Mintel has just published its annual review of the retail sector, the UK Retail Rankings - UK, April 2018. The main body of this report is the basic data on the top 629 retailers in the UK. We give, in so far as they are available, statistics on sales, profits and outlets, together with some key ratios, for these companies.

We also publish a brief view of where the sector is going and some of the big issues affecting it. The following is an edited version of that review.

Failing retailers

The retail sector appeals to be in turmoil. There have been an unprecedented number of failures or retailers reported to be in trouble just in the first quarter of 2018. It would be easy to go on to say that the whole retail sector and particularly the store based sector, is in deep trouble.

But it is not as easy as that. There are some general themes, but most of the businesses which have been closed down have done so for their own specific problems.

There may be underlying themes and it would be true to say that many of the retailers that have sought support through CVAs have over-expanded and had too much space. But that overexpansion has usually been exposed by their own underperformance, it has not necessarily been because of the success of online retailing.

2017 was not a bad year

Whatever one may have expected for 2017 – and expectations were low at the beginning of the year – it turned out to be not too bad at all and it ended with a good Christmas. Retail sales grew by 4.4% for the year, which was better than in 2016 (3.7%), but that masks a reduction in volume growth because of the increase in inflation.

The macro-economic background worsened for consumers. Inflation rose and for almost all the year real incomes were falling. Interest rates rose in November for the first time in 10 years and the housing market was flat (at best). The uncertainty over Brexit continued.

Against that background the retail sector as a whole put in a creditable performance and whatever one may hear about the progress of online retailing, store based retailers increased sales as well, as the next chart shows. Note that the figures for food retailers and non-food retailers are for store based retailers only, though they include any online sales made by those retailers. The electricals figures include both the “electrical household appliances” sector and the “computers and telecoms”. Mixed goods is mainly department stores and broad range businesses such as the non-food discounters.

Figure 1: Retail sales growth, 2017
[graphic: image 1]
Source: Office for National Statistics/Mintel

All the major sectors increased sales, though there were areas of weakness such as DIY, down 1.7% reflecting the problems of Bunnings/Homebase as much as underlying demand. For all the complaints by clothing retailers even the clothing retailers managed growth of 6.6%. But that was thanks to the smaller retailers as the larger ones grew by only 3.7%, something we’ll return to.

Failures – some common reasons

So with that background why have there been so many failures and signs of severe problems?

It’s hard to generalise about failures. Most companies seem to fail because of their own specific failings, but there are some common themes:

  • The format is no longer relevant – as with Toys R Us, Maplin and Kleeneze.

  • Over-expansion – Conviviality and Maplin, again.

  • Poor reaction to a changing competitive environment – most of the fashion retailers. We try to keep this third reason general because to blame online retailing directly would be to oversimplify what is happening.

Toys R Us – format redundant

Toys R Us went into administration last Autumn and closed down after Christmas. The Toy superstore is a format past its sell-by date. It was a highly successful ground breaking format in the 1970s and 1980s, but its fundamental weaknesses have been exposed by increased competition. First there were the supermarkets, opening ever larger stores, and Argos expanded rapidly as well. But these formats could flex their space giving greater prominence to toys at Christmas. Toys R Us had no such option and had to cope with a business which was marginally profitable at best for 11 months of the year. Then came online shopping and Amazon in particular and that was too much for it.

It is interesting to see Hamleys opening small units in railway stations (London Bridge opened in March) and it may well be that such small units catering to distress purchases may perform rather better through the year.

Maplin – who wants it?

Maplin over-expanded and then as online competition grew, the business had no answer. Its rather eclectic product offer and preference for the tertiary sites that suited that offer were no protection. Online retailers could sell a wider range to its tech-savvy customer base. A lot of the product offer (computer components) was highly specialised, but ideally suited to being sold online as it was geared towards internet users anyway.

There was no interest in the chain and the administrators seemed to be closing it down well before the announcement of final closure was made.

Conviviality – hubris

This seems to have been a case of over-expansion through unrelated acquisitions. Why, after all, should a symbol group operator buy into drinks wholesaling? The end was messy as the company revealed it had a £30 million tax bill that it could not pay and the Chief Executive made a rapid departure. The wholesaling and symbol group sides of the business have found new buyers, but there are a number of backers nursing substantial losses.

Kleeneze – who?

It’s true that for many people the reaction to the news that Kleeneze went into administration would have been “I didn’t know it was still around”. But this is a clear case of a business which has been overtaken by other developments. It’s not just a question of online growth, but there just isn’t enough demand for door to door sales of homewares, especially given the delay between ordering the goods and receiving them. There is probably also a lack of people who want to distribute the catalogues. There was a brief period some 20 years ago when Betterware was a big growth business. Even then the average life of an agent was less than two cycles (a cycle being delivery of catalogues, returning for the order and then returning to deliver the goods). It is likely that continuing to attract agents is a major problem. It is unlikely that anyone will rescue Kleeneze and that will give Betterware, the only remaining competitor, a little breathing space.

Furniture – Easy come, easy go

Two significant players failed, MultiYork and its sister company Feather and Black went just before Christmas and Warren Evans soon after. Carpetright is in the middle of negotiating a CVA. The problem for furniture companies is how to establish a USP in a sector where the majority of product is made to order. The failed companies were all pitched at the upper end of the mass market and it is not the first time that MultiYork has come close to being closed down. Carpetright is the leader in the lower to middle mass market. The slowdown in the housing market was probably the main reason. There’s always an “Easy come, Easy go” aspect to furniture retailing, apart from IKEA which is the only furniture retailer to have successfully developed economies of scale, in its case through flat-pack.

Fashion – so much more demanding in the internet era

There have not been many actual failures in fashion in the last year – East, which is in administration, hoping for a buyer, Shoon, which has been through an administration before, and two brands bought by Edinburgh Woollen Mill – Jaeger and Berwin & Berwin, a tiny, formal menswear brand.

But there’s a long list of fashion retailers showing signs of distress. New Look is going through a CVA as we write.

(A CVA is a Companies voluntary agreement – creditors, often the landlords, agree measures such as reducing rents, to take the pressure off a company’s balance sheet. This is not the same as going through an administration, though the two processes have something in common. The main difference is that in a CVA the company’s management retains control, in an administration the running of the business is taken over by administrators. Neither is the same as going into receivership when the company is broken up and the assets sold. )

New Look is just the biggest retailer to have to go through a CVA. Smaller ones such as Select and Joy are going through a similar process. But others have shown signs of distress as well. House of Fraser was supposedly looking for rent reductions on some stores and Arcadia was reported to be asking suppliers for price cuts. Both companies are known to be doing poorly at the moment – House of Fraser since being taken over by Sanpower and Arcadia since profitability at Topshop began to fall.

Why Now – and what does it say about the high street?

It’s worth noting that the second reason given for failure above is timeless. Some managements are all too ready to be persuaded that the scope for expansion is endless or that acquisitions are a short cut to growth. Some (Bunnings) think that success in one country means that they will succeed anywhere, others (Conviviality) that success in one sector means that it will succeed in another only distantly related.

But there is one major factor that has changed – the growth in online retailing. It’s easy to get this out of proportion. In 2017, online accounted for 16.6% of all retail sales, but only just over half of that, 8.6%, was through internet pure players. The trouble is that the vast majority of that pure player share was in non-foods and that was heavily geared to electricals and fashion.

Online still the fastest growing element in retailing

There’s a tendency then to say that the reason for the success of online is that it is superior to store based retailing and that the days of the high street are therefore numbered. But we think that is a misreading of what is going on.

Online is certainly growing. It is new and it is an immature channel of retailing. It has a novelty value and it shows few signs of slowing down. We think that there is no doubt that it will continue to grow.

But it is not as easy as that, partly because online works well in conjunction with stores and partly because of the online retailers themselves and also because there is evidence that online’s share can and will peak.

The multi-channel option – long term makes most sense

John Lewis is the most impressive exponent of the multi-channel option. Online takes approaching 40% of its department store sales. But those online sales depend on the strength of the store based proposition and the trust built up in the brand over many years. John Lewis is the best demonstration of how online and stores can complement each other. Others are following, though none are as advanced as John Lewis.

Online and stores complement each other in that the former can offer convenience (buy when and where you like) and breadth of range (far more than can be offered in-store). The latter can offer the in-store experience, service from trained knowledgeable staff and the ability to try out and try on goods before buying. In multi-channel retailing the two can be combined as customers are likely to have seen the goods first and be happiest buying from a retailer they trust

Competition – so much more than stores vs online

There’s another reason why describing the competitive scenario simply in terms of online vs the high street is very misleading.

Retailing is all about having the right merchandise at the right time in the right place. And of those three having the right merchandise has to be the most important. Retailers have to have goods that people want to buy. In fashion that means understanding current fashion trends and being prepared to take risks. Young fashion in the UK is edgier than in many other countries. But in the UK a retailer that doesn’t have ranges that are at the forefront of current trends will suffer. We think that many of the online retailers – such as ASOS, boohoo and others – have young, dynamic management better able to provide such ranges. And if that is true of young fashion, there is a trickle down effect on older ranges as well, because older customers want trend-led styles that are more wearable.

One of the main problems with the high street fashion retailers is that they have gone risk averse. They have responded to the challenge from these new online retailers by “walking away”. That is especially true of Marks & Spencer and we think it is true of Topshop as well. It was obvious when we analysed the Christmas shopping performances (see Christmas shopping habits -UK, February 2018) that high street retailers could perform just as well as their online counterparts (Joules, Fat Face, Seasalt, TK Maxx, Superdry spring to mind) but they had to have a good understanding of their customer base and have a unique offering that makes them stand out from the competition.

Rabbits in the headlights

The reaction of too many retailers in the face of online competition has been that of rabbits in the headlights – first shock and complete immobility followed by a startled reaction in completely the wrong direction. In the case of too many high street retailers it has been towards conservatism and low risk merchandise and that has been completely the wrong direction. One good example of what they should have been doing is John Lewis, again. John Lewis has substantially boosted its clothing business through the development of more fashionable own brand ranges.

The siren call of diversification

We think that another mistaken reaction is to diversify the range. New Look is a good example of this. It reacted to weak trading by adding new ranges – men, maternity, outsize, petites, older fashions – and the result is a confused range where New Look customers will find much less of what they expect, but the new targets are unlikely to go into the shop because they don’t associate the brand with what’s now on offer. The accountant’s attitude may be to say that the more ranges on offer, the more customers will come into the store and the higher sales will be. But in practice, the actual result of all these brand extensions is likely to be lower sales.

When will online peak? The example of booksellers

We think that the online fashion retailers are outperforming their potential at the moment and there is no sign that their growth is slowing.

But the example of booksellers suggests to us that there is a natural limit for online retailers.

Books was one of the first products to be sold online. It is where Amazon started. An online retailer can make a wide range available to everyone at any time, not just to shoppers in major city centres. Then with the development of e-books there was a major shift to buying online. But a couple of years ago the trend reversed. Customers seemed to rediscover the pleasure of bookshops and they clawed back some of their lost market share.

We think that will happen in other sectors as well. After all, shopping for fashion should be a pleasurable experience and being able to try on the goods should be a great advantage. Hanging around waiting for delivery and then having to return unwanted goods are major disadvantages in shopping online. So we think that the fashion retailers will also reach a peak at some stage, though we hesitate to try to forecast when.

Much the same could be true for electricals. We haven’t discussed electrical goods retailing here. The product is well suited to being sold online, but Currys, in particular, is fighting back with a revitalised format, which combined with Carphone Warehouse makes the most of the advantages of shopping in-store.

Prospects for the high street

For all the growth in online retailing, store based retailer’s sales (including their own online sales) have continued to grow. It’s probably true as one footfall company said recently, that footfall is at a ten year low, but that is not a very helpful statistic as it ignores the fact that store based retailers also trade online and that it is misleadingly artificial to try to distinguish between the store based and online sales of such retailers. The two sides depend on and reinforce each other.

So we are optimistic for the future of our high streets. We think that online and store-based sales will reach an equilibrium at some stage soon. Both have their place and they complement each other. We also think, though we have not argued that in this section, that high streets need to develop. They need to be more than just places to buy stuff. They need to be a focus for leisure activities and immediate meal solutions. The shift of population back into inner cities should boost the attraction of many local centres, they just need to be prepare to take advantage of the opportunities.

Short term prospects 2018 and into 2019 – not too bad at all

The rate of growth seen in 2017 has largely carried over into 2018. After a year of squeezed incomes, real incomes are growing again. Sterling has been relatively strong so that will lead to lower rates of inflation (though the impact will be deferred because most retailers cover their currency obligations forward). Consumer confidence has held up well through 2017 as the next chart of Mintel’s own consumer confidence tracker shows.

The two questions illustrated next are how do current finances compare with a year ago and how do people feel about the state of their finances. The message of the chart is that people were aware that their incomes were being squeezed, but it didn’t bother them.

Figure 2: Consumer confidence, Jan 2014- Feb 2018
Base: 2,000 internet users aged 16+
[graphic: image 2]
Source: Lightspeed/Mintel

The major potential negative factor is interest rates. The Bank of England seems to be signalling that there will be two more quarter point increases this year and that could hurt. The single point increase of last November seems to have had little impact, but two more could have a serious impact on the housing market.

But at this stage it seems to be right to be sanguine about the prospects for 2018. The fears we were expressing 6 months ago now seem to be overstated. There is still uncertainty, not least over Brexit, but it looks as if the prospect for the next 12 months is for steady modest growth in retail sales.

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