Now is the winter of our discontent
Published: 20 January, 2011
The first quarter of the year is traditionally the toughest time for retailers, and corporate failures tend to be at their highest during the period. So what are the prospects for 2011?
Already, the new year has seen profit warnings from retailers as diverse as Mothercare and Clinton Cards, while HMV has announced plans to close 60 stores. It seems likely there is more to come, as the retail market faces a double whammy with the VAT increase and rising inflation both acting as destabilising factors, according to new research from King Sturge.
Although the UK is now out of recession, Angus McIntosh (above), head of research at King Sturge, warns that the economy is still far from healthy. “What we’ve got out there is stagflation- the economy is growing but inflation’s growing faster still,” he says. “This is going to be quite a challenge for 2011.”
Coming at a time when public spending is being cut and unemployment rising, consumers are naturally going to be cautious. And Charles Miller, head of retail at King Sturge, points out that as well as the higher rate of VAT, basic raw material costs are rising globally. “UK retailers have insufficient slack within their margins to absorb these costs themselves, so will invariably pass the higher costs onto consumers,” Miller warns. “Higher prices in the midst of fragile consumer confidence is likely to stymie retail sales considerably.”
Jonathan De Mello, head of retail consultancy at CB Richard Ellis, points specifically to rising cotton prices as a potential problem for the sector. Already Next has announced plans to raise its prices by 8 per cent because of the increased cost of its raw materials.
“Of bigger concern than the VAT rise is the sharp rise in cotton prices, as clothing retailers are often a key driver of footfall into a town, city centre or shopping mall, and typically represent over 50 per cent of a shopping centre’s turnover,” says de Mello.
“Cotton price increases have been driven up by the poor Chinese cotton crop this year, but also by a relatively weak pound, which has pushed up the cost of buying cotton from China and elsewhere. As a result of this, clothing prices have been rising dramatically over the last few months, increasing by 11.3 per cent year-on-year in November 2010 according to the Office of National Statistics.
And he agrees with King Sturge’s Miller that there is a limit to the extent to which retailers can pass on these rising costs to shoppers in the form of higher prices. “Consequently they will see an impact on their margins that will be far more substantial than the effect of the rise in VAT,” de Mello warns.
And King Sturge’s Miller warns that, even though UK rents are rarely pegged to the RPI, rising inflation will still have a major bearing on retail property. “Retailers can expect steep hikes in rates and service charges will also come under pressure, not to mention utility costs,” he warns.
“Retailers may seek to redress this by seeking lower rents,” Miller forecasts. And he says some brands may reconsider their property requirements, choosing value-for-money secondary locations above prime sites, where they find it more difficult to trade at a profit.
“High profile locations are often in high demand but due to the the high rents and occupancy costs they are seldom the most profitable,” he says. “In many cases retailers are even trading at a loss in prime locations.
“As costs come under further review and rationalisation programmes are implemented, the paradox is that the areas with the highest occupier demand could actually be those with the highest level of shake-up going forward.”
