The shock caused by Asos, who communicated a significant profit warning by lowering its sales growth target from 25 to 15% a week before Christmas, is yet another hit to an already dire year for UK retailers. Is the end of consumerism near?
Many market analysts expected online-only retailers to struggle less with cash-flow troubles which many high-street retailers, including big players such as House of Fraser and Debenhams are experiencing. With a focus on consumer preferences for convenience and speedy delivery and the ability to avoid costs such as owning and managing a property portfolio, they would surely have an advantage. However, recently some online retailers are clearly encountering similar problems as brick and mortar retailers.
Brexit uncertainty shifting consumer sentiment?
The truth is, a drop in consumer confidence was inevitable sooner or later and the ‘unbelievably bad’ November sales figures (to quote Mike Ashley) might only be the tip of the iceberg. Brexit uncertainty is however not the only cause for the lack of confidence. Factors such as growing consumer debt, decreased public spending due to austerity, unfavourable shopping weather conditions and severe market competition from Amazon and other online platforms have been negatively affecting retailer’s margins and making consumers more aware of what and when they spend.
Bricks and mortar, online only or a mix of the two, the tension among retailers of any kind is more apparent than usual around this half point in the seasonal trading calendar. In order to reduce their fixed costs, most retailers owning a large amount of property, are already exploring the option of negotiating down their rents using a CVA plan. In 2019, advice concerning prepack administrations and liquidations will most likely be in high demand among SME retailers and with suppliers chasing payments, increasing the pressures on cash flow, decision time might come early this year.
The currently low interest rates, attractive discounting and interesting finance deals, should in theory encourage consumers to increase their spending. However, unlike past recessions, consumers are less likely to come to the rescue in the short term, due to political uncertainty and the approaching Brexit deadline.
The past few decades, people have continuously been feeling as if they are earning increasingly less. While an individual in the late 80s with an annual income of £50,000 and property of which the value yearly increased by £30,000, felt more like they were earning £60,000; the opposite is true for that same individual by the early 90s, during a serious economic recession and with property prices dropping. When applying the same scenario today, it is clear that luxury purchases may be deferred or avoided, but consumer confidence is still hanging on and shoppers have not stopped spending altogether.
It’s not too late…
The typical sales madness during the last few days before Christmas, followed by the January sales may still improve retailers’ trading performance for the season. For those who are not successful, insolvency will follow. However, consumerism is down, not out, and thus retailers can still act to improve their current situation.