Retailers will have to run faster to stand still. Competition will intensify and the margin for error will narrow.
2009 has undoubtedly been a tough year for the retail industry. But low savings rates and lower interest rates reducing mortgage costs have helped boost spending power. Retail spending has held up better than might have been expected.
However, consumers are finally starting to behave as they have in previous recessions -by saving more of their disposable income. Coupled with the potential for interest rates to start to inch up in 2010, the squeeze on consumer spending that was expected this year may just have been postponed, not cancelled.
In Deloitte’s report published yesterday, The Retail Review: Changing Habits, Shifting Patterns, we outline our expectations for retail sales for the rest of 2009 and 2010.
We expect retail spend for the final quarter of 2009 to be down by a whisker year on year. However, the month of December will be slightly better, with spending forecast to be up by 0.5%. To all intents and purposes consumer demand is going to be flat. Viewed in the wider economic context, this is a remarkably positive outcome given the wider turmoil and parlous state of the consumer’s balance sheet.
With spending power squeezed, consumers will be making some difficult choices about priorities and where to focus their belt tightening. Deloitte forecasts that retail will fare better than many other components of the consumer spending budget but, even so, it faces a fall of 1.5% in the total value of retail spending for 2010.
While this outlook can hardly be called rosy, it is a remarkable vote of confidence given the fact we have been through the worst economic crisis in modern times. Nevertheless, the impact on retail will be widely felt. Profit margins will be under further pressure as the room to pass higher bought-in prices to customers is narrowed by weak demand.
Increased bricks-and-mortar floorspace and new capacity provided by the internet add to the challenge. Additional footage plus online (using an average of industry sales per sq ft) has resulted in total retail capacity increasing by some 22% over the past 10 years.
For most of the golden period of rising demand, this growth in capacity was more than absorbed by sales growth. However, this has now come to an end. Indeed, sales per sq ft in UK retail peaked in 2007 and the law of diminishing returns is exerting itself.
Looking forward, retailers will have to run faster to stand still. Competition will intensify and the margin for error will narrow. Nevertheless, there will be success stories and good returns will continue to be made. Even a 1.5% fall in retail sales next year means the retail pot is still worth more than £280bn.
Retailers have been very flexible in adapting to changed economics and the industry has managed to hold its share of the spending pot. The retail market has proved itself to be remarkably robust and with consumer spending representing almost two thirds of the UK economy, any sustainable recovery will have to be consumer-led and retail will be at its heart.