Memorandum submitted by the British Retail
Consortium (BRC)
INTRODUCTION
1. The British Retail Consortium (BRC) is
the lead trade association representing the whole range of retailers,
from the large multiples and department stores through to independents,
selling a wide selection of products through centre of town, out
of town, rural and virtual stores. Our membership comprises approximately
80% of the UK's retail industry.
2. The BRC notes that the Business and Enterprise
Select Committee's inquiry into `Creating a higher-value added
economy' has considered the wider current economic situation and
the challenges this poses businesses and all those with an interest
in the viability of UK plc.
3. The retail sector is a key industry in understanding
the health of the UK's economy. Retail's daily front line interaction
with consumers is an excellent barometer in assessing whether
consumers are feeling the effect of the economic downturn, the
level of disposable income customers have and the way in which
increased costs affects buying patterns.
4. Creating a higher value added economy
is hugely dependant, not only on the quality of goods and services
offered by businesses of all descriptions, but also on the willingness
of consumers to purchase the products and services. All businesses
are reliant of the attractiveness of their offer and their ability
to convince the consumer that what they present them with is worth
purchasing. Any policy, be it emanating from the Government or
an internal strategy operating at individual company level, has
to consider the end consumer.
5. The retail sector is very aware of this
and its operations at all levels start with thinking about the
consumer. Any manufacturer looking to work with retailers will
need to bear this in mind.
6. As the Committee concludes its inquiry
into creating a higher value-added economy, the BRC wishes to
aid members in its deliberations. Below we set out analysis on
the current economic climate and how consumers are responding
to this. As the Committee reaches the end of its inquiry, the
economy has shifted dramatically from where it was at the start.
Members of the Committee will no doubt have this at the forefront
of their minds to make sure that the Committee's views and recommendations
are relevant and valid when the economy is stable, as well as
when times are more difficult.
7. This submission also highlights some
examples of retail innovation. Retail is a very fast moving sector,
both in the goods sold to consumers but also in their operations.
Efficiency and consistency are key objectives at every part of
the supply chain and often the best innovation comes from new
developments meeting this criteria. Additionally, retailers have
harnessed innovative technology to help reduced their carbon emissions
and promote green, sustainable, retailing. The BRC would hope
the Committee considers the sector's contribution to innovative
practices as it conclude this inquiry.
RETAIL IN
THE CURRENT
ECONOMIC CLIMATE
Economic Overview
8. The outlook for both the UK economy and
the retail industry has deteriorated considerably during the last
12 months with recent confirmation from the Office for National
Statistics (ONS) that the economy contracted by 0.5%. Although
last month's announcements by the UK Government and other policymakers
seems to have pulled the financial sector back from the brink
of a full-scale meltdown, the credit crunch has entered a new
phase and is hitting the retail sector very hard.
9. The financial crisis has split over into the
real economy fast with all key economic indicators pointing towards
recession. A combination of falling house prices, high inflation,
rising unemployment and shrinking real disposable incomes has
further provoked a sharp slowdown in consumer spending with retail
sales (KPMG-BRC RSM) down on a like-for-like basis in seven of
the last eight months. The claimant count has now increased for
the ninth successive month and considering the labour market lags
the economy by around six months, this will put further downward
pressure on house prices and consumer spending, with the worst
still yet to come.
10. There is a degree of fear that the economy
is teetering on the brink of a vicious downward cycle. As banks
continue to restrict lending and house prices continue to fall,
households are experiencing a "negative wealth effect",
cutting back on spending and reducing investments, contributing
to the rise in unemployment. Consequently, as unemployment rises
this could then lead to defaults on debt repayments, particularly
mortgages, leading to further loses in the financial sector. Banks
may then restrict lending further, to households and businesses,
compounding economic weakness and further perpetuating the cycle.
11. The decision by the Monetary Policy
Committee (MPC) to cut interest rates by 1.5% in November is a
clear indication that unprecedented measures are being used to
combat a rapid deteriorating economy. Interest rates are now the
lowest since May 1954 at 3%, and it is widely expected that the
Bank Rate will fall further to 2% by early next year, while the
Governor refused to rule out the possibility of a zero percent
Bank Rate.
Figure 1.0—LIBOR and Bank Rate—2006-08
Source: Bank of England.
12 Figure 1.0 shows that the reduction in
the Bank Rate has had a marked effect on the rate at which banks
lend to each other (LIBOR), the difference shown by the bars at
the bottom of the chart. The difference between LIBOR and the
Bank Rate has decreased significantly recently, shown by the bars
on the far right of the chart, however, historically the gap still
remains wide. The government has strongly urged banks to pass
on these savings by cutting mortgage and other lending rates which
generally seems to have been implemented. A large proportion of
households (c.30%) have tracker mortgages, and so these households
will particularly benefit.
13. It has become imperative for the Government
to use fiscal policy at a time when monetary policy has lost its
potency. The Chancellor outlined his fiscal plan in the pre-budget
report, a reduction in the rate of value added tax (VAT) causing
the greatest concern among retailers, while the other most significant
measure is to introduce an upper tax bracket for high earners.
The Chancellor has reduced VAT to 15 per cent from 17.5% beginning
the 1st December running through to 31st December 2009. The Chancellor
outlined that the cost of implementing such a cut would be in
the tune of £12.5 billion, claiming that it was "a measure
to help everyone and deliver a much needed injection into the
economy", however its effectiveness will be widely debated.
One powerful argument against it would be the Ricardian Equivalence.
This suggests that a reduction in taxation will be ineffective
as individuals will view government borrowing simply as deferred
taxation, and so will respond by saving more, hence there is no
overall change in economic activity. Although most economists
view this strict model as simplistic and relying on abstract assumptions,
such as perfect rationality, it raises concerns over the effectiveness
of fiscal policy in general.
14. The labour market sunk to new lows when
official figures were released in November showing that the claimant
count has now risen for the ninth consecutive month (Figure 1.1),
the fastest rise for over 17 years.
Figure 1.1—Changes in the Claimant
Count (000's month-on-month)
Source: ONS.
15. Considering employment is a lagged indicator
and GDP was still growing, although modestly at 0.3 per cent in
Q1 2008, it raises concerns about the future of the labour market
now the economy is actually contracting. Figure 1.2 compares the
annual growth of GDP with employment growth since 1985. It demonstrates
that during the recession of the early 1990s, GDP fell to a low
in April 1992 where the economy contracted by 2.2 per cent. It
took a further six months before employment growth reached a trough,
contracting by 3.5 per cent, depicted on the graph. It would appear
that the future of the economy is darkening rapidly.
Figure 1.2—Comparison of GDP growth
and Employment Growth
Source: ONS.
16. According to the ONS the sectors that
have been worst affected so far have been manufacturing, construction,
finance and distribution, hotels and restaurants, although the
reality is that this will spread into other sectors quickly. Regionally,
London, the West Midlands and the North West have experienced
the fastest contractions in labour, with employment falling 0.8%,
0.6% and 0.7%, respectively. A sharp contraction in the labour
market will have serious implications for the retail industry
and further undermine consumer confidence. The weakening labour
market has added to contractions in retail spending while ongoing
difficulties in the financial sector have only dampened expectations
regarding job security.
Retail Trading Climate
- The consequence of the weakening economic climate
has affected spending and consumer confidence considerably over
the last three months, shown in Figure 1.3. Although sunny weather
in May 2008 did, to an extent mitigate the slow down in sales,
trading conditions have deteriorated markedly with negative like-for-like
sales in six of the last seven months. Consumers' perceptions
about the current economic climate and future expectations about
employment, coupled with increasing energy bills, and falling
house prices have led to a cut back in spending, leaving the retail
industry facing very challenging trading conditions.
-
Figure 1.3—BRC-KPMG Retail Sales
Monitor and GfK NoP Consumer Confidence
Source: BRC and GfK NOP.
18. The BRC-KPMG Retail Sales Monitor (RSM)
revealed a contraction in spending during the last quarter on
a like-for-like basis of 1.6%. In October 2008 retail sales were
2.2% down compared to the same month last year. This represented
a fall in sales by value, despite shop price inflation rising
to 3.0% in November according to the SPI, and 4.5% according to
the CPI. Although the latest GfK-NOP consumer confidence revealed
a slight improvement in September, it would be expected to decline
further next month in light of recent events in the financial
and labour markets.
19. Some sectors of the retail industry
have held up better than others. According to the RSM, there has
been slight growth in grocery sales, partly due to food price
increases and partly through a switch from eating out to home
cooking. Furniture and flooring has been particularly affected
due to its dependency on the number of house moves.
INNOVATION IN
RETAIL
20. This evidence now moves to focus on
innovation in the retail sector. As stated in the introduction,
retail is a hugely innovative industry. One of the ways retailers
hope to ride out the economic storm is ensuring its operations
are performing at a high and efficient level to produce the least
amount of waste, be that through time or cost. Retail is also
innovative in the way it works with others in the supply chain.
When problems are identified with particular practices, often
innovative solutions are implemented to get round the issue.
21. One example of this is the Safe and Local
Supplier Approval (SALSA) scheme. Food retailers, manufacturers,
farmers and the catering industry recognised the demand of locally-sourced
produce however, they were also well aware of the issues preventing
this food reaching the marketplace, not least compliance with
stringent health and safety standards that are a necessary requirement
of food available to the mass public. To solve this problem, the
BRC, together with the Food and Drink Federation (FDF), National
Farmers' Union (NFU) and British Hospitality Association (BHA)
worked together to develop a common, low cost, supplier approval
process for smaller food producers and processors. This scheme
has had a huge impact in helping small, local producers get their
products to market and was hugely innovative in seeing the chain
come together to find a solution to this problem.
22. Quick and consistent stock replenishment
is hugely important for each and every retailer. Several retailers
have invested hugely in Radio Frequency Identification (RFID)
technology to help speed up this task. Essentially, RFID is an
extension of the traditional barcode technology and is included
on the label of an item. The advantage is that the tags do not
need line of site with the reader, so stock taking is far quicker
and easier—a rack can be scanned once and the data as to
the sizes and styles that need replacing is instantly available.
23. RFID has many more potential uses that
retailers and the BRC are looking into. For example, this technology
could be hugely beneficial in finding food products that are close
to the end of their `sell by' date, facilitating returns and providing
information of the origin or environmental credentials of products.
Retailers are keen to increase their innovation in this regard
however, currently work has stalled as the European Commission
is due to make a recommendation regarding this technology in 2009
which could have an implication on the costs of using RFID. Some
fairly hypothetical questions regarding privacy have been raised
and the Commission may insist on mandatory deactivation of tags
at point of sale or possibly offering customers the option. Retailers
have worked hard with the Commission to reach a sensible conclusion
that enables this innovative technology to continue to be harnessed.
Retailers have also engaged in constructive dialogue with BERR,
who have been very helpful. Retailers are keen to continue to
innovate in this area, in a responsible manner, and we would hope
the Committee would support us in this aim.
24. The barcode itself has traditionally
been held as an exemplar of innovation. In June 2007 the former
DTI published a report entitled `Innovation in Services'
which looked at emerging evidence and thinking on services innovation
in the UK1. The report stated that innovation is one of the five
drivers of productivity growth alongside skills, investment, enterprise
and competition (page iii), which demonstrates the importance
of the issue. The report states that there have been many innovations
in retail services but cites the introduction of bar code scanners
linked to information and communication technology as having `transformed'
retail (page 6). The work on RFID shows that retailers have continued
to harness the technology associated with barcodes to further
innovate in this area.
25. The report also highlights the competitive
advantage that comes from innovation (page 63). The BRC would
certainly echo this point and would argue that this is a positive
benefit to the public and the country. Often a retailer will introduce
a new approach that provides them with an advantage and other
retailers will seek to replicate the approach. The report highlights
that learning from a competitor's innovation is not simply a sector-specific
trend with, citing, for example, an airline company learning from
a hotel group regarding customer service and a leisure company
and a theme park organisation looking to retail to learn from
their approaches.
26. Retailers also use price and placement
as innovative ways to introduce products, or indeed, to alter
customer behaviour. Retailers understand that price remains the
key driver of shopping habits (as FSA research into food shopping
habits continually concludes) and they often use this to introduce
a new product by enabling customers to try something that they
would not usually due to cost implications. As you will be aware,
the industry has a target to phase out the use of standard incandescent
light bulbs by the end of 2010. Several retailers have therefore
taken the step to introduce a long term promotion on energy efficient
lightbulbs which includes some stores reducing their cost by half,
stocking a wide variety of bulbs and introducing them at different
price points. This has clearly affected consumer behaviour and
helped greatly increase the use of energy saving lightbulbs by
the public.
27. Retailers will also use innovative displays
of products to inform consumers of information they should be
aware of. Point of sale messages explaining the benefits of products
and the use of whole bays or gondolas are often used when a products
needs greater explanation to communicate its benefits. With reference
to the promotion of energy-saving lightbulbs, this was hugely
beneficial in explaining to consumers the differences and benefits
and has contributed to the great shift in buying behaviour from
traditional lightbulbs to the more environmentally-friendly variety.
28. Transportation is another area where
retail is a highly innovative sector. Clearly transport policy
is a key part of any retail operation. Goods must reach distribution
centres and stores on time, in impeccable condition and in the
most efficient way possible. Retailers do not want to transport
goods unnecessarily, not least due to the environmental and financial
costs this would incur. To this end, many retailers invest considerably
in their transport networks. Retailers' work in this area is varied
and includes the use and trialling of electric vehicles, hybrid
engines, efficient engines, double deck trailers, fuel efficiency
and technology such as cruise control. Additionally, many retailers
now transport more goods using the train network or even canal
system. Retailers are keen to highlight their environmental credentials
and, with reducing carbon emissions and costs being a joint benefit
to investment in transport, this is a key area of innovation.
29. Environmental policy is a key driver
of innovation and many retailers have developed new systems to
help them play their part in reducing their environmental impact.
A further example of this is the investment in stores themselves.
Many retailers are using expansion plans as an opportunity to
build `eco' stores that place emphasis on renewable energy, environmentally-friendly
and (where possible) locally-sourced building products, doors
on chiller cabinets and recycling and recyclable materials. Innovations
of this kind can lead to these stores being up to 40% more energy
efficient than standard stores. Harnessing innovative technology
and thinking creatively about the store as a whole is key in this
area and retailers are very much driving development in this regard.
CONCLUSION
31. This evidence has cited a small number
of innovative practices in the retail sector which the BRC hopes
will give the Committee a good flavour of the considerable work
the retail sector does in this area. We also hope the economic
analysis provides Committee members with a thorough understanding
of the current challenges the sector, and the UK as a whole, face.
Clearly the main issue of concern at the moment is the economic
situation and work in every retail business is focused on surviving
the economic downturn to continue to continue to provide employees
with jobs and consumers with the shops they need.
November 2008
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