Last year proved itself to be one of the most challenging in modern history for the retail and consumer sectors; it was a perfect storm: a global pandemic that forced closures of "non-essential shops"—a new addition to the lexicon—along with restrictions on movement resulting in reduced footfall, supply chain challenges and a heavily impacted Christmas trading period.
The retail sector is going through an unprecedented process of structural change, and we witnessed a number of high-profile restructures and administrations in 2020. However, despite all these challenges, there are signs of optimism for the second half of 2021 onwards as the sector moves away from survival and into recovery mode.
When the pandemic took hold last year, retailers identified very quickly the need to preserve liquidity, bolster balance sheets and address any lending covenants. Conversations were had with key stakeholders such as lenders, landlords and suppliers in order to manage cash and develop resilient supply chains.
Some parts of the sector performed better than others. Consumers had been shifting their spend online for some time, with the U.K. leading the world in the proportion of total spend online pre-Covid.
However, this accelerated at an unprecedented pace during the pandemic as online shopping boomed and retailers had to quickly prioritise their online operations—in practice, their logistics and delivery models. To keep up, some established collaborations and partnerships with third parties.
Retailers had the chance to reset their bricks-and-mortar base with poorly performing stores closed or rents renegotiated. Many have moved onto turnover-based rents, which may make the store footprint more sustainable. They are also having to reimagine and right-size the space they do have.
Levels of footfall are not back to pre-pandemic levels yet, and as a result, retailers are reducing their reliance on expensive stores. H&M is set to close 250 stores worldwide in 2021, while Gap has announced it is looking to shutter all its U.K. stores to move the brand online.
It has been noted that consumers have moved away from the typically busy, indoor shopping spaces that feel a greater Covid-risk in favour of shopping more locally and in out-of-town retail parks, thus also avoiding any public transport.
Local independent retailers fared well over Covid, as the public depended more upon their presence. Many rents are still not being paid, and this could have serious repercussions for landlords who may consequently not be able to keep up with their loan repayments. It is possible we will see a continuation of the company voluntary arrangement (CVA) process, which has become increasingly popular with retailers over the last couple of years.
Retailers have had to cut deep to reduce costs and focus heavily on their balance sheets to ensure they do not burn through cash too quickly, with a tight focus on working capital. This will, unfortunately, result in further job losses as the Job Retention scheme comes to an end and administrations are likely to increase.
An urgent reform of business rates is also crucial if the sector is to enjoy a full recovery. It has been recognised that the system is outdated and does not reflect the changes the sector has seen over the last two decades. Many are calling for a system that puts retailers on a much more even footing with online-only competitors in the hope that the high street can be protected.
Retail sales volumes declined by 1.4% between April and May 2021 following a spike upwards as the easing of retail restrictions in April brought an initial benefit. It is important to highlight that this is 9.1% higher than in February 2020, before the pandemic hit the U.K. While shopping habits may change, the good news for the sector seems to be that U.K. consumer spending will remain as robust as ever.
Non-food stores reported a 2.3% increase in monthly sales in May 2021 with homewares and "other” non-food stores reporting the largest growth of 9% and 7.7%, respectively. Perhaps unsurprisingly, homewares outperformed the sector, with consumers spending more time at home.
It is unlikely this elevated level of demand will remain (how many cushions can a sofa take?!). However, online retailers such as Wayfair have performed strongly over the period, helped further by consumers having higher levels of disposable income due to the lack of discretionary spending over the year, as the unfortunate travel sector can testify to.
The percentage of online sales remains considerably higher than before the pandemic, despite all retail sectors other than food stores reporting a decrease in their percentage of online sales in May 2021 as retail restrictions eased, and physical stores reopened. That was welcome and inevitable, and the longer-term question is how much of these online sales gains will be retained.
"We've seen twelve years of online growth condensed into one and that step-change in behaviour is going to stick," John Roberts, AO's founder and chief executive, recently commented. AO.com has benefitted greatly during this period and would undoubtedly hope that to be the case.
Overall retail sales volumes in May 2021 were 24.6% higher than in May 2020, where we can see a stark contrast between the first national lockdown when the tightest restrictions were in place.
Non-food stores as a whole saw monthly sales rise by 2.3% in May 2021; however, this was not across the sector. As previously mentioned, homeware stores have reported good growth, as well as chemists, toy stores and sports equipment stores. Hardest hit were clothing and department stores, witnessing monthly declines of 2.5% and 6.7%, respectively. However, this is on the back of strong growth in previous months.
Whilst we have been focused heavily on the impact of Covid, we cannot ignore the ongoing challenges of Brexit. When the EU trade agreement was signed, the sector could not be blamed for breathing a sigh of relief, hoping that the long-running uncertainty was over and that there was a chance for a seamless trading relationship without onerous tariffs.
However, it clearly hasn't worked out that way. Many have reported increased costs, supply complications, delays and warehousing issues, leading to some companies closing U.K. factories to open similar facilities in the EU to get around product origination issues.
It is essential, now that the initial confusion has passed, for retailers to work out their supply chain regulations and operational impacts to future proof their business.
The sector continues to face challenges from the economic, political, and social uncertainties that are still present, and there will undoubtedly be failures in the future. However, despite all these challenges, there are opportunities for retailers. The inherent strength and resilience of the U.K. consumer seems to have come through the past 18 months, and it is possible that a burgeoning trend to shorter and more local supply chains will provide other opportunities.
As the weaker players fail, gaps will form in the market, and we would expect to see increased merger and acquisition (M&A) activity. Businesses have a chance to change and adapt to streamline processes resulting in greater efficiencies. New partnerships can be forged, enhancing propositions and capabilities.
As consumers begin to return to pre-pandemic behaviours, the sector should move from survival to recovery. Those who have managed to navigate through the challenges posed will hopefully emerge as stronger businesses. Those that have will have displayed their ability to remain relevant and agile. With the successful rollout of the vaccination programme, consumer sentiment should remain positive as a more normal lifestyle gradually returns.
The high street will undoubtedly look different—relationships with landlords have been changed permanently, the constant increase in retail space of the 2000s is over, a political and social debate over the return to housing in the high street is likely, and a need to transition shopping malls to distribution centres looms. But if nothing else, the past 18 months have proved both the adaptability of the sector and the resilience of the consumer, very encouraging pillars to build upon.
Written by Fiona O’Brien, Senior Underwriter – Credit.
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