While UK retail is facing historic pressures, the current environment is also throwing up opportunities for business. David Maddison from HSBC gives a banker’s view on the health of the sector

Container ship on the sea

Freight rates have nosedived in recent months 

It’s easy to be a pessimist in today’s environment. Headwinds are aplenty and negative headlines are everywhere.

We at HSBC are a large lender to the sector. As a result, I like to think we have a unique and unparalleled view of what’s actually going on, which gives us the ability to dissect the fact from the occasionally embellished headline.

These are the challenges and opportunities facing the retail sector, and how they may ultimately play out. 

The headwinds

A strong dollar: The US dollar is arguably a cornerstone of modern-day retail; most retailers purchase stock in the currency given its global reserve status and general acceptability.

The EU referendum in 2016 saw sterling fall 17% against the dollar. In the latest period of political instability, sterling hit -21% at its worst. 

“If a retailer can’t share the pain with either suppliers or buyers, then a reengineering of the business model may be needed”

This is important. If a retailer can’t share the pain with either suppliers or buyers, then a reengineering of the business model may be needed.

The demise of some retailers in the ensuing year can be attributed to this single headwind, so it must not be underestimated.

Concentrated sourcing: Covid was a watershed moment for global supply chains. The risks of having all your suppliers located in one country or region came to a head.

Port closures, sanctions, political instability, strikes and conflicts have all contributed to bottlenecks and parabolic freight rates.

A consequence was the adoption of new models so as to never rely upon just one country and to genuinely diversify supply chains. 

In what could be considered a reversal of globalisation, near- and on-shoring have made a comeback. And while, as a proportion of supply chains, this trend could be considered modest, it is notable and born entirely from the aforementioned risks in a concentrated supply chain.

Excess stock: Retailers went from not having enough during Covid to coming out of Covid with a glut. In January 2022, very few people foresaw what I’d consider to be the idiosyncratic events that have unfolded since. 

“In January 2022, very few people foresaw what I’d consider to be the idiosyncratic events that have unfolded since”

Consumer balance sheets were arguably in rude health, excess savings existed, consumer debt was at a decade low, real wage growth was strong and unemployment was also at record lows. We were heavily vaccinated as a country and emerging from the Omicron variant without lockdowns nor restrictions.

The term ‘the roaring 20s’ was even used, in reference to the reopening of the economy following the First World War. Sadly, this hasn’t been the case. 

Inflation has hit a 41-year high, real wages are in decline, interest rates are rising, GDP is falling and a recession is all but guaranteed.

As a consequence, what retailers anticipated to be a strong year has fallen short. Excess stock is the result and the need to clear it has become extremely prevalent.

The tailwinds

Freight rates: Last year, as a consequence of unimaginable consumer demand, compounded by congested shipping lanes, port closures and a blockage of the Suez Canal, the price of a 40ft container travelling from the Far East to the West increased tenfold. 

However, over the past year, a reopening of economies has seen consumers switch from purchasing products to experiences.

The subsequent cooling of economies saw a further drop-off in demand, while the near-shoring of manufacturing freed up further capacity on container ships and the final part of the jigsaw – global shipping companies having a glut of new container ships being delivered on the same assumption as retailers had (good times were expected to continue) – intensified the supply and demand imbalance. 

The result has been a near-capitulation in freight rates, which has seen prices dive within touching distance of pre-Covid levels.   

Coronavirus pandemic: A global easing of the last remaining Covid restrictions in place would have an overwhelmingly positive impact.

As witnessed in almost every major economy upon restrictions being lifted, citizens travel in their millions. And so do their wallets, which is currently the case with US tourists taking advantage of a strong dollar and few Covid restrictions throughout Europe – as evidenced in LVMH’s recent results. 

“A reopening of all economies feels inevitable at some point, as can be seen by the current protests in China”

Retailers also have the benefit of knowing what post-Covid trends look like: big spending across holiday and travel categories, strong purchasing habits in the luxury sector, formal and going-out wear booming, etc.

While perhaps a reopening of all economies appears unlikely today, it does feel inevitable at some point, as can be seen by the current protests in China.

Competition: The current economic climate, while incredibly tough, is yet another business Darwinian event. No one wants to see businesses fail, but when one does it boosts the survival chances of those who remain and the sector takes a step closer in rebalancing retail supply and consumer demand. 

It’s a brutal interpretation given the jobs and livelihoods at stake, but arguably necessary in ensuring the survival and ongoing relevance of the sector.    

“A strong dollar doesn’t necessarily mean weak sterling. The potential to source in local currencies may be more palatable”

In summary, is the retail sector doomed? Definitely not. Is it going to be a tough year next year? Yes, it is, but there will be winners and losers – as there always have been. Understanding the pain points will be key to fully address them. 

For example, a strong dollar doesn’t necessarily mean weak sterling. The potential to source in local currencies may be more palatable.

Perhaps try dual invoicing where possible to see if there is a benefit. Also, exploring markets that will potentially benefit from Covid-related restrictions being eased further could be an area to capitalise on in the year ahead. 

Where possible, holding on to non-season stock could be advantageous or even turn a bunce, given where inflation is now and where the cost of the stock was when it was originally purchased.