Retail Economics/RBS Outlook for UK Retail 2019
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Report Summary
1 The macroeconomic environment will remain challenging. GDP is expected to rise modestly by just 1.5% in 2019. The backdrop for household spending will improve as inflation falls towards our forecast of 2.0% and a tightening labour market pushes real wage growth up to 1.3% by the final quarter of 2019.
2 Retail is undergoing unprecedented structural change. The shift towards online, the experience economy, fiercer competition and rising operating costs will continue to put pressure on traditional business models.
3 Investor sentiment towards retail stocks turned increasingly negative throughout 2018, wiping over £13 billion off the value of the General Retailers index.
4 Retailers remain locked in a heavily discount-driven environment which will put profitability under intense pressure throughout 2019, while operating costs are estimated to rise by c. 3.5%.
5 Over 93,000 retail jobs were lost in 2018, the most of any major sector in the UK economy. Retailers are expected to cut back on jobs and hours worked in 2019 as they pivot business models.
6 41% of consumers feel that their personal finances will weaken in 2019; however, notable differences arose by income group.
7 The property market will become increasingly polarised as retailers continue to restructure property portfolios and apply increasingly stringent location and cost requirements when selecting new properties and extending leases on existing space.
8 A hard Brexit scenario presents the most significant challenge for retailers as they will be faced with a raft of changes to the regulatory framework in which they operate. This could add £7.8 billion to the cost of importing retail products from the EU.
9 The biggest concern for retailers is ensuring continuity in the supply of their goods, accessing labour and accounting for additional costs of sourcing products.
10 New models of consumption such as rental markets, curated subscription models, the service economy, autoreplenishment and smart re-ordering have the potential to fundamentally alter the retail norms of today.
Operating Costs
Retailers face further challenges in the operating cost environment in 2019, with labour costs being driven higher by consecutive increases in the National Living Wage (NLW) and National Minimum Wage (NMW).
Given that labour costs are the largest component of operating costs, at around 46% of the total, retailers are likely to continue to cut back on employees and hours worked.
Meanwhile, business rates remain a significant burden for retailers, particularly for those with a large physical store estate. Retail Economics estimates that the industry paid £7.3 billion in business rates in 2017- 18, over 25% of the entire business rates pool, even after taking reliefs into account. Property costs are becoming increasingly polarised as retailers continue to restructure property portfolios, prioritise right-sizing initiatives and execute disposal strategies. On the one hand, rents in primary locations such as large city centres and key regional shopping centres are expected to remain robust as more stringent location and cost requirements drive higher levels of demand. On the other hand, rental markets in secondary locations with excess capacity and declining levels of footfall will remain soft.
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