Risk and Reward: sustaining a higher value-added economy - Business and Enterprise Committee Contents


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

  1. 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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