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Challenging times ahead for UK retail?

By Jamie Calder
Trade credit underwriting specialist

Several years of impressive performance in UK retail could be coming to an end but thankfully, credit insurance is on hand to help suppliers into the retail sector protect themselves against bad debts.

It is widely acknowledged that a significant factor in the UK economy dragging itself from the clutches of the 2008 financial crisis and subsequent recession, was the growth of the UK retail sector. A prolonged state of low unemployment, low inflation and cheap credit has aided a revival in consumer demand, ensuring the tills have kept ringing.

It is not all positive, however; the conditions that aligned to facilitate the buoyant climate are beginning to shift. Jamie Calder, a trade credit underwriting specialist at QBE, outlines the bellwethers that could indicate the UK retail sector is facing a challenging future and how businesses can utilise credit insurance to prepare themselves.

Rising inflation rates

UK Inflation reached a four year high of 2.9% in May 2017, exceeding the Bank of England’s 2% target. UK retailer success can depend on their ability to react appropriately to inflation. Retailers’ cost-bases will correlate with increases in commodity pricing, a trend currently prevalent within food and beverage and fashion. In this situation, the retailer either has to absorb the cost to the detriment of its profit margin or consider raising their prices during a time of falling demand and continued high competition.

Retailers unable to pass their increased cost-base on to the consumer will face significant challenges, potentially being forced to develop a more capital intensive model to lower their long term cost-base.

Real wage growth

UK wage growth continues to lag behind inflation despite an unexpected bump in the three months to June 2017, driven by the increased leverage afforded to employees following a drop in unemployment figures. Where the retail sector is concerned, if wage growth continues to lag behind inflation, consumer spending will be pinched as real incomes fall. Historically, this has led to consumers becoming less inclined to spend on non-essential items. The Bank of England remains confident that real wage growth will recover over the next two years, but this is largely dependent on the UK Government negotiating a smooth exit from the EU.

The fall in value of Sterling

The value of the British Pound was immediately weakened by the uncertainty caused by the result of the 2016 independence referendum. This scenario has created winners and losers in the UK economy. Businesses that export or rely on foreign investment will theoretically enjoy higher demand from buyers overseas as their product becomes comparatively cheaper. However, the UK is a net importer, and many UK retailers themselves will rely on imported goods. In theory, these organisations will have hedged against currency risk; those who fail to hedge effectively will suffer from cost-base pressures.

Business rates

Taxes on properties occupied by UK businesses have reached a total of c.GBP30bn per annum. A significant rise was seen in April 2017 with some businesses seeing their rates doubled.

Retailers in and around London will have been acutely affected by a system that is in some quarters considered to be inefficient, with a particularly disproportionate impact felt by the high-street. Online retailers inherently avoid the consequences of these changes because they are not reliant on a high-street presence to remain front of mind with consumers.

UK National Living Wage

The National Living Wage - effectively the minimum wage for people over 25, was increased to GBP7.50 per hour in April 2017. Although adhering to these guidelines is voluntary, retailers that have agreed to partake in the scheme now face increased labour costs when compared to the same period in 2016. Similarly, an increase in minimum wage will hurt those retailers already contending with inflationary pressures and growing business rates.

Credit boom

The most recent figures from the Bank of England show that unsecured consumer credit has reached similar levels to those of 2008, at the height of the financial crisis. Low interest rates have led to double-digit growth rates in consumer lending with credit card consumer debt reaching an 11 year high*.

History tells us a growing level of borrowing increases the number of people vulnerable to sudden changes in market conditions. If inflation continues to rise and real income falls, we may start to see interest rates increasing, which will materially impact those sitting on burdensome debt piles. Banks may consequently choose to ease back on consumer credit, resulting in a likely fall in demand on the high-street as perceived disposable income decreases.

Political uncertainty

Although Article50 of the Lisbon Treaty has now been triggered and approved by MPs, we are still no closer to understanding how the UK will look, following its split from the EU. The June 2017 general election failed to create the widely expected stability, in fact resulting in increased uncertainty as the Conservatives saw their majority wiped out as Brexit negotiations began in earnest. The result saw further downward pressure on the pound and even greater uncertainty. UK retailers who rely heavily on the EU market for supply or demand will be hoping for a smooth and successful set of Brexit negotiations.

Retailer insolvency

There have been some retail sector casualties in 2017 both in the UK and internationally, with many firms facing insolvency. High profile examples include Blue Inc., Agent Provocateur, Jaeger, Jones Bootmaker, 99p Stores, Brantano and American Apparel. This trend only picked up where 2016 left off, however, with notable casualties including British Home Stores (BHS) and Austin Reed with Banana Republic also closing its UK operations.


2017 has on the whole seen a fall in consumer confidence, albeit with a slight recovery in May 2017. However, it is widely perceived that the actual economic impact of some of the trends above has yet to hit consumers, as retailers continue to absorb costs to remain competitive. Comparative confidence is likely to fall further towards the end of the year with sales of non-food items continuing to drop in the months running up to July 2017, with general increases in UK retail performance almost exclusively driven by food.

How can we help?

Credit insurance is available to help suppliers into the retail sector protect themselves against bad debts, and QBE has a specialist team operating in this area. We are geared-up to support retail suppliers across the board, particularly those that operate within competitive, low margin sectors, with a presence on the high-street and reliance on imports. That being said, we recognise that although the risks facing UK retail are increasing, it does still present opportunities for those businesses who are versatile enough to diversify and adapt to the challenges they face.

We will remain close to our clients’ customers in the retail sector; continuing to engage in an open dialogue with them and working with their latest financial information. This enables us to continue to have a strong appetite for UK retail risks.

If you operate in the UK retail sector and have questions regarding any of the points discussed, or are interested in credit insurance in general, please do not hesitate to contact us, we are here to help you.

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*February 2017