UK Retail sector: trading in 2018 - Rising to the challenge in the year ahead and beyond
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UK Retail sector: trading in 2018 Rising to the challenge in the year ahead and beyond
Retail: is 2018 the beginning or the end? With turbulence and disruption in the sector, what risks and opportunities lie ahead and what are the priorities for future success? An EY panel with a wealth of retail experience held a webcast in January 2018 to discuss their views and ask participants for their insights.
1 Contents 2 2018 peak season trading overview 3 The retail transactional and IPO market 4 Stress in 2018: the margin vice continues to tighten 5 Mapping out the future of retail 7 Summary
2 UK Retail sector: Trading in 2018 Rising to the challenge in the year ahead and beyond
The 2018 peak season
Non-food sales through stores
continue to suffer
Since the peak season trading results started event, as digital sales increased to 27% of the total in
November, and discounting intensified in the run-up to
to come out in early January, the UK retail
Christmas. While overall like-for-like sales edged up by
sector has had blanket coverage in the 0.6% in December,5 this rise was driven almost entirely by
press — much of it negative. However, beneath online and food spend.
the unpleasant headlines there has been a fair This overall picture masks wide variations in performance.
amount of good news, with pockets of strong Interestingly, compared to 2017, 17 fewer retailers
performance emerging in many areas of the announced their peak season trading by mid to late January
industry. That said, an analysis of the figures 2018.6 Most of those that have reported have seen growth in
sales, while some more established names have struggled.
reveals that non-food sales through stores are
Meanwhile, at a subsector level, strong brand owners and
in sharp decline — a particularly worrying trend accomplished online players came out as winners in the
for all retailers with a heavy reliance on sales apparel space, while almost all the major food retailers saw
through their physical channels. sales growth — albeit in most cases largely driven by inflation.
Despite a strong sales performance across the sector, only
Headline economic statistics underline the key themes that the two large discounters gained share in the grocery sector.
impacted peak season trading in 2017. These include:
Looking across the peak season figures, the statistics that
►► A 0.4% 1 fall in real earnings in the three months to spell out the industry’s underlying divergence most clearly
October 2017. are that online sales increased by 7.6%,7 while non-food sales
through physical stores dropped by 4.4%.8 Of course, many
►► Food inflation running at 3.7% in the three months to
online sales are collected from stores — and shops are used
December.2
for browsing and discovering products that are then bought
►► Consumer Confidence Index (CCI) at -13 in December,3 its online. But what the peak season figures make clear is that
lowest since 2013. the operational challenges of the decline in-store sales, with
►► A 3.5% decline in December footfall,4 the steepest fall in largely fixed costs, are becoming more and more intense.
five years. Black Friday became even more of an online
UK like for like (LFL) retail sales growth, including online non-food growth
Food sales: +2.6%
20 Non-food in-store sales: -4.4% 12 month mov. avg.
3 months to Dec. 2017 LFL (online non-food growth %)
15
Online: Online (non-food) growth (%)
10
+7.6% 12 month moving average (growth %)
% growth
5
Growth (%)
Total:
0
+0.6%
-5 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2015 2015 2015 2016 2016 2016 2016 2017 2017 2017 2017
Source: British Retail Consortium (BRC)
1
‘Analysis of real earnings: December 2017’, ONS, 5
‘Some glitter but no gold for Christmas’, BRC,
(accessed via www.ons.gov.uk, 19 December 2017) (accessed via www.brc.org.uk/retail-sales-monitor/reports,
2
‘Bumper Christmas as UK shoppers spend £1 billion more than last 12 January 2018)
year’, Kantar Worldpanel, 6
Result of EY analysis
(accessed via www.uk.kantar.com, 10 January 2018) 7
‘Some glitter but no gold for Christmas’, BRC,
3
‘UK Consumer Confidence drops one point in December to 13’, Gfk, (accessed via www.brc.org.uk/retail-sales-monitor/reports,
(accessed via www.gfk.com, 24 December 2017) 12 January 2018)
4
‘December trading report’, Springboard, (accessed via www.spring-board. 8
‘UK retail spending dipped in December’, Independent, (accessed via
info/updates/articles/BRCfvmnews-december2017, 17 Jan 2018) www.independent.co.uk, 9 January 2018)
UK Retail sector: Trading in 2018 Rising to the challenge in the year ahead and beyond 3
The retail transactional
and IPO market
Still quiet
When asked to assess investor and lender two retail IPOs.9 In fact, similarly low levels of retail IPOs
have been a consistent trend since the peak of 13 achieved in
confidence in the retail sector for the
2014. A look at the relative performance of quoted retailers
year ahead, webcast participants gave a against the overall FTSE 350 index from 2015 through to
decidedly downbeat response — with less January 2018 shows that retail stocks have generally under
than 2% rating the mood as ‘positive’, and performed, with general retailers’ shares in particular well off
the pace. Food retailers have been more stable, and actually
over 80% opting for ‘cautious’. Compared
outperformed the FTSE 350 over the last quarter — although
with last year’s vote, the bright spot is that this trend has been distorted by two particular stocks with
the proportion characterising investors’ specific events driving an increase.
mood as ‘reluctant’ declined from 27% Turning to the transaction environment, the number of
to 17.5% — suggesting that the prospects retail deals has been at a relatively consistent level since
for investments into the industry may the trough of 2013. However, retail acquisitions by UK
private equity have generally remained at subdued levels,
be improving slightly, as 2017’s cost
reflecting the lack of confidence in retail as a whole, the
pressures ease off. perceived lack of debt capacity in retail, and a reduced
willingness to lend to the bricks-and-mortar retail segment
However, it is clear that funding remains wary of the in particular. However, one measure that appears possible to
industry — a situation reflected in the sector’s IPO activity. increase in 2018 is the number of distressed situations: these
While 2017 saw notable growth in UK IPO volumes generally, are already starting to drive deals, and are likely to do so
with 77 IPOs generating £13 billion, this total included only increasingly in the coming months.
Jan. 2015–Jan. 2018 retail share performance vs. FTSE 350
130
120
110 FTSE 350
Index (rebased)
100 Food and drug retailers
General retailers
90
80
70
60
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2015 2015 2015 2015 2016 2016 2016 2016 2017 2017 2017 2017 2018
(estimate)
Source: Capital IQ
9
Result of EY analysis, Mergermarket, (accessed via www.mergermarket.com, January 2018)
4 UK Retail sector: Trading in 2018 Rising to the challenge in the year ahead and beyond
Stress in 2018
The margin vice continues to tighten
The challenges faced by the retail industry A good indicator of the resulting stress was the level of profit
warnings. Some 33% of general retailers issued at least one
in 2017 were not new. Existing operational
profit warning in 2017, up from 26% in 2016.10 This was
and structural issues behind the well- in stark contrast to food and drug retailers, only 10% of
known ‘margin vice’ — such as the shift whom warned, down from 25% the previous year.10 Most
to omni‑channel, increasing overheads, of the general retailer warnings came from the home and
big ticket spend subsector, 45% of which warned in 2017.10
discounting and overcapacity — were
A large number of these companies referenced consumer
exacerbated by intensifying external tensions spending, confidence and footfall as problems, indicating
such as the rising pressure on consumer pressures on the top line. These factors — plus many of those
spending, falling consumer confidence, and mentioned earlier, such as the pressure on non-food sales
in-store — appear to be reflected in the webcast attendees’
weaker sterling. As a result, 2017 saw the
view of the subsectors facing the greatest pressure in 2018,
industry’s existing issues intensify and have a with department stores and home and furniture retailers
cumulative effect. topping the list.
Against this background, four key trends are emerging
Existing operational and structural challenges will in retail:
continue to be exacerbated by external tensions
►► There is a declining appetite for the sector among some
Top line pressure Margin pressure key stakeholders, for example, credit insurers reducing or
Reduced consumer Promotions and discount withdrawing cover.
spending (disposal landscape, weak sterling ►► Many businesses have exhausted ‘no-regret’ self-help
income and confidence) measures like reviewing store portfolios, optimising
labour scheduling and seeking supply chain efficiencies.
►► Retailers are considering more fundamental measures
Margin vice
such as restructuring, disposals, retrenching back to core
areas and even Credit Valuation Adjustments (CVA).
Cost base pressure Structural change ►► Businesses are looking for external support from lenders
Increasing operating Continuing shift or their shareholders, ranging from cash injections
costs e.g., National to online and through to renegotiating banking governance.
Living Wage, omni‑channel model
Apprenticeship Levy It is not all doom and gloom: many retailers, particularly
those with strong brands and operational fitness, are
performing well, and certain subsectors will be more resilient
than others. But the reality is that the current trading
Pressure on cash Banking facilities
environment for retailers is tough, and that the cumulative
Also brings Need to manage
weight of these pressures does expose operational and
working capital Funding facilities in
financial weaknesses.
and capital pressure an uncertain
expenditure environment
challenges
10
Warning signs, Analysis of profit warnings: Issued by UK quoted
companies, Q4 2017, EYGM Limited, 2018.UK Retail sector: Trading in 2018 Rising to the challenge in the year ahead and beyond 5
2018 and beyond
The changing fabric of retail
Given the extreme and ongoing structural The future of retail can be considered through three lenses:
pressures on the retail sector’s operational The macroeconomic backdrop — and here it is vital
and financial state, it is clear that the handle 1 to remember how critical consumer spending is
to the overall UK economy. The good news is that
of the margin vice will continue to turn.
the squeeze on the consumer seen in 2017 should
Faced with such a situation, it is all too easy ease during 2018 as inflation falls back and real
for retail businesses to look inwards and wages start to rise again. However, the upside to
think about how to react internally to those consumer spending is likely to be limited by slower
employment growth and the uncertainty that
pressures, rather than directing at least
Brexit has caused around business investment.
some of their attention outwards to the So the wallet for UK retail is stable at best —
market, to consumers and the competition. and given the rising competitive intensity and
To survive and thrive, this is what they will proliferating alternative uses for that wallet,
‘stability’ for traditional retail appears unlikely.
need to do.6 UK Retail sector: Trading in 2018 Rising to the challenge in the year ahead and beyond
2018 and beyond
The changing fabric of retail
The changing fabric of retail itself, as the What will the UK retail landscape look like in
2 disruptors redefine consumer expectations by
bringing them control, transparency and speed.
3 10 years’ time? In our view, consumers will
become more asset-light, and will shift towards
Consumers are looking for the right experience: choosing a smaller number of products — because
in a recent EY survey of more than 2,500 UK the rest will be done for them by algorithms. So,
consumers, 86% of consumers noted shopping the fight for that small choice will be even more
experience as the top influencer on their buying intense, and consumer businesses will need to
behaviour.11 Given that footfall and online traffic focus less on product and even more on lifestyle.
are the new currency, the question is whether Similarly, the trust equation will become ever
retailers can provide an experience that competes more important. Obviously, this future will bring
with the leisure experience and is also consistent challenges. But for those players with good brands
across the ‘micro-moments’ that make up the and good strategic assets, there are exciting times
customer journey. This requires personalisation, ahead — and they absolutely can play to win.
which demands data. Retailers must be able to
use data to target customers across channels
and segment them by behaviour, while also — as
General Data Protection Regulation (GDPR) looms
— maintaining security around their customer
data. This brings us to trust, which is increasingly
imperative, with 74% of consumers telling us they
would boycott a brand that they didn’t trust,11 and
78% saying their purchasing decisions are strongly
influenced by how a brand treats its employees.11
86% 82% 78%
Good
Customer Brand’s clear
treatment
experience purpose
of staff
Impact on shopping habits
11
If brand + trust = value, how are you solving the equation?,
EYGM Limited, 2017UK Retail sector: Trading in 2018 Rising to the challenge in the year ahead and beyond 7 Summary The time for half‑measures is over The picture emerging from our retail trading 2018 webcast is of a fast-changing retail environment in which non‑food bricks-and-mortar retailers are especially exposed, and those with strong brands and differentiated online capabilities and customer experience have the edge. At the same time, the industry challenges seen over Christmas 2017 continue to be reflected in limited acquisition lending and lukewarm private equity interest, and the likelihood of more M&A driven by distress situations. Yet, some very interesting and positive things are happening in terms of innovation — particularly around consumer experiences and trust. A new retail paradigm demands new thinking — and for those able to develop and apply it — 2018 is the beginning, not the end.
UK
8 Retail sector: Trading in 2018 Rising to the challenge in the year ahead and
UK beyond
Retail sector: Trading in 2018 Rising to the challenge in the year ahead and beyond
8UK Retail sector: Trading in 2018 Rising to the challenge in the year ahead and beyond 9
Contacts
Julie Carlyle
Partner, Head of Retail
UK & Ireland
Ernst & Young LLP
T: + 44 20 7951 3034
E: jcarlyle@uk.ey.com
David Larsson
Partner, EY-Parthenon
UK & Ireland
Ernst & Young LLP
T: + 44 20 7951 8239
E: dlarsson@uk.ey.com
Jessica Clayton
Partner, Head of Retail for Transaction Advisory Services
UK & Ireland
Ernst & Young LLP
T: + 44 20 7951 3034
E: jclayton@uk.ey.com
Christian Mole
Associate Partner, Transaction Diligence
UK & Ireland
Ernst & Young LLP
T: + 44 20 7951 3034
E: cmole@uk.ey.com
Martin Carr
Strategic Retail Advisor
UK & Ireland
Ernst & Young LLP
T: + 44 20 7760 9219
E: mcarr3@uk.ey.comEY | Assurance | Tax | Transactions | Advisory
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