One of the most interesting areas in this month’s Scottish Chambers of Commerce Quarterly Economic Indicator was the evidence of falling optimism in the retail sector, together with nearly half of respondents telling us that their revenues and profits are declining. Retail is of course the part of our economy that is most exposed to one of the key challenges businesses are facing right now: declining real incomes in the face of rising inflation.
Since the beginning of this year, inflation has risen from 1.8% in January to 2.6% in June. At the same time, average earnings are growing at just 2.0%, meaning that real incomes and purchasing power are falling. In the short term, it is not all bad news for retailers – the good weather in April did spark a rise in sales and there are hopes that better summer weather may drive up sales in the July to September period – but if people have effectively less money in their pockets, then that will affect the amount they can spend. This is a crucial consideration when three quarters of our economic growth is driven by consumer demand.
However, retail is changing and adapting to circumstances. January sales are now all but a thing of the past, with the sales period now starting around Black Friday and running through to Christmas. As a summer counterpoint to this, July’s Amazon Prime Day saw the online retailer’s sales reach the highest daily level in its history, growing by 60% compared to last year’s event and eclipsing even Black Friday.
The consumer trend towards chasing value and quality is further evidenced by Aldi’s ambitious plans to almost double its number of UK stores to 1,300 by 2022, with rival Lidl planning its own £1.5 billion expansion. At the same time, successful fast food franchise Subway is planning to open a further 500 UK stores by 2020, taking its number to 3,000 across the UK and Ireland.
So whilst many retail businesses may be chasing a diminishing level of spending power, it is clear that there are, and will continue to be, some stand out successes in the sector. Value is clearly attractive but so too is quality and the customer experience, so while online sales are growing, much of it is being spent at retailers with a High Street presence, such as John Lewis, Apple, or Nespresso. Perhaps this is why even Amazon is now looking at a model that includes physical stores.
The good news is that there are still many opportunities in retail for the right business – large or small – which is focused on delivering a quality and value experience to its customers. With that in mind, perhaps we will soon see a return of optimism to the sector.
First published, The Courier, July 2017
