UK retail should feel cautiously optimistic in 2020, says KPMG/Ipsos Retail Think Tank

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The UK’s retail industry is likely to grow by at least +1.0% in 2020, despite weaker food sales, according to the latest predictions from the KPMG/Ipsos Retail Think Tank.

The General Election result, following over 36 months of political volatility, brings with it a perception of clarity regarding Brexit. The RTT believe this will be welcomed with open arms by many UK shoppers in the short-term, even by those who feel that Brexit may be damaging to the UK economy in the long-term. Retailers should also expect to feel the benefits of growth stimulated by a recovering housing market across the UK in 2020.

An end of political paralysis

While the RTT is cautiously optimistic that political stability will translate into improved sales on the high street in 2020, it stresses there are still a plethora of unknowns to be confronted, including the obstacles around tariffs and trade deals for retailers to negotiate. That said, the general idea of ‘Brexit being done’ is expected to finally unshackle the positives of rising wages, low interest rates and record employment levels from the political uncertainty that has caused consumers to think twice about exercising their increased spending power in recent years.

James Sawley, head of retail & leisure at HSBC UK, comments: “The news of a governing party, with a comfortable majority and clear vision for Brexit, gives me hope that we will see a rebound in consumer confidence in 2020. The UK consumer may breathe a sigh of relief, the end of knife-edge votes and uncertainty should translate to a loosening of the purse strings.”

Next year’s trading deal negotiations with the EU and elsewhere will undoubtedly lead many retailers to review their supply chains to avoid damaging disruption. However, a growing need and awareness to reduce emissions is expected to present a post-Brexit UK with an opportunity to focus on local manufacturing, sourcing and food production, bringing the importance of provenance into focus.

RTT members also point to independent and smaller retailers as being vital to supporting growth in the UK retail sector in 2020. Recent LDC (Local Data Company) figures showed independent retailers to be more resilient in terms of store closures in 2019, providing a shopping experience and product range, often outside of traditional retail centres, that bigger operators struggle to compete with. The RTT agreed this put them in a strong position to continue to flourish over the coming 12 months. 

Breaking a prolonged narrative of the food sector outperforming non-food, RTT members fully anticipate that next year should see non-food make a comeback, and this return to sales growth will offer retailers the opportunity to reset, making 2020 a year of positive transition.

A year in transition

2020, while full of optimism, is predicted to be a year of transition and change for the UK retail sector. ‘Brexit uncertainty’ is an excuse for poor performance that has been delivered by many operators since 2016, but the RTT claims that retailers now must move beyond Brexit and start delivering growth plans. Those retailers that have adapted their operations and ‘weathered the storms’ of the last three years will have a solid base on which to build and flourish over the coming 12 months.

However, RTT members are keen to stress that an uplift in consumer confidence is not a silver bullet for retailers. A short-term economic boost will not suffice to breathe new life into an industry that is undergoing wider structural changes. Good retailers will continue to succeed, poor retailers will continue to fail. The RTT warns that the swathes of administrations and restructuring that have taken place over the previous 12 months will likely increase further next year. This would be a correction welcomed by the RTT, shedding fascias that are beyond their sell-by date, making way for new entrepreneurs and their retail concepts.

The RTT acknowledge that a number of mid-market retailers are coming to the end of their 20-30 year life cycles, and these operators are already beginning to lose their appeal with consumers. Mid-range clothing and footwear retailers, department stores and shopping centres will be at the centre of this plight and will dominate the headlines for the all the wrong reasons in 2020. The ‘at risk’ register, therefore, will continue to remain a long one.

Nick Bubb, retailing consultant, notes: “Whether the decisive Election result will ultimately deliver the certainty that the UK economy needs is unclear, as the risk of a no-deal Brexit at the end of the transition period remains, but an expansionary Budget in February will boost the consumer and the doubters can at least console themselves with the thought that the prospects for the housing market have improved.”  

Grocery 2020

The grocery sector, which in recent years has been propping up the poor performance of its non-food counterparts, is not immune to its own structural changes, which are only set to intensify in 2020. It’s been a long time since ‘the rise of the discounters’ was considered news, they are, and will continue to be very much a part of the future of the grocery sector. In 2020 discounters are on target to reach a combined 17% market share, as they continue to meet the needs of regular, weekly grocery shoppers.

RTT members also highlight a shift in consumers moving away from ‘mission’ shopping such as completing weekly and top-up trips, towards on demand, ‘occasion shopping’. Fast food operators, such as Uber Eats and Deliveroo, are also growing in popularity in response to an increasing demand for home deliveries. Supermarkets, in acknowledgment of this, will continue to expand store space for fresh and chilled goods, appealing to shoppers seeking out curated meals and menus for ‘free from meat/diary nights’ as well as food ordered for sharing.

Supermarkets will also continue to feel the pressure as the size of the ‘supermarket pie’ shrinks, Mike Watkins, head of retailer and business insight at Nielsen UK, adds: “Shopper behaviour is changing with more of what we consume being purchased away from large supermarkets and instead at small stores, out of home or using food delivery specialists and platform providers. There will be consolidation in this channel and possibly investment by other retailers as different business models emerge. And after three years of weak growth there is a need for many supermarkets to reposition in order to be able to achieve a growth in value sales that at least moves in line with CPI,  and a recovery from the 1% decline in volumes across the £164bn food retail industry in 2019 (Nielsen Growth Reporter).”

Easing rental pressures

Cost savings will continue to be a common theme for retailers to pursue in 2020, with the RTT suggesting a further 3-5% needed to be saved over the next 12 months. Many retailers will look to their property portfolio and rent reductions as a potential lever that can be pulled in 2020, building on the successful negotiations made in 2019.

Jonathan De Mello, Head of Retail Consultancy at Harper Dennis Hobbs, adds: “Of the retailers that don’t restructure via CVA or some other mechanism, a large majority are going back to landlords and asking for rent reductions.”

CVAs were a consistent theme of 2019, and the RTT does not expect the broader bout of restructuring to end in 2020. Jonathan continues: “The recent closure of property funds is the first sign that property funds are materially starting to feel the pain that retailers have been feeling for years – and there may well be more fund closures or outright business failures before 2020 is out.”

A new focus for retailers in 2020

Paul Martin, UK head of retail at KPMG, advocates that: “It is becoming increasingly clear that whilst the three key historic drivers of purchase decisions – value, convenience and experience – remain important, new factors are rapidly emerging. I would argue that a second lens of factors should now be considered, these being choice, purpose and privacy.”

Choice and the size of product ranges have proved interesting ‘battle grounds’ for retailers in recent years, with those at the extreme ends of the spectrum delivering strong results. Those retailers offering either a perceived ‘unlimited’ level of choice, or alternately a strictly ‘limited’ and curated choice, have appealed most strongly to consumers. Next year will continue to be a difficult trading year for those whose offer falls somewhere in the middle; trying to provide ‘the best of both worlds’ to the shopper will not only miss the mark for consumers, but impact on working capital and operational complexity.

The RTT members are in agreement that a retailer’s values will also play an increasingly prominent role in driving sales next year, with consumers becoming more aware of the impact that their lifestyles have on the environment. The ethics of a business viewed through its supply chains, delivery methods and packaging will all come further into focus, leading many consumers to start turning away from retailers that are unable to deliver on their own ethical promises or to the consumer agenda. A shift in emphasis towards value and away from the recent obsession with volume, is be a common story that is expected to play out in 2020.

With momentum building towards more sustainable living and the growing drive towards a circular economy, comes a prediction from the RTT that consumers will actively begin to buy less new goods in the future – turning towards repairing, purchasing second-hand items and rental propositions.

In terms of the final factor referred to by Paul Martin – privacy – as retailers continue to invest in convenience, digital offerings and omnichannel experiences, the willingness of consumers to hand over increasing amounts of their personal data for these enhanced levels of service will be crucial to the investments paying off. In conjunction with communicating their ethical and environmental stance, retailers will need to prove to consumers that they have the capability to manage their data and privacy in a trustworthy fashion over the coming 12 months.

Conclusion

The RTT is cautiously optimistic for the UK retail sector as we head into 2020. A perceived end to the political uncertainty that has plagued the economy and consumer confidence for over three years will likely ease, if not end, for many shoppers who will now loosen the purse strings and start to spend again.

This is not to say that retailers should take their eye off the ball. Those that have fundamentally sound businesses – that are able to adapt to the changing market conditions that Brexit will bring, and the shifting consumer demands we will see over the next 12 months – will be able to take advantage of any rise in consumer confidence following the General Election.

However, the RTT warns that there are still many ‘zombie retailers’ who will struggle to survive and could well join in growing numbers those already buried in the densely populated graveyard of retailers past.