Writing for retailers

Zone ‘A’ was an off-shoot of the British Council of Shopping Centres, which represents companies engaged in the retail sector.

This article looked at the causes of the 2005 slump in retail sales. Re-reading it years later, it seems nothing much has changed.

Click here to read the textZONE 'A' So, what’s really behind the slump in sales? Discounting, deflation, house price uncertainty and the threat of further tax rises are taking their toll, as Francis Glibbery reports Six months ago – long before July’s terrorist attacks on London – in the cold, rainy weeks leading up to an unusually early Easter, many retailers could have been forgiven for thinking they were close to the end of the commercial world as they knew it. Sales were down. Oil prices were up. The newspapers were filling with stories of dwindling consumer confidence. The prospects for retailers looked as bleak as the weather forecasts. As the reporting season unfolded and store groups began to declare disappointing results, the year’s earlier profit warnings started to sound like more than the sirens of doom. It seemed their authors had a point. Since the beginning of the year, the British Retail Consortium’s (BRC’s) monthly sales figures had read like a collapsing Test side’s lower order batting figures. In January, for example, like-for-like sales for the month were up by just 0.5% on the previous year. The following month they were 0.3% down. In March they improved, but were still only 1.8% up. And then – after Easter – came April, with sales down by 4.7% on the previous year. Yet despite what seemed like a pattern of poor performance bordering on a technical recession, the mood of  frustration was not universal. While Marks & Spencer and Sainsbury’s battled with their own internal problems, other groups were doing better. Halfords, for example, reported a sales increase of 8.6% for the year ended April 1, with pre-tax profits up by 130.6%. Dixons, whose year ends on April 30, reported total group sales up 8% year-on-year, although profits were down. Both these groups had enjoyed the fruits of selling popular products such as in-car CD and MP3 entertainment systems, flat panel televisions and digital cameras. Carphone Warehouse also turned in improved profits, largely as a result of the way the mobile phone networks support sales of comparatively cheap handsets to the gadget-conscious young. But then, at the beginning of June, the BRC released figures which showed another monthly fall, this time 2.4% for May, and an aggregate fall of 1.5% for the quarter just finished. The figures prompted Kevin Hawkins, BRC’s Director General, to urge the Bank of England’s Monetary Policy Committee to reduce interest rates. But nothing changed. In July the figures for June did nothing to dispel the gloom. Despite the glorious sunshine, there’d been a like-for-like fall of 0.5% during the month and a miserly increase of 1.1% over the quarter. The Bank of England’s August decision to cut interest rates by 0.25% did lift spirits momentarily. But, within days, the BRC’s figures for July were the month’s worst for ten years. Hawkins called for a further cut, saying it would take several months before the first would have any impact on consumer behaviour on the high street. We have yet to see what the Bank will do. There appears to be no single reason for the continuing pattern of decline. Instead, a combination of several militant factors includes:• uncertainty in the housing market;• doubts about employment prospects;• the possibility of further tax rises and• the growth of several successful retail discount groups.There is no doubt the housing market has slowed over the past year. Money is no longer as cheap as it was a couple of years ago, and thousands of house-buyers are having to cope with the end of their fixed rate mortgages. The general state of the economy, which is reckoned by many to have been in slow decline since the beginning of 2004, has raised doubts about future employment prospects. The government’s recent re-election with a significantly reduced majority has also raised the spectre of yet more tax rises. Finally, as Nick Bubb, Retailing Analyst at Evolution Securities, points out, the retail sector is changing as companies like Primark, New Look, Peacocks and Matalan constantly eat into the established retailers’ share of the market. This last point was given extra weight in July when, to the surprise of many, Primark made a successful bid for the Littlewoods group of stores. After the disposal of some of the sites, this move will add another 50 profitable outlets to their growing chain. And, while Primark grows, the major supermarkets – Tesco, Asda and, more recently, Sainsbury’s – are also building successful clothing businesses. Yvonne Court, a Partner and Head of Retail Research and Consultancy, European Research Group, at Cushman & Wakefield Healey & Baker, agrees with Bubb, adding the paradox that, despite the tough trading conditions, demand for retail property remains strong. Mark Teale, Director of Research at CB Richard Ellis, believes that part of the problem is deflation. He points out that we have been living with deflation since the late 1990s. Not the kind caused by a significant decrease in the money supply, but the kind brought about by an increase in the supply of goods generated by global trading and the emergence of quality merchandise produced in countries with low labour costs. This deflation – which has a precedent in the way the industrial revolution lowered costs – has squeezed margins and flattened the relationship between turnover and profits. The Primark product range and Asda’s non-food lines, bear this out. T-shirts for as little as £1.00 and jeans for £5.00 are driving profits through volume rather than margins. Other factors include on-line sales, which have been more successful than expected. The increasing sophistication of supply chain management, which has created a “just-in-time” warehousing culture, is also playing its part by making it possible for companies like Primark to respond to fashionable trends. Teale discounts the government’s 1997 decision to give the Bank of England responsibility for monetary policy as coincidental rather than significant. He also supports the idea held by some high street banks that, in response to last year’s news that Britain had racked up a trillion pounds’ worth of domestic debt, many consumers may have been paying off their credit cards rather than shopping, particularly in the early part of this year. The signs suggest that, in addition to the structural changes affecting the market, the nation has become selective about how it spends its money. Technical gizmos and new toys are in. The more basic commodities such as food and drink are not out, but – in the face of higher petrol prices and increased council taxes – consumers are making more careful choices. Even the shift towards a more casual dress code – which can be sourced in cost-effective markets – may be having an effect. It may even be that the apparent demise of the gentleman’s necktie signals a permanent loosening of the traditional knots which have held the sector together for years.