A number of retailers reported stronger than expected profits towards the end of 2017, with names such as Next and Morrisons defying expectations.
However, our team believe that wider trends in the sector may mean that the high street isn’t as physically fit as it would seem – especially for smaller companies.
We are not alone in this thought, with the latest KPMG/Ipsos Retail Think Tank (RTT) showing that the sector’s turnover dropped in the final quarter of 2017 – a time where Black Friday and Christmas sales usually lead to a boost in sales.
The RTT found that The Retail Health Index (RHI) dropped one point to 80, taking it back to the level it stood at four years ago.
It is certainly clear that some retailers haven’t fared as well as others, with Marks and Spencer’s seeing clothing and homewares sales fall by 2.8 per cent while its food halls were down 0.4 per cent.
This has prompted the company to begin a restructuring with a focus on driving up digital sales.
Similarly, two other high-end retailers House of Fraser and Debenhams each reported a drop in sales of 2.9 per cent and 2.6 per cent respectively – with Debenhams even issuing a profit warning.
The latest RTT report has indicated that non-food sales were particularly weak over the final quarter of 2017, with future growth in this field even more unlikely in the first quarter of 2018.
This trend is likely to be particularly prevalent among smaller independent firms, where economies of scale mean that margins are often far narrower.
Food sales amongst the major grocers, such as Sainsbury’s and Tesco’s have been stronger, but even they are undertaking important restructurings, which include hundreds of job cuts, to revitalise their operations and improve profits.
Lynn Gibson, our Director at Gibson Hewitt, has said that all retailers are facing new challenges.
“The retail sector at the moment is really split, but one thing that is consistent is that companies are facing rising costs,” said Lynn.
“Commercial rents have continued to rise, as have staff costs, particularly with the increase in the National Living and National Minimum Wage.
“Add on to this the cost of compliance with workplace pension rules and most importantly the weakened pound and it is clear to see how margins are being eroded away, which is really worrying for those independents who don’t have the backing of financiers.”
Lynn feels that the traditional high street as we know it is changing and that smaller retailers may have a tougher future if they stick to only one business model.
“Looking at various reports it is clear to see that many shoppers now favour online shopping over physical shopping in the high street.
“Amazon, though technically not a traditional retailer, but rather a distributor of retail goods, probably recorded stronger profits than any of the UK’s businesses.
“It is giants like these that smaller retailers are going to struggle to compete with unless they do something fairly innovative.”
She is worried that many firms in the UK are failing to adapt to the changing nature of shopping.
“Imagine trying to explain to someone 20 or even 10 years ago that you would be buying your next TV or fridge freezer from your grocers, they would have thought you were mad, but with services such as click and collect common place at major supermarkets shoppers are finding new, cheaper and more convenient ways to enjoy spending their hard earned money.”
Lynn is concerned that smaller shops are not keeping pace and may be nearer to failure than they fully appreciate.
“Everyone always says that they would like to see more traditional shops on the high street, but the reality of the matter is that many small independent retailers would struggle to survive on city centre high streets,” said Lynn.
“It is these businesses who may be most at risk in the next few years, especially as older client numbers drop off and younger shoppers choose an online shopping experience instead.”