The UK’s retail sector is a particularly sensitive indicator of the effects of Brexit and its impact on the economy, says Jonathan Reynolds.
The Office of National Statistics announced in April 2017 that UK retail sales suffered their biggest quarterly decline in seven years in March, suggesting that post-Brexit consumer confidence is on the wane.
This is a worrying signal because much of the UK’s recent above-previously-forecast economic growth has been largely down to consumer spending. With prices of everyday items now rising and wages flatlining, the impact of last summer’s Referendum is at last beginning to be felt – and the negotiations with the EU have yet to begin in earnest.
It is already a difficult time for retailers. Many are dealing with a near ‘perfect storm’, including the impact of non-store channels, particularly mobile, on large amounts of retail real estate; the threat of new entrants; increasing price competition, as well as challenging changes in consumer behaviour, including volatility in previous reliable sub-sectors such as clothing. In addition, as intermediaries at the end of the value chain – and so very close to both consumers and suppliers – retailers can expect to be at the receiving end of Brexit effects in other sectors ranging from agriculture to car production to financial services.
Continued consumer spending in the immediate aftermath of the Referendum vote last June may be put down to the fact that the economy did not suddenly tank. However, rising prices, the triggering of Article 50, and the General Election on 8 June have made the general mood much more uncertain. And when consumers are uncertain they spend less, particularly on expensive items that they don’t need.
The fall in the value of sterling has already caused prices to rise in food and other everyday items, with the March 2017 inflation rate being the highest since September 2013, although retailers are on record as seeking to resist price increases that they know shoppers will find unwelcome. The British Retail Consortium has recently studied the likely impact on tariffs and prices if negotiations fail and the UK is forced to fall back on to WTO rules. Default tariffs mean that the average duty on meat imports could be as high as 27%, cheese as much as 35%, and cars 10%. While this might encourage some repatriation of sales (someone who would have bought a BMW might now decide to buy a Land Rover) it will not work in all markets.
A smaller supply of fresh migrants to fill retail jobs in warehousing, distribution and sales will have a major impact – and it is unlikely to be positive. As research into low-skilled agricultural work has indicated, the need to attract more British nationals into these jobs, combined with the recent introduction of the national living wage, will lead to higher wage costs. And it may not be long before these costs reach the threshold at which it makes financial sense for employers to invest in automation instead. There will be fewer jobs in the sector (the BRC has suggested that as many as one million might disappear over the next few years), and those that remain may be better paid, but they are likely to demand a higher level of skill.
What will retailers do longer term? The prospects for fast growth in European markets have never been very good. In the context of a declining domestic market, the biggest firms will look for higher growth opportunities elsewhere in the world. Equally, overseas entrants, although they might find entry or M&A costs a little lower, may well be deterred from UK openings. If anything, this will bring forward a readjustment of the cost base of many of the larger bricks and mortar retailers, with a faster closure of poorly performing real estate and a greater reliance on online platforms.
So does Brexit wreck the retail sector? Probably not, but it’s not going to help. In the absence of a crystal ball, nevertheless, the sector’s performance will be an extraordinarily interesting bellwether for the UK economy.