webloyalty retail research - the economics of retail

1. The economics of retail

4 The future of retail: the supply picture Prepared for Webloyalty by Conlumino August 2013

The future of retail

The supply picture

The economics of retail Introduction

•  Since the beginning of the year the economy has already shown some signs of life with modest GDP growth and a rise in consumer sentiment. While this appears to be sustainable, and is welcome, the degree of the pick-up is very shallow.

•  In our view, the recovery over the next five years is likely to remain on this trajectory. This is mainly a function of three factors.

•  First, the extensive levels of debt across both the public and household sectors, which will act as a brake on growth and weaken the contribution of a consumer driven recovery.

•  Second, the negative headwinds from other parts of the global economy – most notably the Eurozone – which lessen the prospect of an export driven economy.

•  And, third, the further unwinding of some unproductive firms which are impelled by the current low interest rate policy and will likely fall into failure as rates rise. This, and the need to close the productivity gap which has opened up during the downturn, will result in higher unemployment.

•  This latter point is particularly important as there is a very real prospect of the recovery being a ‘jobless’ one, especially over the next couple of years. This will clearly have a dampening impact on both spending and sentiment.

Section 1

The economics of retail

•  The broad upshot is that by 2018 things will have normalised; growth will have resumed, confidence will have strengthened, and spending will be more robust. However, this will be far from a boom period and we will not see a return to the economic characteristics of the pre-recession period.

•  Naturally, there are downside and upside risks to this view and in this section we have presented a more optimistic and a pessimistic scenario. The probability of these forecasts materialising is slightly lower, but they are still firmly within the realm of possibility.

•  Whichever forecast materialises, as we will explore later in the report, what will constitute economic normality as a result has some fundamental implications for the retail sector.



The supply picture

The economic context GDP growth

•  In assessing the next five years in retail, the logical place to start is to understand how the overall economy will perform. While GDP numbers can be fairly esoteric, they do provide a shorthand which neatly reflects the underlying reality on the ground which, in turn, colours consumer sentiment and decision making.

•  The chart below shows our GDP forecasts for the period 2013 to 2018. Our central assumption (which represents a realistic view) is the blue line. This is what we expect to happen and is the assumption on which we base our retail forecasts.

•  We have also provided two other forecasts: an optimistic view (which is shown in green) and a pessimistic view (shown in red). The likelihood of these forecasts materialising is slightly lower, but they are both within the realm of possibility.

•  In very basic terms, the optimistic view assumes strong export growth, which in turn presumes a degree of stability in the Eurozone. This helps to bolster employment levels which, later in the forecast period, feeds through into wage and spending growth which further boost the economy. Under this scenario we have assumed that no further government cuts, over and above those already pencilled in, are required.

•  Comparatively, the pessimistic view assumes sluggish export growth and a rising unemployment profile in the near term. This ‘jobless recovery’ continues to put downward pressure on wage settlements which, coupled with high inflation, undermines domestic demand.

•  It is worth noting that the scenarios differ by degree rather than direction in that they all broadly follow the same recovery pattern.

GDP growth pattern Figures on the chart are percentage annual growth rates

17.0% Total growth (optimistic):

13.9% Total growth (realistic)

9.4% Total growth (pessimistic):

0.3

1.0

1.8 1.9 1.9

2.2

1.1

1.8

2.3 2.4 2.7 2.9

0.2

1.5

2.1

2.7 2.9 3.1

3.6

2012 2013 2014 2015 2016 2017 2018

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Growth rates represent the total growth of the economy over the 2012 to 2018 period.



The supply picture

Scenarios Different economic outcomes

•  GDP numbers are all well and good, but what’s more important is how they impact the realities on the ground and what the different scenarios will look like from the consumer perspective.

•  In the tables below we have mapped what we expect the macro-economic and consumer environment to look like under the various scenarios.

Optimistic scenario What things look like on the ground under this scenario

Realistic scenario What things look like on the ground under this scenario

Pessimistic scenario What things look like on the ground under this scenario

Under this scenario the economy will bounce back quickly after 2013 and, although some weaknesses will remain, things will start to feel more like they did pre-recession by the end of the forecast period.

Under this scenario the economy will not resume solid growth until 2015 and even then will remain below par for the remainder of the forecast period. Things will become more positive, but not as they were pre-recession.

Under this scenario the economy will become more robust in 2015 but thereafter will lack momentum and will see growth flat-line. Things will not be as negative as they were mid-recession but many will still feel recessionary.

Unemployment (2018):

5.1% (2013: 7.9%) Inflation (2018):

1.6% (2013: 2.8%) Disposable income (2018):

3.9% (2013: 0.1%) Sentiment (2018):

+19.4 (2013: -29.3)


6.3% (2013: 7.9%) Inflation (2018):


2.2% (2013: 0.1%) Sentiment (2018):

+7.9 (2013: -29.3)


7.6% (2013: 7.9%) Inflation (2018):


1.3% (2013: 0.1%) Sentiment (2018):

+4.6 (2013: -29.3)

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The supply picture

Retail spend growth Different scenarios

•  Using the underlying economic assumptions, we have mapped out how retail spending growth might look under the different scenarios.

•  The chart below shows the growth rates for each year as well as the value of all retail spending at the start and end of the forecast period. The total growth rates for the whole period are shown in the boxes under the chart; these represent how much retail will have grown by 2018 from the start point of 2012.

Overall retail spend and growth rates for different economic scenarios Figures on the chart are percentages

0.9

1.7

2.6

3.0 3.1

3.3 3.1

1.2

1.6

2.2

2.7

3.1 3.0

2.3

2.9

3.3

3.6

3.9 3.7

0.5

1.5

2.5

3.5

2012 2013 2014 2015 2016 2017 2018

£310.5bn

Optimistic scenario Total growth: 21.4%

Realistic scenario Total growth: 18.1%

Pessimistic scenario Total growth: 14.6%

£310.5bn

£310.5bn

£366.6bn

£376.8bn

£355.8bn

Retail spend at start (2012)

Retail spend at end (2018)

•  The difference between the optimistic and realistic scenarios is £10.2bn of spending across the period; between the pessimistic and realistic scenarios the difference is £10.8bn.

Section 1




The supply picture

Overview of retail Today and tomorrow

Section 1

The structure of retail

Retail spend segmentation by sector Figures in the pie charts are percentages

22.9 21.1 17.2 16.1

12.8 9.1 7.7

2.5

-6.2

-25.9 Food H&B C&F Total Electricals Home Other DIY Books HE

Food & grocery, health & beauty and clothing & footwear will be the vanguard of growth over this period, reflecting their less discretionary nature. Food in particular will continue to outperform, with persistently high inflation meaning that the sector accounts for a rising proportion of overall retail spend, despite efforts by shoppers to offset the impact. Conversely, the sectors most closely related to the housing market will underperform.

2013:

2018:

Food & Grocery

Other retail

Clothing & Footwear

Home

Electricals

Health & Beauty

Home Entertainment

DIY & Gardening

Total growth of each retail sector, 2013-18 All figures are percentages

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