Wednesday, 4 January 2017

2017 And All That

As is customary at this time of year, we have a selection of direly pessimistic and overly optimistic predictions for the coming 12 months. Well, I'd hate to exclude myself from all this fun, so here are what I believe will be the big themes for 2017.

Either way, it's going to be an exciting and challenging year in retail. See you on the other side!

The Shrinking Spend
The economy as a whole may have been growing, albeit slowly, for a while now, but the reality on the ground does not reflect that. Rents and mortgages take up at least 40% of expendable income while a figure published this week pointed to rail fares taking up 14% of income for those who commute. 

These figures will continue to grow, and should there be even a small interest rate hike, the amount available for households to spend in shops will decline sharply.

Retailers will also need to combat upward cost pressures caused by continued uncertainty over the UK's exit from Europe, both in terms of their direct imports and the costs of their suppliers.

Less spending from shoppers and higher prices will hurt volumes in the long run, which of course will hurt manufacturers who depend on selling volume to keep costs down.

So, price will continue to be important so expect more price wars and pack size reductions. It will be interesting to see how the single price retailers (Poundland, Poundworld, etc) can cope with these pressures. 

People In Retail
After many years of depending on state subsidized labour, retail is having to deal with increases in the minimum wage (although it is still well short of a Living Wage) and a growing backlash against under-employment through zero hours contracts. Last year saw increased media scrutiny into conditions at warehouses and I'd expect this to extend beyond the rag-trade this year. During my time in grocery retail, Distribution Centres were tough places to work but the ones I saw weren't as bad as those exposed at Sports Direct last year. However, the workplace has changed a lot over the last 10 years and an undercover exposé could be damaging if similar bad practices are discovered.

The debate on automation will grow too. Amazon's "Go" concept has got a lot of retail analysts excited, but we need to be careful about automation. Some stores I visited in the run up to Christmas were struggling to cope where they had over-invested in self-scan tills at the expense of manned tills which are still the most efficient way of getting shoppers processed. And while retailers may get excited at the reduced manpower costs of automation throughout the supply chain and store, some caution needs to be considered. From a service perspective, people like buying from people (on the whole!) and more importantly, staff are often your most loyal shoppers. With around 2.8 million people in the UK employed in retail, A 10% cut in workforce could wipe £1.2bn of sales out, so it's not something to be taken lightly.

Fight or Flight For Wal-Mart
As I predicted, Asda finally lost the 2nd spot in Grocery to Sainsburys last year despite huge investment in price from their American parent group. A new CEO might make a difference, but years of poor or "bought" performance from Asda under Andy Clarke will take a big effort to rectify.

In the UK, Asda faces a multitude of problems and will need to get smarter to deal with them. Too often, they depend on their one marketing lever - Price - and this is clearly broken after the rise of the hard discounters. 

Wal-Mart's aspiration for global simplicity - seen by the Wal-Martisation of the Asda logo - will need to be adapted if they are to succeed in the UK. They have lost their top end to JS and Tesco, their core to the Hard Discounters, and a resurgent Morrisons is causing trouble in their heartlands. They can't rely on George clothing to bail them out as much now with Primark so dominant. I expect their former CEO, Andy Bond, is scenting blood as he merges Pep & Co into Poundland too. 

So, what will Wal-Mart do? They've been able to overlook the declining market share over the last few years as Asda has delivered increasing profits, but the loss of 2nd spot, declines in volumes and the tougher GSCOP rules means they can't throw their weight around with suppliers so much and the cash cow might start to run dry.

Another Convenience Revolution
It's been a vibrant channel for a few years now, but Co-op's new format and the One Stop business should make the sector raise its standards even higher.

Nisa and Spar have created some great looking stores in response to the JS Local/ Tesco Express challenge, but the standards of execution in Co-op and One Stop are something else that even JS and Tesco will need to take notice of (and yes, I know Tesco own One Stop!!!).

I would hope a focus on availability, core ranges and shopper-led space management become the new agenda for independents

Bitter Pills For Pharmacies
I will be doing a full blog on this sector soon, but it's worthy of note here as Pharmacy retail faces a big challenge this year with funding cuts from the NHS and threats to reduce the number of licenses.

It is a largely under-developed sector for retail - many pharmacists seem to think retail is below them - but with many pharmacies dependent on over 90% of their turnover from the NHS services, they will need to turn to retail to fill these gaps.

It is a sector ripe for consolidation, with less than half of the 14,000 community pharmacy licenses in the hands of the large multiples. However, until the licensing plans of the government become clearer, I would not expect any major acquisitions from Boots, Lloyds or Well.

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