It has been a challenging year for UK retail, will the London 2012 Olympics usher in a sunnier outlook for retailers?

It has been a challenging year for UK retail. Weak underlying consumer sentiment and fears of fallout from the Eurozone crisis have prompted a raft of high street closures. Meanwhile, a wet and miserable summer has, so far, further dampened demand. The Diamond Jubilee bought some respite. Will the London 2012 Olympics usher in a sunnier outlook for retailers?

In these times of austerity, both consumers and retailers are looking for any positives that can be drawn from the ailing UK economy. So far this year, the search has been in vain. The demise of high street staples like Game Group, Clinton Cards, Aquascutum and Peacocks have painted a very bleak picture for UK retail. In fact, in the first six months of this year the Centre for Retail Research recorded 35 retail businesses failing – affecting over 37,000 employees. This is more potential retail job losses in six months than in the previous two years combined.

In many respects, the second half of the year looks just as bleak. Poor weather has compounded economic insecurity to keep footfall down. This has prompted a host of profit warnings from the likes of Tesco down to smaller specialists such as Halfords.

The retail sector is pinning its hopes on the Olympics to provide a much-needed boost in the second half of the year. Oxford Economics estimates that the Games will bring in 450,000 tourists from overseas. The Chinese ambassador has claimed that China alone will account for 250,000 visitors. In addition it is thought that 5.5 million people will flock to the capital during the Olympics to attend events or simply soak up the atmosphere.

An Olympic gold rush?

While Londoners may bemoan the travel headaches that an overcrowded transport network will bring, retailers have been rubbing their hands with anticipation in the hope that a fast injection of cash and goodwill will push consumer sentiment up and provide a tangible boost to the economy.

In this respect, those hopes should be well founded. Visit Britain estimated that the average tourist spend in the UK in 2011 was £584 per visitor. This crude estimate alone implies a cash injection into the London economy of over £260 million. Much of this will be spent in non-retail channels such as hotel rooms or meals, but retail will benefit. Last year, research firm Datamonitor estimated that the Olympics would result in an extra £100 million in retail sales, mainly in the merchandise and clothing subsectors.

The Centre for Retail Research goes further – in a study with online price comparison website Kelkoo it estimates that the diamond Jubilee and Olympics combined will bring in an extra £1.07 billion in retail spending between June and August. Much of this will be spent across the country on celebrations, with a sizeable chunk coming from merchandising and also from tourists.

How it will be spent? – The breakdown in Olympics and Jubilee Spending

Total increase in spending£1,069 million
Spending on celebrating events£685 million
Souvenirs & memorabilia£307 million
Tourist retail£77 million

Source: Centre for Retail Research

All that glistens…

A few bumper weeks will not be enough to bring the UK retail sector out of the doldrums. The Economist Intelligence Unit forecasts retail sales of just over £313bn in 2012. This represents a decline, in volume terms, of 0.1% on 2011. A £1.07bn cash injection, however welcome, amounts to less than one-third of a percent of the country’s overall retail sales.

Much of the Olympics benefit will be focused on retailers in London. From a retail perspective, shopping meccas such as Oxford Street have suffered far less from the current economic woes than high streets in towns and cities outside of the capital. The retail benefit of the Olympics will therefore to places where it is needed least. A feelgood factor may boost sales across the country, but the impact for struggling retailers outside the M25 will be marginal.

This sentiment has been backed by a number of sources. A Reuters poll of economists saw 26 of 28 respondents expecting that only London would benefit from the games, with a BBC poll showing 74% of the population agreed with them.

The wider economic outlook is not encouraging for retailers. Historical evidence suggests that Olympic host cities often see a fall in hotel occupancy rates as Olympic demand puts off other potential tourists. For London-based retailers, the Olympics may even prove disruptive to the throngs that normally crowd along Oxford Street. A spending binge during the Games may also merely borrow sales from the future. Retailers are much more likely to see durable benefits if the current good weather is sustained and consumers are treated to a real Indian summer.