From discounter proliferation to online failures and less tax for the Treasury, how the Retail Sector Council sees the industry’s near future
It is the UK’s biggest private sector employer, contributing 6% of UK government tax receipts, according to CBI figures. Now retail is warning government to expect that sizeable contribution to Treasury coffers to diminish dramatically as the sector undergoes rapid change.
The Retail Sector Council, whose members include the chiefs of Sainsbury’s, Primark and the BRC, fired a warning shot to the government this week in a new report.
Its “purpose is to start the next conversation across the sector and with government about the challenges we face and how we can work together on those”, says RSC co-chair and former Co-op CEO Richard Pennycook.
So, what does the council see in retail’s future?
1. Discounters everywhere
Discounting is “without question” the greatest market force affecting food retail globally, bringing with it “major structural change”, says Dave McCarthy, the report’s author and a senior advisor to HSBC Investment Bank.
Citing NIQ data, the report highlights how Aldi and Lidl combined have consistently outgrown home delivery for grocery market share (see table).
“Consumers want discounting, certainly in food, more than online,” says McCarthy.
While online retailers can monitor consumer behaviour and habits in detail, bricks & mortar retailers have been slow to embrace technology that can give them similar insights. Many have “no idea what products customers have browsed and what purchases customers did not make after browsing”, the report says. “Yet the technology to monitor this has existed for many years.”
Physical retailers with better digital capabilities will be best-placed to compete both with pureplay online retailers and discounters, says McCarthy.
The report highlights Tesco as “one of the leading retailers to gather data on its customers via its Clubcard”.
3. Online consolidation
Physical stores embracing technology will also be best placed to move into omnichannel retail, the source of continued online growth – though in food, online is close to maturity, the report argues.
And for purely online retailers, the continued growth in the channel comes with a catch, with their valuations dropping as markets become increasingly dissatisfied with their failure to deliver profits. “They’re coming under different pressures now because people are recognising they have to make a return on investment,” says McCarthy.
It will lead to “consolidation of pureplay online and even mergers with, or takeovers by, successful bricks & mortar retailers”, says the report. “Or we may just see a number of online businesses fail and fold.”
4. Fewer stores
As bricks & mortar becomes more omnichannel, and more sales move online, retailers will need fewer stores, says the report. There will also be more corporate failures. Of stores that remain, a higher proportion will be discounters.
The report cites Local Data Company figures suggesting a net 37,700 stores closed across Britain between 2018 and 2022.
“This has been a trend for 10 years,” says McCarthy. “We saw it last week with Wilko and it’s only going one way.”
5. Fewer employees
Fewer stores means fewer shopworkers, as online is “less labour intensive” in the first place.
Discounters will not make up for the decline, because “by their very nature they tend to have low-cost structures and higher sales per employee”, the report argues.
In simple terms, “discounters employ fewer people per sale”, says McCarthy.
However, alongside this, the digitisation of retail will mean “increased demand for higher skilled staff”, says the report. “This needs to be considered by the government and relevant skills need to be embodied into the school curriculum.”
6. Less tax
Fewer stores, fewer employees, and more corporate failures will mean less property tax, less income tax, and less corporation tax paid.
“The combination of these factors could reach a tipping point for the Treasury at the same time revenues from transport fall substantially due to the transition to electric vehicles.” The report calls for a “joined-up discussion” over planned and foreseeable changes.
Pennycook says: “We’re saying to government, as cars go electric, fuel duty will also reduce enormously.”
7. Crumbling high streets
Alongside the fall in store numbers, retail will continue its migration to edge-of-town sites such as retail parks. It puts high streets in danger of entering “a vicious spiral of closures with fewer stores, meaning a reduced centre of gravity” for communities, says the report.
“A community can spiral down quite quickly with severe implications for the local population and the local economy.”
The council calls for reform of planning rules which prevent closed shops being repurposed by encouraging landlords to leave them vacant “rather than accept a new, lower paying tenant”.
It also calls for a levelling of the playing field between online and bricks & mortar on tax, not just on business rates, but in “tax loopholes which favour overseas retailers to the detriment of UK-based retailers”.
“The government should be ambivalent to whether a sale is done online or in store,” says McCarthy. “Right now, it appears government is worse off when sales move online.”
Consumers want sustainability, and it therefore needs to be at the core of a retailer’s offer. But many consumers are not willing to pay a premium for it, making it hard for retailers to become more sustainable “when their competition are focused purely on low prices”, says the report.
It calls on government to level the playing field by providing incentives for sustainability and relaxing competition rules which prevent collaboration.
Competition regulation currently makes the industry “extremely wary of anything that looks like we’re talking to each other” says Pennycook.
“Yet, in some circumstances, that could be beneficial. If the food industry works together for common standards on recyclable packaging, we’d get solutions much quicker than each company doing it alone.”