It has been a brutal winter for Britain’s high street. Restaurateurs, clothing and electronics outlets and car retailers have all sounded the alarm in recent weeks. A spike in insolvencies and restructurings have hit well-known brands including Toys R Us, Maplin, Mothercare, New Look, Prezzo and Bargain Booze. Many high street favourites won’t see out the year. The upshot is that shopping thoroughfares — for many Britons still the artery of the local community — face a heart attack as severe as anything seen since the financial crisis. So what is behind this retail pain? What, if anything, should be done to address the sector’s woes?
Let’s dismiss the usual culprit. Consumer spending has remained remarkably resilient in recent months. It takes more than “remoaning” and political incompetence to stop Britons shopping. As one pension fund manager recently remarked to me: “The UK consumer is like a water buffalo; dragging it down is not an easy task.” Consumer spending has grown by 1.2 per cent in real terms over the last year — a growth rate not markedly dissimilar from the long-term average of 2 per cent. This strength stems from an unemployment rate hovering around a 43-year low. Retail chief executives lining up to blame a deteriorating consumer backdrop do not (yet) have facts on their side. Four other factors have far more relevance to the current malaise.
First, operating costs have surged. The introduction of the apprenticeship levy on the payroll of larger employers is a simple payroll tax given a racier name. The minimum wage has risen by 11 per cent in real terms in recent years and the collapse in the pound has meant a 15 per cent surge in import costs since the end of 2015. Add in the disruption of the first meaningful change to business rates since 2010 and you have a co-ordinated spike in the costs of delivering a face-to-face retail experience.
Second, in standard economic theory these additional costs of supply are shared between businesses and consumers. While this ability to “pass through” higher operating costs always varies between brands and sectors, a theme of recent times has been how much of these additional costs has been swallowed by retail margins and insulated from price increases. Average shop prices have now been falling continuously since the second quarter of 2013, according to the British Retail Consortium.
This lack of pricing power stems from overcapacity on the high street. While Times readers will be split on the impact of historically low interest rates, this low cost of capital has triggered a remarkable expansion in retail outlets. The capacity added over the past five years now acts as a constraint to forcing through price increases. This “buyers’ market” will remain in place until the most inefficient operators concede defeat and pull out.
Third, consumer patterns are changing fast. Almost 20p in every pound is now spent online — a number that has doubled since the start of the decade. Rather than slowing down, there is evidence from the government’s digital efficiency report that this pace is set to accelerate as traditional forms of face-to-face retailing capitulate in the face of lower-cost operating models.
Finally, this winter of retail discontent has coincided with weather that has encouraged stay-at-home consumers. Habits are sticky. The fear for many traditional retailers is that consumers, having engaged, perhaps for the first time, with online retail, will not come back out to play as the weather improves.
Investors have responded. UK-listed retail companies have seen their shares decline by 18 per cent since mid-2015. The stock market has risen by 6 per cent over the same period. This has tempted many investors to ask whether now is a good time to buy back into retailer shares, which are trading at their cheapest for three and a half years. My view is that it is likely to get worse before it gets any better.
Having praised the recent resilience of consumer spending, the squeeze on disposable incomes is set to pick up. Council tax bills showing an average increase of 5.1 per cent are landing on doormats. Pension contributions for ten million workers are trebling this month, and for five million working age households their benefits are being frozen in cash terms. With the Bank of England also set to increase borrowing costs in May, this points to a significant squeeze at a time when traditional retailers least need it. So what should be done?
The government should resist the temptation to stand in the way of changing consumer habits. With public money facing much more virtuous demands, the chancellor should avoid getting in the way of capitalism’s great gift: creative destruction. As new models of retail delivery emerge, the inefficient should be allowed to wither and die. One only needs to look across the Atlantic to the US president’s recent attacks on Amazon for an example of ill-thought-out protectionism wrapped up in level-playing field-rhetoric. It is a post-Brexit model for capitalism that the UK government would do well to ignore.
One area of more fruitful effort would be a commitment to simplify taxes for small businesses. Larger businesses can minimise the tax burden they face because they have the resources to navigate the complexity in the UK’s tax system. While estimates of the total length of UK tax legislation vary between 6,000 and 18,000 pages long, either figure leaves UK small businesses woefully underequipped to navigate the opportunities and pitfalls. This largely invisible drag on competitiveness needs a chainsaw, not a surgeon’s knife. A failure to do so will hasten the decline of our nation of shopkeepers.
This article was published in The Times newspaper.