The UK retail market is set to increase in size by 15% over the next five years, taking its value to just over £312 billion. However, this headline masks the fact that retailers will experience falling profitability as operating costs and the cost of credit rise disproportionately, which points towards the challenging times the retail sector faces over the next few years.
This year’s winners, among others, come from the garden and DIY sector, the pet sector, baby/childrenswear and toy retailing. Those who haven’t fared as well include outdoor/sports retailers and entertainment sector.
Therefore, in an industry of high-profile losers and sometimes seemingly staggering deal dynamics for businesses that demonstrate resilience in the current economy (eg Pets at Home), we look at the main challenges for retailers in the run up to 2012.
Availability of credit insurance
In the crunch of 2008 many companies were driven out of the market by the lack of credit facilities, meaning they could not fund stock. This remains high on the agenda for many retailers, with suppliers reluctant to do business with retailers who cannot demonstrate adequate insurance protection. The message is clear – make sure you are talking to your insurers regularly and that they understand your business so that adequate cover is established for peak periods.
Supply chain security
Suppliers are under financial pressure and consideration needs to be taken of the consequences of a major supplier failure. Are adequate back-up arrangements in place to mitigate such an event? At present, many retailers are changing sourcing from China to India and Bangladesh. There are widespread concerns over capacity constraints and infrastructure in both countries. Are delivery schedules realistic? When supplier margins and payment terms have been aggressively reduced and capacity constraints occur, suppliers can ’cherry pick’ orders to fulfil.
For ’seasonal’ retailers, old seasonal stock should be close to 90% sold by the time the new season starts. In this climate margin needs to be sacrificed. There is little point holding onto stock as old season stock rarely sells.
Input costs remain high and are growing. Therefore retailers should, where practical, be looking to hedge to mitigate this, either by using derivatives or through fixed pricing.
Responding to competitor actions
With significant constraints on consumer disposable income, delays in responding to competitor actions can be costly and will be magnified in a downturn. Retailers need to consider whether mechanisms to monitor such activity have been implemented and is the business responding accordingly?
In general, online sales will continue to grow and retailers therefore need to assess their online presence and strategy. However, we believe that the playing field is changing. Some pure retailers without a brand or physical sites to showcase their products are showing some signs of weakness (ASOS among others excepted). This is particularly so in fashion, where every chain has a transactional website now.
Ones to watch
Retail covers a variety of businesses as the following section demonstrates
Fat Face is an active lifestyle brand that sells clothing, footwear and accessories for men, women and children. It is a multi-channel brand with a network of 171 wholly-owned stores, mail order catalogues, a fully interactive website and a growing wholesale operation. With a turnover of £152 million and employing over 2,000 staff, this company has a strong balance sheet.
Fat Face website
Established for almost 150 years, Hillier Nurseries are one of Britain’s premier growers of hardy garden plants, for garden centres (including 14 of their own) throughout the UK. The company has a turnover close to £27m and employs 496 staff.
Hillier Nurseries website
Established in 1972 as a single site in Micheldever, where the head office remains, Hampshire-based Micheldever Tyres, the UK’s largest tyre distributor has seen the business grow to be the UK’s largest tyre distributor and, under the Protyre brand, the fourth largest tyre service centre operator by volume. Now employing 1,100 people, Micheldever Tyres sold six million tyres in the 12 months to March 2011, generating £300m in revenue. As part of its ongoing expansion, the company recently announced an increase of its existing financing facilities and the completion of two acquisitions.
Micheldever Tyres website
For more information on the retail sector in this region and throughout the UK, contact:
Corporate finance manager
Grant Thornton website