UK Retail Will Hit Rock Bottom in 2009, Says Verdict

June 9, 2009

UK retail will be at its weakest in 2009, according to Verdict Research.

It claims the current downturn is not a temporary side effect of the recession but the mid-point of a lengthy reform of the retail market.

Verdict Research is predicting just 8.1% growth in the UK over the five years to 2013, a massive drop from the increase of 14.1% in the same period to 2008.

However, it says the good news is survivors will find themselves in a far less competitive environment, with major opportunities for market share gains and winning new customers.

Verdict is forecasting total UK retail will decline by 0.6%, or £1.7bn, while non-food spending will decline by 3.0% – the first negative growths since Verdict Research’s records began in 1984.

This will inevitably mean more hard times for retailers and more significant casualties, it says.

According to Verdict, the UK economy will be the key performance driver.

The housing market will remain unstable, undermining both consumer confidence and spending power, it says. Spending ability will weaken, despite the rampant food and utility bills inflation of 2008 dropping away throughout the year, as consumer disposable income will become increasingly pressured by slowing wage growth.

And, it adds, disposable income will go into savings and paying back debt.

The main driver of the decline though will be rocketing unemployment.

“Unemployment will not peak until late in 2010, as cutbacks continue to spread outwards from the financial sector to affect all areas of the UK workforce,” said Malcolm Pinkerton, senior retail analyst at Verdict Research and author of the report.

“Both actual unemployment and the looming threat of it act as the ultimate dampeners to consumer spending, so the worst is truly yet to come.”

Verdict warns the economic crisis is more complex than any for decades and recovery will therefore take longer.

“At present it seems we are still facing a considerable wait before the banks’ balance sheets are sufficiently stable for them to resume a high degree of lending again,” said Pinkerton.

“In addition, even when the UK economy does lurch back into life, the prospect of higher taxes to repair the battered public finances will inhibit growth severely.”

Verdict Research is predicting a return to positive GDP growth in 2011, yet non-food growth in 2011 in the UK will be just 1.1%.

“The economy is an important factor, but it is also a headline grabbing one, when the truth is that retail very much has problems of its own,” said Pinkerton. “Consumer eagerness to take on debt to fund ever higher retail expenditure is now a thing of the past, meaning retail is skirting a saturation that will finally consign the meteoric growth rates of the past to the history books once and for all.”

Fundamental changes to consumer psychology

The recession is providing the catalyst for a long-term transformation, added Matthew Piner, retail analyst at Verdict Research and report co-author.

“By the end of this downturn, shopper psychology will be irreversibly changed from that of the heady days seen in the late 90s and early part of this decade,” he said.

“Spending will rise after the recession and consumer confidence will gain some traction again, but shoppers from the lower socio-economic groups in particular will have formed a more price conscious outlook and an intolerance of taking on debt to fund retail expenditure.”

As such, non-food retail growth in the UK will be just 2.1% and 2.5% in 2012 and 2013, a much more reserved level than the average 6.3% annual growth seen through the nineties.

Retailers need to evolve

Verdict says retailers will have to change their strategies by necessity, with a survival of the fittest style cull-taking place.

Across the different sectors retailers will have to adapt in varying ways, but there will undoubtedly be re-occurring themes across the sectors. Innovation, differentiation and exclusive products will need to become an integral part of retailers operations.

“Retailers will have to learn to balance the new consumer desire for quality, timeless products, with the need to drive shorter replacement cycles for areas where consumers are instinctively cutting back,” said Piner.

“They will have to compete harder on the entry price items upon which consumers are more sensitive, whilst becoming more adept at adding value to higher priced products.”

Merchandising will also need to become more efficient, both in a logistical sense and in terms of driving sales.

“Retailers will have to become more adept at spotting consumer trends early and reacting to them, as well as flexing product mixes towards more successful ranges,” added Piner. ”They will need to learn to diversify sales into complimentary areas wherever possible, in order to squeeze maximum spend from consumers once they have attracted them into stores.”

On the operational side the most important aspect, over the next two years at least, will be generating sufficient cash to trade through the downturn, concluded Piner.

“For those companies fortunate to then still have a strong balance sheet at the end of the downturn, there will be plenty of lucrative opportunities for space expansion.”