MHP Retail Report July 2011


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MHP Retail Report July 2011

  1. 1. Retail - an investment appraisal focusedon politics and public policyWhat is this report about?It is now over a year since the formation of the Coalition Government. With the wheels inmotion on some of the most radical reforms to public services and fiscal policy in a generation,we analyse the investment prospects for the retail sector over the next three to five years, froma political and public policy perspective.Our findings  The Government’s Localism Bill and a community ‘right to appeal’ gives communities a greater say on the retail mix in their vicinity – and could cause a headache for retail developers  An overall majority for the Scottish National Party in Holrood has increased the potential for SNP policies such as minimum pricing for alcohol and a so-called ‘Tesco Tax’ on large developments to be introduced in Scotland; if successful Westminster may follow suit  Retail has already been considered as part of the Government’s ‘Red Tape Challenge’, but issues such as Sunday trading laws remain contentious, with the Treasury pushing for liberalisation  Likewise employment law, health and safety and other cross-market issues are being re- evaluated every 4 months – the Government’s rhetoric on health and safety has been firmly in favour of a shift away from an apparent ‘compensation culture’  Work is underway in the European Commission on water ‘footprint’ labelling for products – pressure on retailers to keep ahead of public policy on sustainability and maximise the reputational and commercial benefits of sustainability initiatives will increase  Commercial and reputational risks will likely increase for companies failing the Government’s Carbon Reduction Commitments, but opportunities will increase for retailers to be Green Deal providers  The Government has now concluded its Waste Review with ambitious targets to make the UK a ‘zero waste’ economy. It is clear that pressure on retailers to reduce waste –in particular food waste – will only increase  Single issue campaigns and pressure groups are increasingly focused on high profile brands and retailers – digital mobilisation means that pressure groups can reach wider audiences Mandate, Hogarth & Penrose combined MHP, 60 Great Portland Street, London W1W 7RT T +44 (0)20 3128 8100 F +44 (0)20 3128 8171
  2. 2. and build momentum much more quickly and effectively; the impact on retailers is often immediate, particularly if direct action affects salesIntroductionThis paper analyses the future for retail in the short to medium term (three to five years). Morespecifically, the paper examines the implications for retailers and investors of the broaderpolitical and policy environment. It identifies key policy trends and analyses the potentialimpact on the sector.Political context: Uncertainty in Westminster, Holyrood andbeyondThe Coalition Government plans are radical. Its first priority is to cut the UK’s Cuts to thedeficit. The success of the programme to cut the deficit will hinge on deficitwhether the UK economy can shoulder austerity or falters as the spendingcuts bite.Although there are clearly tensions within the Coalition, we still expect UK GeneralWestminster’s centre-right coalition to last the course. It is certainly not in Election due bythe Lib Dem’s interest and in particular those of Nick Clegg’s to leave the 2015Coalition. Terrible local election results on 5 May, as well as near wipeout forthe Lib Dems in Scotland, removed any doubt that a general election is not inthe interests of Mr Clegg’s party.Therefore we expect the next generalelection is likely to be May 2015.Scotland went to the polls on 5th May, and voted in a majority SNP Scotland –administration in a landslide victory for the Nationalists – the first of its kind. Election MayThe clear result should provides some clarity for retailers in Scotland in the 2011coming months as policy becomes clear – for example on key issues such asalcohol pricing.The Scottish National Party had mooted a ‘Tesco tax’ on the square footage ‘Tesco’ taxof retail stores but this never made it into the Budget at the end of the last dismissedparliament. It was perceived to be a blunderbuss approach to deter out oftown retail developments. However a working majority in Holyrood maymean that the issue re-arises.The Scotland Bill, which enacts the recommendations of the Calman New tax powers Mandate, Hogarth & Penrose combined MHP, 60 Great Portland Street, London W1W 7RT T +44 (0)20 3128 8100 F +44 (0)20 3128 8171
  3. 3. Commission on devolution, is likely to have a significant impact on the future for Scottishtax system in Scotland. Key provisions in the Bill include increased tax-raising Parliamentpowers (including the ability to set a new variable rate of income tax) for the likelyScottish Parliament and the devolution of stamp duty, giving the ScottishParliament power to set its own tax rate on land transactions. If the Bill ispassed, which we expect it will be, the new powers for the ScottishParliament should be in place by 2015. First Minister Alex Salmond has madeclear to the Prime Minister that he will fight for as much autonomy aspossible, and Mr Cameron will likely not want to be seen to be ignoring thewill of the Scottish people.The European Parliament elections will be held in 2014, at which point new EU – EuropeanCommissioners will be appointed. Observers do not expect the direction of Parliamentpolicy on key issues such the Working Time Directive and the single market elections into alter dramatically. 2014Fiscal policyMinisters in London hope that the effect on retailers of the recession and Corporation taxpublic spending cuts will be offset to some extent by tax cuts. Having lower thanpreviously announced that it planned to cut the corporation tax rate to 24% the end of the Parliament, the Chancellor recently announced a doublingof the proposed tax cut this year of 2%. Accordingly, corporation tax by theend of this Parliament will be 23% - a full 5% lower than in 2010.VAT has already gone up and we do not expect to see another rise in the VAT expectednext two to three years. However with an election in 2015 the Government to remainmay well think it would be expedient to announce a small reduction in the broadly therun up to the Election and therefore we expect that a small reduction will be sameannounced by the Chancellor in the 2014 Budget.The Coalition hopes that these measures will help businesses grow even in No reduction inthe tough economic climate. However, the Government has little room for businessmanoeuvre. Indeed George Osborne has said that “a significant reduction in taxationoverall business taxation is simply and sadly unaffordable in the short term”.We expect tax to remain a challenge for the retail sector and the proportionof tax paid is unlikely to decrease significantly. General taxation onconsumers will remain at high levels and, coupled with relatively low wage Mandate, Hogarth & Penrose combined MHP, 60 Great Portland Street, London W1W 7RT T +44 (0)20 3128 8100 F +44 (0)20 3128 8171
  4. 4. increases and the squeeze on take home pay due to inflation, will impactnegatively on consumers’ purchasing power.The big issues for retailersNext 1-2 yearsPlanningThe Government’s localism agenda is altering the retail planning Impact ofenvironment, shifting limited planning powers to local government and localism agendacommunities. uncertainThe Government has made a specific commitment that a new ‘NationalPlanning Policy Framework’ will give local communities greater freedom toset their own policies and abolish regional strategies in favour of local andneighbourhood plans.Furthermore, as part of the provisions set out for communities in the Power toLocalism Bill, communities will be given a new right to draw up a designate the‘neighbourhood development plan’. As such, communities that take the desired retailopportunity to organise forums are likely to have the power to designate the mixdesired retail mix for their neighbourhood. This will include the location andlook of new developments and the use of existing premises; for example,these plans may prioritise independent stores over larger brands.Communities are also likely to be given a ‘community right to appeal’, where Communityan approved development contradicts the parameters of an existing right to appealneighbourhood plan.However, it is important to note that ‘neighbourhood development plans’ will Localism Bill yetonly exist where communities initiate the process. More specifically, they will to be passesbe at the bottom of a pyramid of local and national plans, and will be obligedto be broadly in line with the over-arching plans. Note also that the LocalismBill is still to be passed in Parliament and therefore subject to further changeand amendment.As such, we expect the changes to have a limited positive impact upon small Local councilsretailers, some of whom may benefit from neighbourhood plans which to take healthprioritise independent stores. Conversely, larger retail chains may find that into accountthe planning process becomes more challenging, as communities use their when makingnew powers. planning decisions Mandate, Hogarth & Penrose combined MHP, 60 Great Portland Street, London W1W 7RT T +44 (0)20 3128 8100 F +44 (0)20 3128 8171
  5. 5. Finally, and in line with the shift of power to local government, we expect tosee an increase in the number of local authorities banning fast foodbusinesses from opening near schools. Waltham Forest became the firstcouncil to introduce such a ban and others are following suit, buoyed by aHigh Court decision which ruled that councils ought to take into account thehealth and wellbeing of pupils when making planning decisions.The Government’s commitment to local and civic empowerment, as evidentin the Localism Bill, means that retailers must take more account of localgovernment and communities when making investment decisions about newdevelopments.AlcoholPrior to the May 2011 election, attempts by the Scottish National Party to Minimumbring in minimum alcohol pricing in the Alcohol Bill 2010 failed. However, we alcohol pricingexpect this issue to be raised during the course of the next ScottishParliament, particularly since the SNP now commands a majority. It is likelyto gain traction south of the border if supporters of minimum pricing see anopportunity to gain momentum.Earlier this year the UK Government launched the Public HealthResponsibility Deal in order to tap into the potential for businesses and otherorganisations to improve public health and tackle health inequalities throughtheir influence over food, alcohol, physical activity and health in theworkplace.Established by Andrew Lansley, the Health Secretary, it is likely to consider aproposal to require a proportion of alcohol advertising to be spent on thepromotion of responsible drinking. However, to date, there have been nostrong commitments or policy announcements.Red TapeThe Government recently chose the retail sector for the first in a series of Sunday trading“Red Tape Challenges” aimed at cutting unnecessary regulations. The public under scrutinyare being asked for their views on consumer information, restricted goods,weights and measures, trading requirements and Sunday trading. Mandate, Hogarth & Penrose combined MHP, 60 Great Portland Street, London W1W 7RT T +44 (0)20 3128 8100 F +44 (0)20 3128 8171
  6. 6. There have been tensions within the Coalition and across government withregard to Sunday trading. The Treasury were arguing for further liberalisationon the basis that it would lead to growth. However we understand that therewas a strong body of support for not making any changes and therefore wewould expect that there will be no liberalisation in the current Sundaytrading laws.Of more interest is the long term plan to force Departments to comment Governmentevery four months on the six cross-cutting themes across the campaign, aims to reducecovering: employment law; pensions; company law; equalities; health and ‘burden ofsafety; and environment legislation. If the Government achieves its aim, in regulation’theory retailers should enjoy a reduction in regulation, however in reality theimpact is unlikely to be of any real commercial significance.Next 3-5 yearsUtilitiesUtilities policy is the area with perhaps the clearest commercial risks and Energyopportunities for retailers, starting with energy. Most large retailers are performancecurrently required to display energy performance certificates and the certificatesGovernment is seriously considering making private commercial buildingsdisplay similar certificates. We expect this to offer smaller retailers anopportunity to negotiate over leasing arrangements and associated costs.However for the big retailers there will be an opportunity to become both Users andusers and providers of energy, a move that will be warmly welcomed by providers ofGovernment. Large retailers will increasingly take advantage of the energycommercial opportunity to sell energy back to the grid.As Paul Polman, CEO of Unilever, said last year, “those companies that wait Carbonto be forced into action or who see it solely in terms of reputation Reductionmanagement or CSR, will do too little too late and may not even survive.” CommitmentThose who are ahead of public policy and maximise the reputational benefits dataof such achievements are likely to offer a good return on investment.To take just one example, the data regarding the Government’s Carbon PartnershipReduction Commitment, aimed at non-energy intensive industries such as working Mandate, Hogarth & Penrose combined MHP, 60 Great Portland Street, London W1W 7RT T +44 (0)20 3128 8100 F +44 (0)20 3128 8171
  7. 7. retail, will soon be available as a league table. Those retailers that are takingaction now will avoid being ‘named and shamed’. Crucially, they can alsoreap the bottom line benefits as evidence shows that sustainability mattersto consumers, especially those at the higher end of the retail market1.And finally, we expect innovative business practices to deliver results. Forinstance, we are increasingly seeing large brands with a substantial presenceon the shelves in the UK working together to solve business issues. Heinz hasjust announced that it has been working in partnership with Coca Cola andwill soon adopt their ‘PlantBottles’. The PET plastic ‘PlantBottles’ are partiallymade from plant materials and have a lower reliance on non-renewableresources compared with traditional PET plastic bottles. Switching toPlantBottle is a step in Heinzs global sustainability initiative to reducegreenhouse gas emissions, solid waste, water consumption and energy usageat least 20 percent by 2015. We expect this to have a positive impact ontheir bottom line. The big retail brands are likely to adopt similar practices tosolve their business issues faster.Supply chain security and sourcingSustainability matters are central to retail because they are at the heart of Sustainabilitylong-term competitiveness. There are real potential benefits for retailers that at heart ofare prepared to take the lead and who will clearly get prime mover competitivenessadvantage. Water is a good example. A third of the world’s population live incountries that are experiencing water stress. Retailers that source flowersfrom Kenya, for example, will already be aware of the pressure on the watertable in Kenya and the impact that it has on the cost and quality of theproduct.The scale of potential geo-political threats arising from water shortages, Wateramongst other environmental issues, is enormous. This means that retailers ‘footprint’and investors need to anticipate the future direction of policy both at a labelling on thenational and international level. Building on schemes such as the EU horizonEmissions Trading Scheme, work is underway in Brussels to explore a similarmarket for water. From pasta to cotton, the ‘water’ footprints of manyproducts commonly found in UK retail stores are increasingly seen asproblematic by policy makers. Companies with high water usage, including1 The Future Laboratory, The Futures Report – Retail 2010, p. 170 (‘Sustainability hierarchy’) Mandate, Hogarth & Penrose combined MHP, 60 Great Portland Street, London W1W 7RT T +44 (0)20 3128 8100 F +44 (0)20 3128 8171
  8. 8. P&G and Coca Cola, have been focusing on this challenge for some time, withpositive results for their respective bottom lines. Those who choose to ignorethe warning signs from Whitehall and the European Commission are likely tofind themselves on the receiving end of regulations and tax changes over thenext few years.Last year retail market monitoring report, ‘Towards more efficient and fairer EC Retailretail services in the internal market for 2010’, was adopted by the European Market ServicesCommission (DG Internal Market). The Commission analysed the entire retail report – followchain from suppliers to consumers by accounting for all the relevant EU up legislationpolicy objectives, be they competitiveness, social, environmental or possibleconsumers. The subsequent report identified a series of problems for thesector and, should the European Parliament show an interest, this report maywell lead to EU action or indeed legislation.Should the Commission seek to address unfair contractual relations through Scrutiny oflegislation then there may well be cost implications for UK retailers, as they unfairmay be forced to review existing contractual arrangements with suppliers. contractual relations.However, the consensus is that outcomes will be broadly positive, Pressure toparticularly for larger retailers. The latter are likely to welcome better open upenforcement of the Services Directive as this would open up difficult markets difficult EUwithin the EU. marketsRISKSLocalismThe Government is actively considering whether to allow councils to retain New locally-locally-raised business rates and give local authorities the power to grant raisedbusiness rate discounts if they wish; the Local Government Resource Review is business ratedue to report in July 2011. possibleIn line with competition between countries over corporation tax, competition Competitionbetween neighbouring councils to have lower business rates and thereby likely to lowerattract businesses is likely to benefit retailers. Councils are also expected to business ratescompete by offering attractive deals, for example refunding business rates to Mandate, Hogarth & Penrose combined MHP, 60 Great Portland Street, London W1W 7RT T +44 (0)20 3128 8100 F +44 (0)20 3128 8171
  9. 9. a proportion of build cost over a number of years with a view to securingadditional rates in future.Employee costsFollowing recommendations from the Low Wage Commission, the NationalGovernment recently increased the National Minimum Wage (NMW). It refuses Minimumto be drawn on whether the NMW will be increased in years to come but it Wage maywould clearly be politically expedient to do so especially as the next election rise beforeapproaches. This is also an area where the Lib Dem partners in the coalition next generalwill be keen to be seen to be delivering something of benefit to low paid electionworkers.WasteThe Government recently published its Waste Policy Review, setting out its Europeanplans for a ‘zero waste’ economy. However, much UK waste policy is, and will Commissioncontinue to be, driven from Brussels. Resource efficiency is an EU priority, one to reviewof only seven flagship initiatives of the EU’s 2020 Strategy. Retailers will be recyclingfamiliar with the main Waste Framework Directive, which sets the basic directivesdefinitions relating to waste management and lays down waste managementprinciples such as the ‘polluter pays principle’. More specifically, retailers areincreasingly concerned about how the WEEE (Waste Electrical and ElectronicEquipment) Directive will be implemented in practice. The EuropeanParliament is currently arguing that consumers should have the right to‘unlimited take-back of small volume waste’ and stores should be obliged tosort ‘reusable’ from ‘unusable’ waste.In 2012 the European Commission plans to undertake a full review of EUrecycling directives, aligning product-specific waste legislation (including theDirectives on end-of-life vehicles, batteries and packaging) to the WasteFramework Directive. More changes are in the pipeline but the implications forUK retailers are not yet clear. AnaerobicWhat is clear is that this policy area is hugely significant. Get it wrong and it digestion andwill directly impact on the profitability of retailers. Get it right and innovative similardevelopments such as anaerobic digestion could benefit local communities innovationsand retail revenues. likely to benefitAlongside the Waste Review, the UK Government also published an anaerobic retailers Mandate, Hogarth & Penrose combined MHP, 60 Great Portland Street, London W1W 7RT T +44 (0)20 3128 8100 F +44 (0)20 3128 8171
  10. 10. digestion strategy aimed at increasing energy derived from waste through theanaerobic digestion process; they are under pressure from retailers and othersto provide a level playing field so as to promote investment in this area.Countries such as Germany are leading the way in such innovative wasteprogrammes and businesses are benefitting.More specifically, retailers could benefit because there are financial incentivesfor them to use anaerobic digestion; it is among the technologies that receiveadditional support in the form of multiple Renewables Obligation Certificates(ROCs). The latter is a green certificate with a cash value issued to anaccredited generator for eligible renewable electricity generated within theUK. Retailers using anaerobic digestion to generate heat will also benefitfinancially from the 2011 introduction of the Renewable Heat Incentive.Therefore early indications are that, subject to sensible regulation, UK retailersmay also have an opportunity to gain from such innovations.TobaccoCampaigns, led by health charities, to ban tobacco displays are gaining Tobaccomomentum. However, the Health Secretary, Andrew Lansley, is known to be in display bantwo minds regarding the ban due to come into force for large shops in 2011 uncertainand 2013 for smaller shops.If the ban on tobacco displays comes into force, there are cost implications for Costsmaller retailers regarding changing their displays, in addition to a potential implicationsloss of revenue arising from tobacco. for smaller retailersEmployee costsThe EU Council of Ministers rejected a recent proposal from the European EuropeanParliament to legislate for 20 weeks of maternity leave at full pay. They Parliament’sexpressed concerns regarding the cost implications of extending paid proposalmaternity leave. They also rejected plans to include paternity leave in a draft aboutDirective on maternity leave. maternity leave rejectedThe Council concluded that the European Commissions original proposal to by memberextend the minimum length of maternity leave from 14 to 18 weeks could be a states Mandate, Hogarth & Penrose combined MHP, 60 Great Portland Street, London W1W 7RT T +44 (0)20 3128 8100 F +44 (0)20 3128 8171
  11. 11. more acceptable basis for a compromise than the European Parliamentsproposed amendments.Without the EU Council’s approval, the proposal cannot now become EU law.The EU Presidency will therefore now consider how best to continue with thedraft Directive. The very earliest that these rules could have been endorsed byeach member state is not for at least another five years.Note that the UK Government lobbied heavily against the EuropeanParliament’s proposal, and HM Treasury in particular is concerned about thecost to UK Plc of any changes.However, Nick Clegg is personally committed to shared parental leave. Herecently set out his vision for a "properly flexible" system of shared parentalleave in Britain by 2015, condemned Britains "Edwardian" system that placesthe burden of childcare on mothers and discourages fathers from taking acentral role. We expect the Department for Business, Innovation and Skills to Clegg’s visionopen a consultation on shared parental leave shortly. for shared parental leaveWe expect minor changes to the existing legislation prior to the next general in UK by 2015election, primarily because the Liberal Democrats will negotiate changes inorder to deliver on one of their key priorities.Consumer creditLabour MP Stella Creasy recently introduced a private member’s bill, ‘The Regulation ofConsumer Credit (Regulation and Advice) Bill’. It aims to impose certain limits consumeron consumer credit interest rates and charges; to establish a levy on credit credit likelyand debit card providers to fund the provision of debt advice services; and, tomake other measures relating to the regulation of, and availability of adviceon, consumer credit.In common with most private members bills it was derailed, however itsucceeded in putting the issue of loan sharks and consumer credit high on thepolitical agenda. Therefore retailers who have successful store cards which aresignificant sources of profit will need to be prepared to see their profit marginreduced as they come under pressure to reduce their APR on store cards.We expect this issue to be re-visited by the Government and legislativechanges to be made. As such, retailers should consider reviewing customer Mandate, Hogarth & Penrose combined MHP, 60 Great Portland Street, London W1W 7RT T +44 (0)20 3128 8100 F +44 (0)20 3128 8171
  12. 12. store card programmes.Pressure groupsThere has been a significant rise in pressure groups targeting high profile The impact ofretailers and other companies in the UK. Only recently, UK Uncut, a group single-issueopposed to the Government’s cuts to public services and tax avoidance, shut campaignsdown high street retailers through direct action protests.UK Uncut is unlikely to achieve major concessions from companies or theGovernment but this is part of a growing trend. We have seen effective single-issue campaigns, often led by high profile celebrities, gain increasing tractionamongst consumers and decision-makers. Only this year major retailers,including ASDA and TESCO, changed their supply chain policies on tuna,following pressure from Hugh Fearnley Whittingstall’s successful ‘Fish Fight’campaign, consumers and Greenpeace.Single issue campaigns are increasingly focused on high profile brands as itsan effective way to communicate their message. A recent example isGreenpeace’s advertisement highlighting the use of palm oil in Nestlé’s KitKats which was part of wider campaign about the deforestation of rainforests.Digital mobilisation also means that pressure groups can reach wideraudiences and build momentum much more quickly and effectively.The impact on retailers is immediate, particularly if direct action affects sales.More interesting is the impact on a company’s corporate reputation in themedium to long term and the cost implications of any changes to the businessmodel or supply chain management. If you have any questions or require further information, please send an email to Fiona Holroyde at Fiona. or Lucinda Kemeny at or call +44 (0)20 3128 8100 Mandate, Hogarth & Penrose combined MHP, 60 Great Portland Street, London W1W 7RT T +44 (0)20 3128 8100 F +44 (0)20 3128 8171