Retail Reduced - 7 big themes in September 2022 for the retail sector

Liz Truss’ Government has committed to a wide range of tax cuts and borrowing in its Growth Plan 2022 to prop up demand as the economy falters  – measures included cuts to income tax from April 2023 and reversing recent and planned corporation tax and national insurance rises. The Government has also pledged to reintroduce tax-free shopping for overseas visitors (including a consultation on a digital scheme) – potentially boosting retail particularly in tourist areas. A freeze on alcohol duty rates from 1 February 2023 has also been announced. In the longer term the Government’s plans for new investment zones in 38 local areas could benefit new retail developments. However, as the BRC note in their reaction to the Government’s plans, there was no mention of reductions to business rates, something the retail sector lobbied hard for during the leadership campaign.

In terms of measures concerning retail workers, the Government’s announcement included proposed legislation to introduce minimum service levels for transport services to mitigate the impact of strikes (potentially easing pressures for retail workers getting to and from work during strikes). Proposed reforms to improve access to flexible childcare support could also benefit retail workers (although the announcement contained no details). The Government also proposed legislation ‘to make it easier to settle industrial disputes by ensuring meaningful employer pay offers are put to employees’.

On the energy crisis, the Government has announced new measures to address rising energy costs for businesses. The Energy Bill Relief Scheme will fix wholesale gas and electricity prices for all businesses, charities and public sector organisations on non-domestic energy tariffs. The Government has set a Supported Wholesale Price – expected to be £211 per MWh for electricity and £75 per MWh for gas – and will compensate suppliers for the reduction in wholesale gas and electricity unit prices that they are passing onto non-domestic customers (the difference between the rate the business is currently paying and the Supported Wholesale Price). It will apply to fixed contracts agreed on or after 1 April 2022, as well as to deemed, variable and flexible tariffs and contracts. It will apply to energy usage from 1 October 2022 to 31 March 2023, running for an initial 6-month period for all non-domestic energy users. Government support will be subject to a maximum discount – likely to be around £405/MWh for electricity and £115/MWh for gas, subject to wholesale market developments. The discount will be applied automatically. Energy consultants Cornwall Insight note the support effectively reverts market prices back to the Spring of 2022.

The support package is extensive in scope although retailer and consumer businesses will wonder what, if any, support is planned from April 2023 when wholesale prices are still expected to be very high. Although they are still eligible, application of the discount may also be more complicated for larger businesses on flexible purchase contracts, as the Government guidance acknowledges.

The retail and consumer sector acted quickly to honour the late Queen and navigate the legal and reputational implications arising from the new Bank Holiday and period of national mourning.

It will be interesting to see how the long weekend impacted retail sales figures. August was a very challenging month for retail sales, with retail sales falling 1.6% month on month, falling faster than commentators had predicted. Closures for the Queen’s funeral and restraint during the mourning period could prompt further declines in September, although certain niche categories may have done well.  For example, retailers sold out of the Queen’s favourite drink, Pernod Ricard’s Dubonnet, as shoppers honoured her memory. Marmalade sales were apparently also up as consumers made marmalade sandwiches in tribute to the Queen’s recent adventures with Paddington Bear.

As a result of the Queen’s death, Royal Warrant holders have two years to drop the use of the Royal Arms, as those warrants are now all void. Warrant holders may reapply to the new monarch.

Good retail and consumer sector tenants may be increasingly hard to source as the cost-of-living crisis dents consumer confidence and puts pressure on retailers’ costs. Some retailers are cutting plans for new stores (Iceland for example has paused new store openings due to energy price rises).

In the economically challenging months ahead due diligence on tenants will be important for retail landlords. Earlier in August the Financial Times covered Oxford Street’s challenges and in particular the proliferation of American-style sweet shops  in place of the big-name tenants historically associated with this famous shopping street. The sweet shops have been accused of tax evasion and worse and have opaque ownership structures.

With some retail and consumer businesses bringing forward spend on energy saving initiatives in the wake of rising prices (and possibly using savings from the new Energy Bill Relief Scheme to fund energy saving measures), energy efficiency improvements could be an increasing source of friction between landlords and tenants.

In September UK consumer confidence fell to its lowest level since comparable records began almost 50 years ago.

The ‘social’ in ESG is growing in importance as retailers balance their own cost pressures against the need to support consumers facing financial hardship. Retailers want to encourage spending. But what is responsible and appropriate?

Iceland is partnering with community interest lender Fair for You to offer micro loans of between £25 and £100 to Iceland customers via pre-payment cards. Iceland has said that trial micro loans of between £25 and £100 resulted in 92% of customers who had been turning to food banks, stopping or reducing their reliance on these services.

But retailers must be wary of legal considerations if providing credit to customers – even if done for social rather than commercial reasons. The FCA has written a “Dear CEO” letter to members of the British Retail Consortium (pdf download) to remind lenders and merchants who offer Buy Now Pay Later (BNPL) agreements that they must meet regulatory obligations when promoting those agreements, or risk committing a criminal offence.

Over the summer retailers have been looking at innovative ways to support workers in the cost-of-living crisis. Where possible retailers are reviewing pay, but many are looking beyond pay to other benefits. John Lewis is offering free meals to staff this winter.  Sainsbury’s has recently announced increases in pay and a support package for staff including free food for workers. Marks & Spencer has raised pay and is extending the free food it offers to staff as well as providing free sanitary products.

How retail and consumer businesses can support workers will continue to be a key theme in the months ahead.

Over the summer we have seen more news recognising the increasing popularity of the second-hand market / circular economy for cost and environmentally conscious consumers (see Ebay sponsoring Love Island). Decathlon launched a rental service across a range of sports and lifestyle products to help out consumers during the cost-of-living crisis. Tommy Hilfiger has partnered with online resale platform thredUP allowing its US customers to sell their second-hand Tommy Hilfiger clothing in return for Tommy Hilfiger credits (and shop for second-hand items). PrettyLittleThing is launching a re-sale marketplace that will allow users to sell and purchase clothes from both PrettyLittleThing and other brands via an app. Uniqlo is taking a different slant and is expanding its clothing repair services offered in Regent Street, with plans to expand to other stores.

Fashion retailer Reiss has posted a profit before tax and exceptional items of £39.6m for the year to 30 July 2022, compared to a loss of £3.8m the year before. An interesting collaborative aspect of Reiss’ success is how the retailer credits use of Next’s Total Platform services (Next’s outsourcing service where brands can ‘buy-in’ use of Next’s stores, warehouses, delivery networks, systems, marketing, and credit facilities) for delivering significant improvements to its operations.

As cost pressures intensify it will be interesting to watch to see if more retailers seek mutually beneficial collaborations to drive efficiencies and improve supply chains.