BLOOD on the high street! Retailers in crisis! The headlines triggered by the consumer slowdown, and by the fearful reaction of the nation’s retailers to the quieting of their tills, could hardly have been more apocalyptic. The nation’s high street chains are, we are told by the CBI, facing their worst trading conditions for 22 years.
Well, maybe. There is no question that the last glowing embers of a consumer boom that had already been slowly fizzling for years have now more or less burned out. A nation of shopaholics is, reluctantly, trying to clamber on to the wagon of prudence.
This week the latest official high street sales figures may well produce another bout of wailing from the retail sector. But the reality is not quite as grim as the industry’s miserable snivelling suggests.
Even when the consumer boom was at its crackling best, and sales growth was blazing away at annual rates as high as 7 per cent, the story from the retail groups was that it was all tough going.
Things are a whole lot tougher now. But the volume of griping from the retail industry is as much a product of the intensity of competition faced by individual companies as it is of overall trends in consumer spending.
All the horror stories drown out the truth that sales are still, on the whole, growing — just rather more slowly.
In September, the British Retail Consortium reported that the value of sales was 3.1 per cent higher than a year before. The most optimistic comment it could muster was that matters were “no worse”.
It now seems likely that we are going to see several years in which consumer spending rises more slowly, albeit from the high existing level that has emerged from the boom.
Retailers will simply have to get used to a situation in which their share of further gains in national income is, for a time, less than it was. But in an environment in which competition was already fierce, this will make it cut-throat. For ever-more-canny consumers, that will often be no bad thing. For the retailers, it will be exceptionally hard.
Facing these challenges, many retail groups may finally be forced to rethink business models that have been driven by a relentless expansion of their floorspace.
When the retail sector complains about the consumer slowdown, it likes to quote not total sales, but what it calls “like-for-like” sales, which are supposed to strip out changes in floorspace in shops. So when the BRC found total sales were 3 per cent up year-on-year in September, it emphasised instead that, “like for like”, they were down 0.8 per cent. Like-for-like sales had fallen for seven out of nine months, it protested.
Yet that, of course, is a product of decisions by managements to keep expanding their stores. Now the industry may have to accept that space may be reaching its final frontier.
This, though, is a minor issue compared with two looming challenges that confront retail managements over the longer term, and which may transform the face of the nation’s high streets.
In an industry that is already a battle for survival of the fittest, the future evolution of consumer spending patterns and of retail productivity may determine which companies prosper and which become extinct.
Some familiar names may vanish. Just as C&A has disappeared from the high street, could M&S follow in 20 years? Changing shopping habits, as spending patterns mutate with further rises in living standards, will amplify the pressures on retailers. As a proportion of total consumer spending, what we pay for retail goods has been steadily sliding since the 1960s — from 60 per cent then, to only 34 per cent now. If the trend of the past 20 years continues, Capital Economics projects that retail sales will take only about a fifth of what we spend on other things by 2030, as more and more of our rising income goes to services such as travel, recreation and restaurants. In turn, this will have enormous implications for retailers’ fortunes.
Capital’s projections show that, for example, the proportion of total spending going on food and drink would drop from 9 per cent now to just 1 per cent in a couple of decades. Clothing and household goods would also see their share of spending drop.
In such a testing world, productivity performance will be a big deciding factor in sorting out the winners and losers. And here, the research points to enormous opportunities.
Studies by economists at the US Conference Board have shown that not only is the productivity gap between the US and Britain driven mainly by the economies’ use of information technology, but that the differences are concentrated in the retail, wholesale and financial industries.
A large part of America’s potent productivity performance is put down to an IT- driven surge in efficiency in US retailing. There, growth in “total factor productivity” — which measures how effectively businesses are using both capital and labour — leapt from 1 per cent in the first half of the 1990s, to 5.4 per cent in the second half.
In UK retailing there was some improvement, but from minus 1.1 per cent to only 1.2 per cent. That modest turnaround and the much sharper improvement in the US point to the big chance for Britain’s retail groups.
New research from John Van Reenen of the Centre for Economic Performance at the London School of Economics shows, however, that the onus is on managements to grasp this. Mr Van Reenen’s work suggests that 80 per cent of the performance gap is down to the effectiveness with which IT was used. US managements were simply better at this.
In the ever-harsher climate of UK retailing, much of companies’ success will continue to depend on the traditional arts of offering attractive products at appealing prices.
But the duller matters of systems and processes will weigh ever more heavily. More and more, what will count is not just what they sell but how they sell it.
