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UK retailers – ‘sentiment is crumbling’

  • “Sentiment is crumbling among retailers” notes Anna Leach, CBI deputy chief economist
  • Data releases show retail sector is in a downward spiral
  • Weakness in demand is significant because the consumer has for so long been the driver of growth
  • European retail is also on the wane
  • Policy reforms are available to the new UK government and might be needed

Results of an industry sentiment poll have been released by the CBI (Confederation of British Industry). The poll shows that: “retailers expect the sharpest deterioration in business conditions since February 2009”. (Source: The Guardian)

Source: CBI

The latest quarterly edition of the Distributive Trades Survey was released on Thursday. It noted:

“Conditions have further deteriorated, with investment intentions for the year ahead staying negative for the sixth consecutive quarter, albeit to the least extent over this year so far. Employment also fell for the eleventh straight quarter in August.”

Source: CBI

Even the bread and butter sectors – groceries, clothing and hardware – are indicating they have seen sales volumes drop.

Only 10% of retailers surveyed by the CBI reported sales had increased over the past year. In comparison, 58% said sales were down. Put into a historical context, the figures are the worst since December 2008 and the second worst since the survey began in 1983.

 

From a low base

The most recent survey continues the trend of ‘more bad news’. The June survey incorporated data from 88 firms, including 45 retailers, and reported that sales volumes fell at their fastest pace for 10 years. Not since the 2009 financial crash had volumes slumped so dramatically.

NASDAQ – Global Retail Index – Five year price chart:

Source: TradingView

The Nasdaq Global Retail Index (Ticker: NQG5300) shows the spirited performance of the consumer over the last five years. Spurred on by loose monetary policy, they have manged to continue spending and form significant support for the global economy. As the global business cycle enters a mature phase, there are worrying signs that in terms of technical analysis, there could be signs of a ‘double-top’ forming. The price action would suggest the shake-down in 2019, which caused the index to correct to near $1,600 could still take markets lower if the recent highs of $2,050 prove to be too strong a resistance level.

Analysts looking around for the reason that the Global Retail index can’t push on to higher levels might do well to study the sub-group that is the European retail index (Ticker: NQUE5300). Comparing the Global and European retail indices highlights the lack of strength in Europe. Over a five-year time scale the European retail index is down 5%.

NASDAQ – Global Retail Index / European Retail Index – Five year price chart:

Source: TradingView

 

Next steps

The CBI report of course references the disruption that would follow a no-deal Brexit. The wording however also appears to be moving the focus of the organisations lobbying onto other issues. Anna Leach, CBI Deputy Chief Economist said.

“Retailers are also buckling under the cumulative burden of costs, including an outdated business rates system and the apprenticeship levy. Businesses will be looking for government action at the Budget in the coming months to alleviate some of these pressures.”

Source: CBI

As CBI members are established businesses, it followed that the CBI would be a willing out-rider of ‘project fear’ and did engage extensively in lobbying on the subject of Brexit. Its members interests would after all be best served by maintaining the status quo rather than opening the door to disruption or indeed disruptor rivals.

The recent report however and its shift in wording suggests a shift of approach by the trade organisation to issues over which they have more influence. The business rates system and apprenticeship program are mentioned in the CBI report and are pressing concerns for retailers.

Analysis at a more granular basis reveals the new business rates in particular are widely reported to be the final straw that leads to businesses ceasing trading.

The shift of emphasis onto these items and away from Brexit may be more fruitful as the newly instated Johnson government will need to throw some love around after 31stOctober.

An opportunity for price rises

UK retailers in sectors such as fashion and home goods are at the same time facing a currency squeeze. As the pound sterling has reduced in value against other global currencies, retailers have had to choose between passing prices on to consumers – never popular, sometimes impossible; or taking on the extra cost and seeing their own profits reduced.

The approach towards October 31stand the Brexit deadline might actually offer retailers an opportunity to slip out of this particular conundrum. A similar large-scale change was put through during the introduction of the euro at the turn of the century. During the move from national currencies to the euro, retailers and manufacturers managed to bring through price increases.

Germany's finance minister at the time, Hans Eichel admitted that the introduction of euro notes and coins led to significant price rises across the country, particularly in food and services. Germany was not an isolated case as across the eurozone it was consumers who were left to carry the burden of transitioning to the new currency. Hans Eichel said:

“We relied too much on the fact that retailers would police themselves and that was possibly a mistake.”

Source: The Guardian

Whilst it’s unlikely the CBI would about-face and support the Brexit process, it does appear to have turned down the volume of its opposition. Maybe it is shifting to the view that its members are prepared to make the best of things and might actually benefit from the certainty that would come from the process being instigated. This ‘plan B’, with newspaper (and lobby group) headlines detailing the travails of Brexit would also offer retailers the smoke and mirrors needed to raise prices. There is not much other good news, as Leach said:

“With investment intentions for the year ahead and employment down, retailers expect a chilly few months ahead.”

Source: CBI