2009 will be crunch time for UK high street

UK retailers should brace themselves to cope with one of the worst years on record in 2009, according to Verdict Research.

In an analysis conducted on behalf of ActiveResilience, the risk management specialists, Verdict warns high street spending will reverse next year and retail profits will nosedive.

“2009 will prove to be the real crunch for many shops,” said Neil Saunders, director of Verdict Consulting – the specialist division of Verdict Research.

Excluding internet sales and sales at grocery multiples, retail spending growth on the high street will shrink by over 4%, the largest drop since Verdict’s records began in 1965.

This slower rate of growth at a time of increasing costs could potentially wipe £3.6bn off the collective profits at leading retailers in 2009.

A more cautious consumer, a higher proportion of spending made on food because of price inflation, and the cannibalisation of the internet will all contribute to the high street’s decline, reports Verdict.

“The consumer purse is under significant pressure and while a cut in VAT may help household budgets it is economic naïveté to think it is going to make consumers embark on a spending spree,” said Saunders.

The pressure on the consumer is intense. According to Verdict, over the past 10 years consumers have consistently spent more than they have earned: income growth has run at an average of 2.4% a year, but has been outstripped by spending growth which has grown by 3.3% a year. The shortfall has been made up both by consumers dipping into savings and consumers taking on additional debt. This has left household finances in a precarious position and has decimated the appetite to spend.

“The consumer is unprepared for this downturn, most are in an incredibly weak position to deal with it and there is simply no wriggle room in household budgets,” said Saunders. “No amount of VAT cutting is going to change that.”

2009 will not be the end of it

Although the deterioration in spending will ease after 2009, the high street, excluding grocery and Internet sales, will continue to face a difficult time well past 2010 and positive growth is not expected to fully return until 2014.

Six years of negative growth will take their toll on high street sales, which will decline, by £17.6bn from £157.5bn in 2008 to £139.9bn by 2013.

“With such a dire outlook for the high street, it is inevitable that more retailers will go under,” says James Flower, senior consultant at Verdict.

“The length and depth of the retail downturn will test even the strongest of retailers and some will not last the course – at least not in their present form.”

Profit free fall

Verdict warns that the tough trading conditions are likely to wipe billions of pounds from retail profits in 2009. With the cost of running a retail business going up by 4-5% a year and demand falling, many retailers will find their margins and profits severely squeezed.

Verdict estimates that over the course of 2009 as much as £3.6bn of retail profits could be wiped out and the average operating margin could fall 3.8% percentage points to just 2.8%.

“2009 will be a lean year for most retailers,” said Saunders. “With incredibly thin margins in most sectors, many are already taking a hit with the deep discounts they’re offering: that situation will only worsen in 2009.”