Retail Armageddon

In December it started to become apparent that a decision had been made to step-up preparations for a no-deal Brexit amid uncertainty over the fate of Theresa May’s proposed exit deal.

With only two months until the UK formally withdraws from Europe (at the time of publication) Ministers have already agreed for £2bn stipend for government departments to help if the UK leaves without a deal. There are also plans to send letters to about 140,000 firms advising them about preparations ahead of the 29 March withdrawal.

Brexit Secretary Stephen Barclay said no-deal planning “needs to be much more a priority for businesses” and there would be “significant increases” in the guidance issued to them over the next few weeks. Businesses will be provided with 100-plus page online packs to help them prepare and emails will be sent to around 80,000 companies most likely to be affected. Nevertheless business look set for more uncertainty in 2019, continuing the turbulence of last year.

Indeed the past 12 months rank among of the worst years for high street retailers with shop floor uncertainty and a string of established names going out of business. In the three months to September, there were 93,000 fewer jobs in retail in the UK compared with the same period in 2017, according to the Office for National Statistics. In addition the British Retail Consortium warned there could be up to 900,000 fewer jobs in retail by 2027.

That prophecy is already starting to play out, with fundamental changes in our shopping habits creating a worrying trade environment. Technology is driving this shift – with one in every five pounds spent via the internet – but there has also been a change in how customers prioritise their spending. Online sales are also pulling spending away from physical shops so it’s getting harder for traditional retailers to make the economics add up.

Retail is getting a much smaller share of disposable income than it did a few decades ago as customers splash more on what they do and less on what they wear; good news for clay grounds and shooting estates but less so for the companies that are trying kit out shooters. As well as grappling with the shift to online, retailers have been hit with an array of rising costs – from wages, the apprenticeship levy and business rates to new regulatory changes such as the introduction of Europe’s new data law, GDPR.

The struggling pound has meant retailers have had to pay more to buy the same amount of products from Europe and abroad – costs which have been proving difficult to pass on to consumers. It’s proving difficult for retailers to adapt, and because they can’t just hand back the keys and close a raft of stores, many suspect that they will have to resort to a formal restructuring deal with its landlords.

The process, known as a Company Voluntary Arrangement (CVA), is a form of insolvency proceedings that is increasingly being used by retailers as a way to close stores. Homebase, Mothercare, New Look and Carpetright are examples of big brands that have all entered into CVAs in the past year; this highlights the issues that arise as large retailers retreat from the high streets.

Furthermore we’re likely to see increased financial pressure on landlords who’ve got big loan-to-value deals, too. It’s a bit like having a large mortgage and finding out you’re in negative equity. In the first half of 2018 alone, 2,692 stores run by retailers with multiple outlets had closed, according to the accountancy group PWC. Many in the industry expect more similar retail casualties in the first half of 2019 and town centres will need to be reinvented, with less emphasis on shopping if they are too survive.

Mike Ashley, the unlikely saviour of House of Fraser, described trading as the worst in living memory and warned recently that Christmas shopping was so bad, it would “literally smash retailers to pieces”. In addition, the endless political uncertainty has festered to create a ‘feel-bad’ factor.

The prospect of no-deal Brexit is now yet another thing retailers have to worry about, but despite the challenges lots of retailers are thriving suggests head of the British Retail Consortium, Helen Dickinson. “It’s not Armageddon retail,” Helen insists. ‘’This is reinvention retail. Although we are seeing distress in certain parts of the market at the same time many new entrants are coming in, new retail businesses continuing to grow. Retail sales as a whole are still growing.”

But the transformation is really just beginning, and in an economic environment that’s never been so unforgiving, can a solution simply be sent in the mail? Answers on a postcard please.

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