Those in the retail and restaurants and bars sectors would be forgiven for entering 2018 with a sense of trepidation. Whilst restaurants and bars saw a comparatively stronger growth in 2017 from the weak base of a year earlier, as costs and inflation began to bite, the outturn for the year became subdued. As we entered 2018, disruption was the prevailing theme. This disruption took many and varied forms; ranging from uncertainty as a result of ongoing Brexit negotiations;Trump’s executive orders, the influence of new technology and increased competition from online channels; Big Data, and the ever changing consumer habits.
At the start of 2018, we witnessed concerns over performance across both sectors. This led to the high profile administrations of a number of traditional bricks and mortar retailers, particularly those with large property footprints and trading models which had been slow to adapt. The business failures were mirrored across casual dining sector, where we saw several well known chains revive the CVA in conjunction with well publicised negotiations with landlords in a bid to alleviate pressure on their underlying cost bases.
The critical trading period of Q4 2017 started off poorly with the worst October in 10 years, and it took until the last week of December in the week ending in Christmas Eve, for sales to finally achieve positive growth, up by +5.31% as compared to the equivalent week in the prior year. Last-minute pre-Christmas purchases and a level of discounting associated with Super Saturday gave sales a much needed boost. However, as the discounting season got underway in earnest in the last week of December, which also included Christmas Day this year, sales were down by –3.84% to end the month with a bump.
Weak trading performance has continued into 2018, where unsurprisingly the Beast from the East provided a real challenge to bricks and mortar sales which have now been negative in every February since 2013. In-store sales have also not seen positive growth in four of the last five months and whilst online sales continue to grow above their high street peers, we’ve seen a significant slowdown in what has been to date a consistently strong retail category. If there is any ray of sunshine for the online retailers, it is that as they have begun to mature, their operating margins have increased as a result of a more established business model. However with the recent suggestion of a turnover based tax for these ‘new’ retail models the healthier margins may well be squeezed in the near future.
Source: BDO High Street Sales Tracker showing LFL sales across categories in 2017.
Restaurants and Bars
Figures from the Coffer Peach Business Tracker showed Britain’s managed pubs, bars and restaurants experiencing slight growth in sales in February 2018, with an increase of 0.2% year on year. Pubs and bars posted better like-for-like sales, up by 1.3%, while restaurants saw sales decline by 1.5% nationally. London fared better than the rest of GB, with like-for-likes up 0.8% compared to flat trading across the rest of the country.
Negligible growth in February, coupled with a tough 2017, particularly for London restaurants, adds further pressure to the sector, which has already had to absorb significant cost pressures around property, tax and employment costs, along with the peaking food inflation. With further increases in the national living wage and auto enrolment pensions costs due next month this coupled with ongoing rent and business rates negotiations there seems to be little respite from escalating cost burden.
The fog is yet to lift on the Brexit forecast for 2018
There were certainly many important questions left unanswered at the end of 2017. What progress would be made on those crucial Brexit negotiations? What would Brexit mean for the future of the workforce and the supply chain? How would consumer spending hold up, as household incomes felt the squeeze of higher inflation and limited wage growth?
While UK GDP growth in 2017 was stronger than predicted post referendum and consumer spending did not take the hit that was feared, Brexit-induced uncertainty has continued to cast a shadow over growth prospects in Q1 of 2018. This high level of uncertainty is causing businesses to waver over investment decisions, to the detriment of productivity and economic output. The continuing absence of a unified government stance on the goals and direction of Brexit only serves to compound this disruption for both businesses and consumer confidence. However, with the government starting to make headway with the announcement this month of a two year transition period for the UK’s exit from the European Union, we hope that the ill effects brought about by uncertainty will now start to ease.
Source: Global Data Consumer Sentiment Tracker for 2017
In addition to Brexit negative impact of an uncertain political and economic environment has also compounded the decline of consumer confidence which has been particularly subdued for the past nine months and culminated in a drop to -34.5 in November, which didn’t bode well for festive spending.
Although, increasing slightly at the beginning of 2018, consumer confidence is not expected to improve until there is positive real wage growth and greater clarity on the impact of Brexit for the consumer. Whilst the consumer purse remains tight the weak confidence and continuing uncertainty are likely to result in an even more cautious consumer , so we would not expect the pressure on retailer sales to ease in the short to medium term. Poor consumer sentiment is also likely to precipitate the discounters and disruptors gaining further market share as consumers look to trade down or in different ways.
Weathering the storm in 2018
As we reflect on 2017 and 2018 so far, we cannot ignore the impacts resulting from the political and economic uncertainty which weighed heavily on the UK economy throughout the year. The consequential effects on consumer confidence and spend would have led many consumer businesses to refocus their strategy to respond to short and medium term impacts.
Whilst we expect that the cost effects of inflationary pressures will ease, sector transformation brought about by technological disruption and a new consumerism will continue to provide both challenges and opportunities to the sector - and if the recent past is anything to go by, at an increasing pace.
So where should consumer businesses concentrate their efforts in 2018?
1. A COLLABORATIVE BUSINESS MODEL
Savvy retailers and restaurants owners will be looking to identify complementary service providers to manage costs effectively and increase market penetration moving forward. This will cover areas such as:
- working in synergy with those that can support elements of their supply chain to protect margins against further cost rises; and
- ensuring that retail stores are positioned alongside complementary brands to encourage footfall and joining forces with others to deliver an enhanced retail, leisure and dining experience for the consumer.
2. EMBRACING TECHNOLOGY
As cost increases take full effect and inflationary pressures on the consumer purse become even more real, those in the sector will be looking at all avenues to protect margins. Looking at the structure of a bricks and mortar retailer next to their online only equivalent, it is impossible to ignore the vast difference in operating model and business structure between the two.
As well as embracing new channels to market and utilising Big Data as a tool to find and retain customers, retailers and restaurateurs should look to innovative technologies to create efficiency, reduce costs and find new routes to the customer.
3. CUSTOMER IS KEY
Whilst 2017 will be viewed as a difficult year, the gap is widening with clear winners in the sector reporting
strong profits and plans for expansion. Brands who have been successful have understood who their consumer is, what they want, how much they’re willing to spend and how they want to be communicated with. Significant financial investments into technology should be customer led to generate the right returns for the longer term; considering not only the consumer of today but understanding who that customer will be tomorrow.