Retail focus: Last Christmas?

This week’s blog comes from Julie Carlyle,  Partner and Head of Retail, UK & Ireland, and Brian Marshall, Transaction Advisory Services Retail Leader.

Many retailers are pinning their hopes on the next six weeks – the golden period that could make or break their year. As we approach Black Friday, we’ll look at the prospects for this Christmas, whilst also exploring what retailers can do to not just survive but thrive now and beyond this festive season.

The big lesson from our analysis of the last 20 years of retail profit warnings – released for the first time here – is the importance of radical action. Companies who can’t reinvent themselves may find this their last Christmas.

Why is it so tough out there?

It’s been a brutal year. According to our analysis, retail profit warnings are running at an eight-year high. High street chains closed almost 6,000 stores between January 1 and September 30, according to Centre for Retail Research – already 77% higher than 2018 overall. Like-for-like retail sale growth has only been in positive territory four times in 2019, according to BRC, whilst only just breaking above zero in July and October.

Consumer finances have improved in 2019. Disposable incomes have risen. Employment levels are high. House prices are still growing in most of the UK. But there is an inertia in retail sales that echoes the rest of the UK economy. Uncertainty prevails. We can see these trends in the contrast between consumers’ positive  view of their own prospects, versus their negative view of the overall economic outlook.

Consumer confidence
Add this consumer reticence to well-documented structural change and the upshot is a sector that contains a wealth of new opportunities – but only for retailers with the resource or expertise to grasp them. To remain competitive, retailers are in a race to invest, restructure and reinvent themselves to keep up with technology and consumers’ rising expectations – whilst also keeping a lid on prices.
Brands that have clear differentiated purpose and engagement with the consumer will continue to go from strength to strength this Christmas. But for some it’s a question of survival.

Can Christmas save 2019?

It’s against this backdrop that we approach Black Friday, or in reality ‘Black Autumn’. Ideally, retailers buy and price stock specifically for this discount event. But, this year, many retailers have been forced to mark-down full-price stock ahead of Black Friday to clear excess inventory – especially in apparel which remains on the backfoot after an unseasonably warm September.

Adding to this year’s complications are the especially late timing of Thanksgiving and the uncertain impact of a December General Election. These two events look set to push more sales into December than usual, making it even harder for retailers to hold their nerve on the pricing of Christmas stock.

Apparel and big-ticket retailers have found it especially difficult to gather momentum this autumn. But, any retailer without a well-defined and thought-out product and delivery proposition will struggle this Christmas. Department stores remain vulnerable to competition, whilst pure-play online stores also need to be mindful of a growing consumer preference for instore collection.

Retailers that can delight their customers and literally deliver the goods should emerge as the winners – but Christmas won’t be a panacea for struggling retailers.

What’s the price of getting it wrong?

Our data shows that around a third of the FTSE Retailers sector has issued a profit warning in the last 12 months, whilst one in six retailers have warned twice or more. Companies issue profit warnings for a variety of reasons. Most aren’t terminal. But three FTSE Retailers that have issued three or more warnings have gone into administration or been sold in 2019 and a look back at the last 20 years of profit warning data tells an equally startling story.

The third profit warning is often a precursor to distress as EY analysis showed earlier this year, but especially so for retailers. FTSE Retailers who issue three or more profit warnings [1] are twice as likely to enter administration within a year than quoted companies overall. They were also far more likely to experience a restructuring event, which includes administration, but also CVA, debt restructuring and distressed sale.

Retail 20Y

*breach or waiver
**CVA, Distressed Sale, Debt Restructuring, Administration

This is partly a structural issue. Many retailers have used CVAs to create a more sustainable store footprint. Around half the FTSE Retailers in our data who went into administration were also sold immediately in a pre-pack sale, which secured business continuity – a significant benefit for retailers. But this only tells part of the story. There is a more central issue here around retail’s much higher than average vulnerability to multiple profit warnings, which stems fundamentally from many retailers’ reluctance or inability to make radical enough changes in the face of economic and structural change. It’s why we see so many CVAs fail. Addressing the number of stores, without reinventing the rest of the business isn’t enough.

Retailers issuing three or more warnings lose on average 61% of their share price between their first and final warning, with just 7% of companies regaining that value a year after.

How can retailers survive – and thrive?

The priority for stressed retailers is to stabilise and stop a chain reaction of downgrades that will destroy stakeholder and consumer confidence. But, stabilisation doesn’t mean preserving the status quo. Management also needs to be galvanised to take decisive, radical and quick decisions. Too often we see retailers repeating the same mistakes and making incremental decisions that fail to turn the company around.

Incremental cost cutting leaves retailers perpetually losing the race between cost reduction and sales shrinkage, whilst consigning them to trade without the headroom and funds they need to put the business on a new course. In the face of strengthening economic and structural headwinds, retailers cannot afford to stick to tried and tested formulas. This is an environment that favours retailers that can stand out from the crowd, win trust and embrace constant change.

How can retailers do this?

Retailers need a deep understanding of their business and customer journey, making optimum use of data analytics to maximise efficiency, engagement and sales. We expect to see further radical cuts in store numbers, but we also expect a reinvented store presence to be a central component of many major retailers’ strategies. With physical shopping remaining an important part of consumers’ leisure time, retailers need to work out how they create a distinctive offering and maximise their time with the consumer through personalisation, experience and increasing touch-points, such as instore collection.

Trust is quickly eroded by constant promotions and by behaviours that contradict customer expectations. As customer attitudes change – for example to the environmental impact of fast fashion – retailers need to show they’re listening and adapting too. Building flexibility into the business model will be key to keeping up with the pace of changing consumer demand and behaviours.

[1] Included in our multiple profit warning analysis are companies that issue a chain of three or more profit warnings in one year – with any further warnings issued within six months of the last added to the chain. Further information and analysis is available on EY Profit Warning 20th Anniversary web site.

Edited by Kirsten Tompkins