FSP Retail Blog

Locking the Stable Door

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The proportion of UK multiple retailers trading unsustainably has increased from around 23% last year to 28% this year. Furthermore, the location of the stores of “at risk” retailers, and the reasons for their financial stress, are now different. Retailers are categorised as “at risk” if the ratio of gross profit on sales to the cost of labour and depreciation is below parity.

Last year, a disproportionate number of shops of “at risk” retailers were in medium to large industrial towns, mainly in the north of England. The stores belonged principally to traditional retailers, such as Woolworths, whose store locations had been determined by historic shopping patterns. Many of these stores have, as anticipated, now closed and the towns are experiencing high rates of vacancy. This has attracted much attention, not least from BCSC, but in truth, the horse has bolted. These towns need to develop a new, viable retail strategy built around their surviving retailers. Amongst these retailers, the proportion now “at risk” is lower than the national average. There is, after all, still a role for these towns within the retail hierarchy.

Currently, the proportion of “at risk” stores is higher than the national average in some prime retail locations scattered right across the UK. The likely explanation is that less experienced retailers have taken on inappropriate stores in otherwise sound retail locations. Identifying such traders and developing contingency plans is a significant asset management task. With credit difficult to secure, and banks looking to reduce outstanding loans, retailers that have expanded aggressively from an unsound base or taken on high levels of debt are amongst those most at risk.

Given the continuing high proportion of “at risk” retailers, FSP anticipates that retailer failures will continue in smaller numbers throughout the year. However, the profile may change with a lower proportion of “traditional” retailers and more that are over-extended or debt-driven. As always, forewarned is forearmed.

The evolution of UK retailing

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Have UK retail conditions got easier or more difficult in the last 12 months?

The question is raised by a discrepancy in figures for the number of UK retailers going into administration. Figures from Deloitte show that the number this year has fallen 43% on the previous year. In contrast, analysis of the SnapShop database shows a substantial increase in retailer administrations.

An obvious explanation of the discrepancy is that SnapShop covers just 2,300 of the largest UK retailers while the Deloitte data covers retailers regardless of size.

The evidence is surely that retail conditions have got more difficult. For years operational costs have been rising faster than sales. In response, sophisticated and powerful retailers have focused on building their gross profit margin. Globalisation and supply chain management have successfully reduced costs to the retailers. Tesco for example claims that their food price increases have been less than 2% even while ONS figures show average food price increases of around 8%. The supermarket explanation of the difference is that the ONS measure excludes items on special offer. Hmm

Now, however, there are new considerations. In the wake of the credit crunch, the value of sterling against the euro has fallen 14%. Global inflation is a pressing issue and labour costs are rising in the key supplier economies. The gap between the rise of commodity and retail prices is, according to the ONS, now wider than for 20 years. For example, annual wheat prices have risen 57% while retail prices for bread and cereals have increased 8.5%.

These changes favour the large retailers with sophisticated financial management systems for forward buying. For some years they have been squeezing out independent retailers. The evidence from SnapShop is that the impact has now reached the middle and smaller sized multiple retailers. The outlook for the retail offer is for a reduced diversity unless offset by the arrival of large overseas based retailers.

The evolution of UK retailing

---

Have UK retail conditions got easier or more difficult in the last 12 months?

The question is raised by a discrepancy in figures for the number of UK retailers going into administration. Figures from Deloitte show that the number this year has fallen 43% on the previous year. In contrast, analysis of the SnapShop database shows a substantial increase in retailer administrations.

An obvious explanation of the discrepancy is that SnapShop covers just 2,300 of the largest UK retailers while the Deloitte data covers retailers regardless of size.

The evidence is surely that retail conditions have got more difficult. For years operational costs have been rising faster than sales. In response, sophisticated and powerful retailers have focused on building their gross profit margin. Globalisation and supply chain management have successfully reduced costs to the retailers. Tesco for example claims that their food price increases have been less than 2% even while ONS figures show average food price increases of around 8%. The supermarket explanation of the difference is that the ONS measure excludes items on special offer. Hmm

Now, however, there are new considerations. In the wake of the credit crunch, the value of sterling against the euro has fallen 14%. Global inflation is a pressing issue and labour costs are rising in the key supplier economies. The gap between the rise of commodity and retail prices is, according to the ONS, now wider than for 20 years. For example, annual wheat prices have risen 57% while retail prices for bread and cereals have increased 8.5%.

These changes favour the large retailers with sophisticated financial management systems for forward buying. For some years they have been squeezing out independent retailers. The evidence from SnapShop is that the impact has now reached the middle and smaller sized multiple retailers. The outlook for the retail offer is for a reduced diversity unless offset by the arrival of large overseas based retailers.

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