The Warwickshire Outlook - by Dave Ayton-Hill
In his regular assessment of the county's very latest economic outlook, Warwickshire County Council's head of economy & skills Dave Ayton-Hill asks: Will it be a Happy Christmas for the retail sector?
Consumer spending accounts for two thirds of total economic output in the UK and, in turn, retail accounts for around a third of all this spending. The relative performance of the retail sector is therefore both a key driver and barometer of overall economic activity.
When you consider that, on average, retailers generate over 50% of their sales and profits in the three months leading up to Christmas, it's clear that a good or bad Christmas can genuinely make or break a retailer.
Over 2017 we have seen a gradual erosion of consumer confidence as real wages have started to decline. Price inflation is now at a five-year high at 3%, driven by the devaluation of sterling following the EU referendum result; but average wage growth rose by 2.2% over the past year.
Many big-name retailers (including Next, Marks & Spencers and John Lewis) are warning of a difficult trading period ahead and are already experiencing sales either below average for the time of year, or below their expectations for this crucial part of the year.
Recently the British Retail Consortium have released figures suggesting that retail sales shrunk by 1% on a like-for-like basis in October compared to a year ago and official figures from the Office for National Statistics showed that the amount of goods bought by consumers fell by 0.8% in September. While October saw a small upturn of 0.3%, the overall sales figures were lower than the same time last year. Finally, Visa reported that their data shows a fall in consumer spending by 2% in October, the fastest year-on-year decline in four years. This was also the fifth monthly decline in six months, and was driven by a 5% decline in spending on the high street.
However, there is certainly a feeling of “deja-vu” as there were similar warnings last year when the spectre of Brexit was supposedly going to make consumers much more cautious and hold back on spending. In the end, retail spending was very strong and one of the key reasons why the economy saw growth in 2016 and early 2017 that was much stronger than many economic forecasters had expected.
Furthermore, it is clear that retail patterns are changing – online sales are growing strongly, up by 14% since same time in 2016 and now account for approximately 17% of all retail spending.
The on-line market is therefore critical and leads us to consider two things. Firstly, the (relatively) recent growth in popularity of the so-called Black Friday (and now also Cyber Monday). A huge focus of Black Friday/Cyber Monday is around sales over the internet and, given both the concerns over consumer spending and the rise of the on-line retail market, will be a huge test and barometer for the underlying health of the economy. Forecasters are suggesting that over £6bn of sales will be made in the UK over this weekend period, and many retailers are hoping that this “event” will help kickstart their currently relatively weak level of sales. If consumers do come out spending as the retailers hope, then many of the concerns over consumer confidence and falling real wages will disappear. However, if sales are muted, then many retailers are going to start seriously worrying about their revenues in this critical period and it will suggest that the UK economy is really starting to slow down – raising concerns for the year ahead.
The second thing to consider from this analysis is the importance of small, local retailers having a strong on-line presence as a way of securing their ongoing growth and prosperity. This is the key rationale behind Warwickshire County Council's Town Centres programme, which is supporting a dedicated training scheme focused on helping businesses improve their digital skills and maximise the opportunities that exist on-line and through social media. An example of how this help can really drive a business forward is Joco Interiors as you can read here.
It is also important to highlight the importance of small independent retailers to the local economy. At a time when the (legal) tax minimisation schemes being undertaken by large corporations is again in the news, it is worth remembering that using small local retailers can make a huge difference in your local economy.
Because most independent shops source their goods and services from the surrounding local area, money spent in these shops “sticks” in the local economy far more than spending with multi-nationals and is re-circulated through something called local multiplier effects. It is estimated that for every £10 spent in an independent shop, £50 is generated within the local economy because of these effects.
This is perhaps something to consider when browsing the on-line sales on Black Friday!