexit developments.

The retail sector fell into a slump following the financial crisis of 2008, and continued to witness a steep decline until 2012. The sector started to recover in 2013 and continued to grow stronger until late 2016. However, 2017 and 2018 witnessed a slight slowdown in sector output (see Figure 1).

The retail sector GVA experienced a steep drop in the month following the Brexit referendum, but soon picked up pace from October 2016 onwards. The decline can be attributed to an uncertain outlook perceived by businesses in the aftermath of U.K.'s surprise decision to leave the European Union (EU).

Retail sales in the latter half of 2018, specifically December, were flat in volume terms, as shown by the three-month rolling average index (Figure 2). Consumers refraining from further spending after Black Friday promotions and the U.K.'s looming exit from the EU were primarily accountable for the decline.

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Online Shopping: A Rising Challenge for Retailers

One of the key concerns plaguing retailers is the continued growth of online shopping, with market turbulence across the industry creating ideal conditions for new entrants to flourish (Figure 3).

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Online sales were approximately 18 percent of all retailing in the U.K., accompanied by strong growth in clothing and department stores. Department stores, in particular, saw record online sales of 18.4 percent in August 2018 (Figure 4).

Online sales in food stores grew at a strong pace from February 2018 to May 2018, but were witness to a slowdown in growth, with sales at 5.5 percent in August 2018.

An assessment of the 10-year growth in online sales shows significant increase across the non-specialized and clothing store categories, but a much slower pace of increase in the food store category, with online sales remaining relatively flat in the last four years. This trend reflects consumers' growing preference for purchasing majority of clothing and footwear items online, while at the same time sticking to more conventional modes of shopping in the food store category.

The resulting impact of the increasing popularity of online retailing is perhaps best reflected in the number of physical store closures in the U.K. in the last five years.

The number of store closures rose drastically, from approximately 20,000 in the first half of 2017 to over 24,000 in the first half of 2018 (Figure 6). Burgeoning occupational costs and rising competition forced many retailers to announce a slowdown in store openings.

The High Street: Preparing for Turbulence

The year 2017 was a tough one for high-street retailers as they were up against rising import costs resulting from a falling pound. A surge in employment costs and escalating investment in technology upgradation and store experience further eroded retailer margins (Figure 7).

Many retailers had hoped for an improved outlook in 2018. However, freezing temperatures led to a slowdown in high-street sales in the first quarter of the year. In the wake of the royal wedding and the World Cup fever, the middle of the year did witness a slight uptick, steered primarily by increased spending on food and entertainment.

Homeware sales on the high street recovered significantly towards the end of the year, after experiencing a major slowdown during the middle of the year (Figure 8). Non-store sales witnessed several upheavals throughout the year, reflecting the volatility in consumer spending and sinking consumer confidence.

Retail Outlook: Five-year Scenario

The U.K. retail industry will continue to battle headwinds in the form of low consumer and business confidence brought on by the current Brexit turmoil, disruptive technological trends and volatile consumer expectations.

With the six-month Brexit delay, we expect retail sales to rise at a slow pace for the rest of 2019 (Figure 8). Continued political uncertainty and supply chain pressures will result in increased import costs for retailers and rising cost pressures for end consumers. Retail sales are expected to pick up faster from 2021 to 2023, as trade pressures on the U.K. recede with a definite trading framework with the rest of the world in place.

 
References:
1. ONS Regional Gross Value-Added Reference Tables, December 2018

 

 

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