Retail Outlook: what's in store for the UK retail sector?

What will 2017 look like for the UK retail sector? And what opportunities exist for retailers to help optimise their performance?

If 2016 was characterised by expected cost headwinds (National Living Wage, rent and rates) and unexpected political events (the EU referendum and the US election results), then what will 2017 look like for the UK retail sector? And what opportunities exist for retailers to help optimise their performance?

First, the official predictions, our economists tell us that they are expecting UK GDP to rise by around +1.5% in real terms in 2017.  While that’s a slowdown on 2016, it’s higher than Germany and France, and a much gentler slowdown than observers were predicting directly after the EU referendum.  However, they also tell us that they expect inflation to accelerate faster than earnings growth for the first time since 2014, and to reach 3% by the end of 2017. Inflation will eat into disposable income.

Consumers are already starting to feel the pinch with fuel and utilities price rises before Christmas.  With Sterling 10-15% lower than a year ago, and as remaining hedges unwind and costs need to be passed on, Asda’s disposable income tracker, which has grown steadily to £200 per family per week, looks like it will start to reverse 3 years of consistent growth.  Consumers also tell us that they plan to spend less on every category of spending, with the exception of grocery.

So the prospects for retailers are looking bleak, in spite of wider economic growth and consumer confidence (with PwC’s regular survey showing that consumer sentiment remains resilient). But who will be the winners and losers? 

The themes and trends of Christmas 2016 gives us some clues.


Who will be the winners and losers of retail? 

Christmas 2016 was better than expected… or was it?

On paper, retailers had one of their best Christmases in recent times, with the median of reported like-for-like sales results at over 6%.  This was fuelled by the disposable income growth mentioned above, perhaps surprisingly resilient consumer sentiment, a mini consumer credit boom as a result of that confidence, and weak comparatives for some as a result of warmer and wetter weather in 2015.

However, as well as the usual selective reporting bias, with different reporting periods and some large privately owned retailers not reporting performance at all, Christmas trading figures were flattered by a number of factors that will not repeat in 2017.  Notably, with Christmas Day falling on a Sunday, there were fewer trading hours lost on Christmas and New Year itself and an extra bank holiday falling in January rather than December.  In fact, several large retailers reported that these and other distortions flattered headline trading performance, most notably Marks & Spencer and John Lewis.

In addition, the margin benefit from improved promotional discipline around Black Friday, where PwC saw many more retailers reining back discounting the following week, might have been undone by higher discounting, particularly online, in a bid to clear stock the week before Christmas.

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A tale of two sectors: grocery winning…

One sector that did have a robust Christmas was grocery.  Volume growth returned to the sector in mid-2016, and, while grocers broadly held prices in the run up to Christmas, prices have risen across the board this year.

Perhaps the most interesting trend was recovery in the performance of the Big 4, while the like-for-like growth of discounters and premium supermarkets slowed.  This ties in with PwC’s consumer survey which found that consumers prefer sticking to their main supermarket if they can, didn’t want to scrimp on Christmas dinner, but intend to economise by buying more own label, cheaper brands and items on promotion.

Not surprisingly, the best performing of the Big 4 supermarkets had made investments in entry price points to remain more competitive with discounters, while also innovating in their premium or Finest ranges.

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…while fashion may be in for a tougher ride

The headline performance of fashion retailers was strong, after a nail-biting season that began with unseasonably warm August and September dissuading consumers from buying new autumn outfits.  However, the double digit sales growth of many fashion retailers belies a tougher environment under the surface.  According to Kantar, overall fashion sales declined 2% in 2016 – the worst year on record since the recession.

The lack of any mainstream fashion trends and “must-buy” items favoured retailers that either brought niche trends to wider audiences (with more high street chains launching athleisure, plus size, “genderless” and “modestwear” collections) or that innovated (for example, with designer or celebrity collaborations, or by using technology, such as Ted Baker’s Mission Impeccable “shoppable video”).  It also favoured independents (up 3% year on year) and supermarkets (with both Tesco and Sainsbury reporting strong clothing performance).

That innovation will become ever more important in 2017, as consumers tell us they expect to make fewer clothing purchases and simply go clothes shopping less often.

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What does this all tell us for 2017?

What we know for sure is that there will be no let-up of the trading and cost pressures that retailers experienced in 2016.  Knowing the consumer, what they want and how they want to buy, will become more important than ever. 

And, in the absence of certainty on the top line, winning retailers will be getting their house in order around operations and costs, while at the same time investing in innovation to differentiate themselves from the crowd.  That innovation will most likely involve collaborating with technology companies to deliver this, just as Ted Baker did with Google in delivering the voice search on its shoppable video.

We highlight two particular opportunities for retailers:

  • We see working capital as a greater area of focus, particularly as trading volatility increases. According to PwC’s global working capital survey, the number of working capital days has remained constant over the last 10 years. However, the divergence between the best and worst performers has grown, and we believe that there’s potential to release an average of 3% of sales across the retail sector, not just through better buying and stock management, but also better payments and collections and SKU rationalisation.
  • In technology, we see customer hygiene factors becoming more important. For example, looking at the results of PwC’s Christmas shopping survey, the innovation that consumers are looking for may not be high tech hardware such as drones, virtual reality and beacons.  Instead they simply asked for a working website or mobile app, with easy-to-find products, and similar availability of products online and in stores

All of this is good, old fashioned retailing, you might say.  But, as in any period of volatility or contraction in consumer spending, there are likely to be casualties amongst weaker players.  So retailers that organise themselves and invest now, will find themselves in a stronger position when the dust settles in the future.

 

Explore the data

Click below to find out how consumers responded when asked how they think their disposable income will be in the next 12 months:

View as aggregate

View by gender

View by age

18 - 24
25 - 34
35 - 44
45 - 54
55 - 64
65+

View by affluence

AB
C1
C2
DE

 

 

 

Contact us

Lisa Hooker
Partner, Transaction Services
Tel: +44 (0)7802 882562
Email

Kien Tan
Director, Retail Strategy
Tel: +44 (0) 20 721 23910
Email

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