This week’s blog comes from Julie Carlyle, Partner and Head of UK Retail at EY.
Black Friday is almost here. It is strange to think that in just five years, one long weekend in November could come to mean so much to UK retailers. But this extended weekend now kicks off, shapes and sets the tone for the festive season.
After such a tough year, the stakes feel even higher than usual. Which is why, in this blog, I want to share the Black Friday indicators we’re watching and what I think they’ll tell us – not just about this Christmas, but the broader retail shakedown.
Has Black Friday kick-started spending, are consumers still holding back?
UK consumers should feel richer. Wages rose by 3.2% in the three months to the end of September, against inflation of 2.4%. But, this consistent rise in disposable incomes has been a long-time coming and real wage growth is still below 2015 levels, whilst real wages remain lower than a decade ago. Interest rates are rising – albeit slowly – and house prices have stalled. And will households feel confident enough to spend any extra cash given the run-down in their savings?
The EU referendum vote didn’t hurt retail sales in the immediate aftermath of the vote and UK consumers usually put worries aside at Christmas. But, given the high-stakes of the next few weeks, it seems unlikely that the outcome will have no influence on already subdued consumer confidence. Even under a smooth Brexit scenario, the EY ITEM Club expect consumer spending to increase by just 1.5% in 2018, from 1.8% in 2017 – a far cry from 3.6% growth in 2016.
The fight for the consumer pound is going to be exceptionally tough.
Who’s discounting, by how much and when?
We’re not just looking at how much consumers spend, but when they spend it. A typical retailer can secure over 40% of sales and 120% of EBITDA in their final, ‘golden quarter’. But In the last few years it’s proved hard to kick-start that demand before Black Friday. Early, deep and widespread discounting will give us a strong indication of high inventory levels. It’s also a pretty good indicator that more retailers will be struggling with cash flow in the New Year. Stores will want to avoid ‘desperation discounting’; however, some may have little choice.
Last year saw a marginal decline in the intensity of pre-Christmas promotions. But, as a result of high inventory and sluggish early-autumn spending, we expect deeper discounts and for more retailers take part this Black Friday. Indian summers are especially problematic in apparel and early indications suggest that inventory levels are especially high. The sector likely to show most resilience is grocery, with consumers continuing to prioritise spending on food.
The bottom line & Brexit
How much any increase in sales feeds through to the bottom line will depend on the level of discounting and how well retailers can manage rising operational costs. In 2018-to-date, over 50% of FTSE General Retailers’ profit warnings have cited rising overheads – i.e. increases in wages, fulfilment, business rates – whilst 16% have cited the increasing cost of investment in new stores and technology.
Brexit’s ultimate impact on retailers’ cost-base will depend on the outcome of the final deal. There is potential for changes to tariffs; increases in border delays; increases in UK wages – if EU labour levels drop; and for a further drop in sterling so long as uncertainty continues.
How much are consumers spending online – and who’s capturing that spend?
Of course, it’s not just about how much and when consumers spend, but where and how they spend it. Online spending during Black Friday 2017, increased by 11% year-on-year to £1.39bn, according to IMRG – with 39% of that spend completed on a smart phone. The UK spends more online per household than any other country and online sales are rising by around 10% a year. Whatever happens to total sales this Black Friday, online sales will rise substantially.
How well retailers tap into this spend is a vital indicator. Much of the distress we’ve seen this year stems from a struggle to cope with a seismic shift in consumer behaviour and expectations. Legacy store numbers and the cost of running online and physical operations is part of the problem. The great willingness amongst UK consumers to embrace online retail creates huge opportunities, which are much easier – and cost effective – for pure-play online retailers to grasp. But the issues always go deeper than excess stores. Retailers utilising the cutting edge of technology – from tailoring offers, to literally delivering the goods – have their chance to shine in the next few weeks. If retailers have significant operational weaknesses, they’ll likely to be exposed by the sheer intensity of Black Friday.
The rise of online means further rationalisation of store portfolios is inevitable in the New Year. As we’ve seen in the last few months, retailers looking for CVAs can expect some resistance from landlords. Landlords can also expect retailers to ask for concessions that mirror the terms offered in CVAs on the same site. Stress is building in non-prime locations, but even prime locations need a plan to adapt to the rapid changes we expect in the next few years.
Which USPs are driving sales?
High levels of discounting, rising costs and consumers’ changing habits mean that even if sales increase, we could still see more retailers in distress in the New Year. Indeed, what I expect to see this Black Friday and beyond is an even deeper split between retailers with a clear USP and technology-driven operational excellence – and those do not. That USP could be in product, price, convenience, online or store experience, brand equity, or ethical reputation. But retailers need to be constantly thinking about how they can stand out from the crowd.
As we’ve seen throughout 2018, department stores have struggled because their USP – the convenience of multiple brands under one roof – has effectively been eliminated by the smartphone and ability to shop from multiple brands any place, any time. Consumers looking for value will also continue to trade up and down, leaving the midmarket exposed – especially in clothing. Grocery is less vulnerable to a squeeze on consumer spending, but we see the same trend here with premium ranges and discounters expected to perform well.
What we’ve also learnt from the last ten years is that no retailer is invulnerable. FTSE General Retailer profit warnings are running at a seven-year high. Restructurings – including administrations and CVAs – are approaching recession-like levels. Consumers may be sentimental in principle, but not in practice. To survive, retailers need to have a strong vision of how their offering stands out and fits into consumers’ changing lives.
For further insights on the science of Black Friday, visit ey.com/uk/blackfriday