The consumer economy
The most significant recent economic trend that relates to retailing has been the steady improvement in consumer confidence since its record lows during the global financial crisis. Over the last three months consumer confidence has continued on its upward trend and is now back around the pre-Global Financial Crisis levels, albeit in negative territory still. The latest data for April shows that the confidence level has improved to -3, which is better than the long run average for this index. Retail sales are also nearly 4% up on 2013.
Future growth in retail spending will have to be driven by more than just reductions in savings, and this means the key metric to watch at present is the growth or otherwise in real average earnings. The recent declines in CPI, from over 3% per annum in 2012 to 1.7% at the end of February 2014, has definitely started to herald a more positive period ahead for real earnings growth. Indeed, with average earnings rising by 1.5% in 2013, the UK consumer should start to feel richer in the next few months.
There are undoubtedly still challenges ahead for the consumer economy, with the bulk of public sector cuts still to be implemented, and the timing and pace of rises in the base rate still unclear. However, a real consumer recovery is undoubtedly underway, though the phasing of that recovery around the country will depend very heavily on the structure of individual regional and local economies. The latest forecasts for total household spending in the UK are for average annual growth at constant prices of 2.4% per annum over the next decade, significantly better than the 1.1% per annum that has been seen over the last ten years.
The retail occupational market
The Christmas pick-up in trading that we commented upon in the last issue of this report is symptomatic of a trend that a number of retailers have commented on, where consumer are apparently savings up their discretionary spend for the key holiday periods. This is probably a reflection of the relative weakness in consumer confidence, and our retailer clients are generally reporting that this trend has continued in the first quarter of 2014. Generally, trading has been quiet over the first three months of this year with retailers suggesting that this is because spending is being delayed until the Easter weekend which was late this year. Easter, which has always been a hugely significant period for DIY and garden retailers, is shaping up to be equally important for clothing and other general merchandise operators.
The most acquisitive segment of the market remains the convenience store operators, with continued expansion by Sainsburys and Tesco being added to by Morrison's desire for significant growth in London and the South, and newer concepts such as Boots' non pharmaceutical based convenience store offer.
There has been a wide spread of performance in the clothing and accessories sector in recent years, with higher end offers such as White Stuff, Jack Wills, Jigsaw, Radley and Joules all reporting strong growth in sales and planning further expansion. At the lower end of the scale Primark continue to expand, both opening new stores and looking to enlarge the size of their stores in existing trading locations. The mid-market remains challenging, with Marks and Spencer continuing to lose clothing market share.
The polarisation in retailer's locational requirements remains significant, with many retailers on strong pitches now reporting regular approaches from other retailers who want them to assign their leases. However, demand remains patchy away from these prime pitches.
Many of the new store openings that are being announced are not net new openings, with retailers across all segments of the market continuing to rationalise their portfolios by closing poor-performing stores. Furthermore, a number of large retailers are looking to reduce operational costs, either by cutting headcount in their head offices, or by attempting to drive down distribution costs.
The latest research on store closures from PwC and the Local Data Company shows that shops are closing at a rate of 16 per day across Great Britain, though this is down from the 20 per day that was seen in 2012. Indeed, the PwC research states that the year-on-year net reduction in multiple stores has fallen by almost 80%. Interestingly, these figures hide some more recent changes, with several of the jewellers now back in a firmly expansionist phase.
Furthermore, the relaxation of change of use from A1 to A2 has been met with significant interest from new and established financial services operators. For example, Metro Bank, Barclays and Lloyds banks are all currently looking for new banking hall premises. We also expect that the change to the pensions system that was announced in the Budget will lead to a sharp increase in the number of Independent Financial Advisors on the nation's high streets.
The trading environment for UK retailers will definitely continue to improve over the remainder of 2014 and into 2015. We expect that a combination of an improving housing market, and the return of real income growth will stimulate a pick-up in spending across most goods sectors. Retailers are rapidly adapting to the world of internet retail, and while this will mean that they need fewer shops, the average unit size that they require will rise. There will be further rationalisation of store portfolios to adapt to this new world of multi-channel retail, but the retailer demand to get into the best regional and sub-regional markets is already intensifying.
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