'09 the year of upheaval
The latest White Paper from the KPMG/Synovate Retail Think Tank provides some interesting soundbites that set out the good, the bad and the ugly aspects of the retail economy and its prospects for 2009. Marlon Stern reports.
As think tanks go the KPMG/Synovate Retail Think Tank (RTT) are an interesting bunch. Its seven person membership spans financial services, academia, property, professionals services, banking and research, each member a retail expert without actually being a retailer. As a result there's no internal competition and no axe to grind - it's not a lobbying body on behalf of the industry, or any industry, and thus is able to provide candid, credible opinion. The RTT's stated aim is to provide "the authoritative, credible and most trusted window on what is really happening in retail and to develop thought leadership on the key areas influencing the future of retailing in the UK".
While 'thought leadership' sounds like something an Orwellian secret police service might provide, there's little argument that the Retail Think Tank's opinions always make for interesting reading. Its latest White Paper released late last month is no exception. The document, entitled 'What are the prospects for UK retailers in the year ahead?' contains some eyebrow-raising assertions and interesting analysis. Too lengthy to carry in full, we've extracted the key points and sound bites.
The economic picture
To very few people's surprise the RTT shared the view that there could be no quick fix for UK plc, with consumer spending expected to fall both this year and next. The most likely victims of this fall, the White Paper stated, is likely to be in areas of discretionary spending such as expensive consumer goods, furniture and home improvement. And though the prices of food, fuel and many commodities have fallen, these potential savings have been negated by the collapse of sterling. Going forward, the RTT said, many retailers would be forced to re-think their sources of supply.
Vicky Redwood of Capital Economics said: "The economy is going from bad to worse. As the UK experiences a recession that is set to be worse than that of the early 1990s, consumers are in for an extremely tough year." She went on to state that for house prices to reach "something resembling fair value" they would have to fall as much as a further 20%.
Richard Lowe of Barclays added: "Hopes by many commentators at the beginning of 2008 were high that this crisis would be largely contained within the financial system. However, this was not the case with an uncertain economic outlook resulting in falling house prices, increased unemployment and a significant reduction in consumer confidence. The result has been consumers paying down debt and increasing their overall savings."
Concluding, Nick Bubb of Pali International asserted: "We face a systemic banking crisis and history shows that the economic recessions that these cause take over four years to resolve because Government monetary policy is so ineffective. This recession will be U-shaped, not V-shaped."
However, the RTT did note that the response from the authorities had come far quicker and gone far farther than has been typical in the past. Although this is unlikely to be sufficient to prevent a siginificant contration of the economy, should at least be sufficient to prevent the recession becoming a full blown recession. Additionally, the fall in food and fuel prices already easing the squeeze on consumer incomes should be joine by a drop in utility prices later in 2009.
Much stock in retail?
Over the course of 2008 the retail sector stock market index plummeted 50% as the depth of the economic downturn became apparent. A better than expected Chritmas and New Year suggested there might be something of a turn around in early '09. These hopes were short-lived as Nick Bubb explains: "Unfortunately, the light at the end of the tunnel simply seems to be a big train approaching and the New Year spending spree more of a 'blip', caused by an unusually helpful calendar and weather, rather than a new trend, which will be paid for by some very tough weeks to come."
Cash management
Keeping tight control on cashflow, expenditure and supply chains are going to be among the key skills required in the retailers' arsenal this year. According to Helen Dickinson of KPMG: "Cash is now a top priority, yet many retailers are not very good at forecasting cash and most have a poor track record of bringing down working capital." Now that is fighting talk, likely to rile more than a few retail directors in the operations and financial departments. Ms Dickinson's somewhat incendiary comments continued: "With the squeeze on credit, this inability to accurately forecast cash will be a critical challenge for many. Also, my experience is that most businesses implement cost reduction programmes, as they are currently doing, only for costs to creep back over time. Retail is especially susceptible to this."
The RTT White Paper pointed to the large amount of stock that retailers sourced from overseas, resulting in an increased currency risk being introduced into their businesses. Thus, it suggested, retailers should receive support from their banks budget planning process in order to deliver on budgeted exchange rates.
Strategy in a changing market
The current state of flux in the retail market is set to continue, with refinancings, high-profile disposals and likely as not a smattering of opportunitistic acquisitions. Though recession poses many threats to vulnerable retailers, the report also indicated that it presented as many opportunities for the stronger companies to invest and pick up market share. In true Darwinian economics, those both strong and able to adapt to changing surroundings will flourish, whilst the weak and inflexible will struggle to survive.
Helen Dickinson said: "The winners will be those that do two things - relentlessly pursue their clear vision of who their customers are and what they want and have the flexibility to innovate and make changes to their business to respond to those changing customer needs."
"Retailers may never be the same again," added Tim Denison of Synovate. "Following top-to-bottom reviews of their businesses nothing will be left unquestioned nor remain sacrosanct. Carrying less stock and refreshing product offers more often will put new focus on buyer-supplier relationships. Liquidating slow-moving stock more quickly and frequently will become increasingly common practice. New emphasis may also be seen on local sourcing, bolstering range dynamism and variety, guarding against weak exchange rates and fulfilling green ambitions."
Dr Denison also suggested that customer behaviour was likely to continue changing, with a likely drop in overall annual footfall of around 2.3% this year compared with 2008. Furthermore, he stated, "There may be fewer purchases and smaller basket sizes, but some will decide to shop and spend less often, so valuing trips more than they have done over the last decade. Their price knowledge will become more accurate and whereas buying on credit used to be de rigueur, we may now see a revival in the art of saving-up-to-afford-to-spend, something not seen for a generation." This the report suggested could cause other shifts. in the retail environment: "Shoppers' expectation of more enjoyment from fewer experiences should trigger a paradigm shift in the industry with a potential re-birth of customer service excellence", it said. Again, there might be some within retail who would suggest the use of the word 're-birth' was inappropriate given their current customer service offerings.
The big picture
The global slowdown will inevitably influence retailers' international activities. As Professor John Dawson of the Universities of Edinburgh & Stirling said: "The slowing of growth in consumer spending in emerging markets and likely declines in mature markets pose a strategic conundrum for these international retailers. Whilst opportunities will certainly still exist in emerging markets, should firms make investments with a long term view that these markets will return to strong growth or should attention be focused on making sure performance is solid in their UK operations?" The RTT's consensus seemed to be that the answer to this particular question might vary sector by sector - with continued overseas expansion from some and withdrawal from others.
Another question only answerable by time is the extent to which currency fluctuations and market hardships might encourage foreign businesses to consider UK retailers as bargain acquistions.
Property opportunity
Another potential effect of the downturn in the retail market and closure of high street branches will be the opportunity for expanding companies to pick up well-priced town centre locations. However, according to the RTT, this opportunity will not be as pronounced as had been the case in other periods of recession. This is because the supply of new floorspace began slowing during the first half of 2007 - well before the current financial volatility struck. Mark Teale of CB Richard Ellis explained: "Stock shedding by distressed retailers will release some primary and good secondary stock. Some 4,000 units - equivalent to 0.5% of GB stock - has been predicted by some commentators, providing a rare opportunity for stronger players to selectively grab High Street market share, albeit bearing in mind there are over 2,700 chain retailers operating in Great Britain - so not as big an opportunity as it might at first sight appear."
Conclusion
The RTT's White Paper concluded that 2009 is set to be a 'brave new world': what it described as "an extraordinary year set against a unique economic backdrop where casualties will invariably capture the headlines". But this Retail Think Tank insists, won't be the whole story: "the RTT points out that there are many winning retailers in the economy. As businesses have failed - and may continue to - there is much turnover to be won by their competitors in the sector, if they have the right strategy and proposition". Either way, it said, the retail industry will look very different by 2010.
