Webloyalty Retail Research - The Economics of Retail

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In this, the first part of the Webloyalty Future of Retail research report, we look in detail at the current market, and how the retail sector has been affected. …

In this, the first part of the Webloyalty Future of Retail research report, we look in detail at the current market, and how the retail sector has been affected.

This part also discusses possible outcomes for the retail sector in terms of growth between 2013 and 2018.

To view and download the full research report, head to the Webloyalty website:

http://www.webloyalty.co.uk/images/webloyalty_retail_research.pdf

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  • 1. 1. The economics of retail
  • 2. Section 1 The future of retail The supply picture economics of retail The economics of retail Introduction •  Since the beginning of the year the economy has already shown some signs of life with modest GDP growth and a rise in consumer sentiment. While this appears to be sustainable, and is welcome, the degree of the pick-up is very shallow. •  The broad upshot is that by 2018 things will have normalised; growth will have resumed, confidence will have strengthened, and spending will be more robust. However, this will be far from a boom period and we will not see a return to the economic characteristics of the pre-recession period. •  In our view, the recovery over the next five years is likely to remain on this trajectory. This is mainly a function of three factors. •  Naturally, there are downside and upside risks to this view and in this section we have presented a more optimistic and a pessimistic scenario. The probability of these forecasts materialising is slightly lower, but they are still firmly within the realm of possibility. •  First, the extensive levels of debt across both the public and household sectors, which will act as a brake on growth and weaken the contribution of a consumer driven recovery. •  Second, the negative headwinds from other parts of the global economy – most notably the Eurozone – which lessen the prospect of an export driven economy. •  And, third, the further unwinding of some unproductive firms which are impelled by the current low interest rate policy and will likely fall into failure as rates rise. This, and the need to close the productivity gap which has opened up during the downturn, will result in higher unemployment. •  This latter point is particularly important as there is a very real prospect of the recovery being a ‘jobless’ one, especially over the next couple of years. This will clearly have a dampening impact on both spending and sentiment. 4 The future of retail: the supply picture Prepared for Webloyalty by Conlumino August 2013 •  Whichever forecast materialises, as we will explore later in the report, what will constitute economic normality as a result has some fundamental implications for the retail sector.
  • 3. The future of retail Section 1 The supply picture economics of retail The economic context GDP growth •  In assessing the next five years in retail, the logical place to start is to understand how the overall economy will perform. While GDP numbers can be fairly esoteric, they do provide a shorthand which neatly reflects the underlying reality on the ground which, in turn, colours consumer sentiment and decision making. •  The chart below shows our GDP forecasts for the period 2013 to 2018. Our central assumption (which represents a realistic view) is the blue line. This is what we expect to happen and is the assumption on which we base our retail forecasts. •  •  •  Comparatively, the pessimistic view assumes sluggish export growth and a rising unemployment profile in the near term. This ‘jobless recovery’ continues to put downward pressure on wage settlements which, coupled with high inflation, undermines domestic demand. •  We have also provided two other forecasts: an optimistic view (which is shown in green) and a pessimistic view (shown in red). The likelihood of these forecasts materialising is slightly lower, but they are both within the realm of possibility. In very basic terms, the optimistic view assumes strong export growth, which in turn presumes a degree of stability in the Eurozone. This helps to bolster employment levels which, later in the forecast period, feeds through into wage and spending growth which further boost the economy. Under this scenario we have assumed that no further government cuts, over and above those already pencilled in, are required. It is worth noting that the scenarios differ by degree rather than direction in that they all broadly follow the same recovery pattern. GDP growth pattern Figures on the chart are percentage annual growth rates Total growth (optimistic): 17.0% 3.6 2.7 2.1 Total growth (realistic) 13.9% 1.5 The future of retail: the supply picture Prepared for Webloyalty by Conlumino 2.2 1.8 1.9 2015 2016 1.9 0.3 2012 Growth rates represent the total growth of the economy over the 2012 to 2018 period. 5 2.9 1.0 0.2 9.4% 3.1 2.7 1.8 1.1 Total growth (pessimistic): 2.3 2.9 2.4 August 2013 2013 2014 2017 2018
  • 4. Section 1 The future of retail The supply picture economics of retail Scenarios Different economic outcomes •  GDP numbers are all well and good, but what’s more important is how they impact the realities on the ground and what the different scenarios will look like from the consumer perspective. •  In the tables below we have mapped what we expect the macro-economic and consumer environment to look like under the various scenarios. Optimistic scenario Realistic scenario Pessimistic scenario What things look like on the ground under this scenario What things look like on the ground under this scenario What things look like on the ground under this scenario Under this scenario the economy will bounce back quickly after 2013 and, although some weaknesses will remain, things will start to feel more like they did pre-recession by the end of the forecast period. Under this scenario the economy will not resume solid growth until 2015 and even then will remain below par for the remainder of the forecast period. Things will become more positive, but not as they were pre-recession. Under this scenario the economy will become more robust in 2015 but thereafter will lack momentum and will see growth flat-line. Things will not be as negative as they were midrecession but many will still feel recessionary. Unemployment (2018): Unemployment (2018): Unemployment (2018): 5.1% (2013: 7.9%) 6.3% (2013: 7.9%) 7.6% (2013: 7.9%) Inflation (2018): Inflation (2018): Inflation (2018): 1.6% (2013: 2.8%) 2.8% (2013: 2.8%) 3.1% (2013: 2.8%) Disposable income (2018): Disposable income (2018): Disposable income (2018): 3.9% (2013: 0.1%) 2.2% (2013: 0.1%) 1.3% (2013: 0.1%) Sentiment (2018): Sentiment (2018): Sentiment (2018): +19.4 (2013: -29.3) +7.9 (2013: -29.3) +4.6 (2013: -29.3) 6 The future of retail: the supply picture Prepared for Webloyalty by Conlumino August 2013
  • 5. The future of retail Section 1 The supply picture economics of retail Retail spend growth Different scenarios •  Using the underlying economic assumptions, we have mapped out how retail spending growth might look under the different scenarios. •  •  The chart below shows the growth rates for each year as well as the value of all retail spending at the start and end of the forecast period. The total growth rates for the whole period are shown in the boxes under the chart; these represent how much retail will have grown by 2018 from the start point of 2012. The difference between the optimistic and realistic scenarios is £10.2bn of spending across the period; between the pessimistic and realistic scenarios the difference is £10.8bn. Overall retail spend and growth rates for different economic scenarios Figures on the chart are percentages 3.9 Retail spend at start (2012) 3.6 3.3 3.5 2.9 £310.5bn Retail spend at end (2018) 3.3 3.1 3.1 £376.8bn 3.1 3.0 2.3 2.5 3.0 3.7 2.6 £310.5bn 2.7 £366.6bn 2.2 1.7 1.5 1.6 £355.8bn 0.9 £310.5bn 1.2 0.5 2012 2013 2014 2015 2016 2017 Optimistic scenario 7 Realistic scenario Pessimistic scenario Total growth: 21.4% Total growth: 18.1% Total growth: 14.6% The future of retail: the supply picture Prepared for Webloyalty by Conlumino August 2013 2018
  • 6. Section 1 The future of retail The supply picture structure of retail Overview of retail Today and tomorrow Retail spend segmentation by sector Figures in the pie charts are percentages Food & grocery, health & beauty and clothing & footwear will be the vanguard of growth over this period, reflecting their less discretionary nature. Food in particular will continue to outperform, with persistently high inflation meaning that the sector accounts for a rising proportion of overall retail spend, despite efforts by shoppers to offset the impact. Conversely, the sectors most closely related to the housing market will underperform. 2013: 2018: Food & Grocery Other retail Clothing & Footwear Home Electricals Health & Beauty DIY & Gardening Home Entertainment Books Total growth of each retail sector, 2013-18 All figures are percentages 22.9 21.1 17.2 16.1 12.8 9.1 7.7 2.5 -6.2 Food 8 H&B The future of retail: the supply picture Prepared for Webloyalty by Conlumino C&F Total August 2013 Electricals Home Other DIY Books -25.9 HE