Business, Innovation and Skills CommitteeWritten evidence submitted by the British Independent Retailers Association

1. Executive Summary

1.1 The British Independent Retailers Association (bira) provides an analysis of the UK retail sector breaking out the contribution and importance of independent shops, the great majority of outlets. It analyses the dynamics of the market and calls for a number of initiatives by government to maximise the potential for growth in the sector, both in the UK and in its outreach abroad.

2. Introduction

2.1 bira represents over 5,000 UK independent retail businesses with more than 7,000 outlets, providing both services and advocacy for the sector. It advocates a data-driven approach to the sector by government.

3. Factual basis

3.1 The submission draws on its own factual research as well as that from commercial research businesses, other trade associations and government agencies.

4. Recommendations

4.1 bira recommends courses of action in these areas among others:

Analysis of Big Data in business.

Reform of the Business Rating system.

Assistance with development of e-commerce for small businesses.

Development of a common European consumer law regime to maximise the potential for growth.

Main Submission

1. Introduction

1.2 The British Independent Retailers Association (bira) welcomes this very timely inquiry into UK Retail, particularly as it avoids the term High Street in its title: the whole UK retail market is far bigger and more complex than that term would suggest. It is big and important, providing roughly 20% of GDP, turning over more than £300 billion annually,1 touching the lives of everybody in the country. But it is not a simple, undifferentiated market and features important divisions by product, trading location and company structure all of which are undergoing cyclical and structural change.

1.3 This organisation represents over 5,000 independent, mostly non-food, shops with over 7,000 outlets, from the Isles of Scilly to the Shetlands, the Channel Isles and everywhere between. The businesses operate in a wide range of product sectors, including fashion, gifts, furnishings, housewares, DIY, building supplies and garden and agricultural machinery. The shops are generally family-owned and run, with sole traders, partnerships and private limited companies the most prevalent forms.

2. The UK retail market

2.1 Independents represent a hidden majority of the retail outlets in the UK. While analysts look up from their desks to scan the universe of retailers they see the stars, as astronomers do with the night sky, but not the dark matter and dark energy that make up most of it. On a more earthbound level the Local Data Company is physically tracking 516,827 premises containing 470,851 businesses of which 324,158 are shops: 69%, nearly seven out of ten of those, are independents.2

2.2 Most bira members are in the largest subdivision, 30% of all shops, the “Comparison” market (non-food, same goods, different shops), in the non-food half of retail, while 13% are in convenience (food), leisure 23% and service-providing businesses 27%.

2.3 Concentration of market share in UK retail is marked but uneven. Half of the £300 billion market is in food, half in non-food.3 The latter market contains just over 140,000 outlets. The UK has less than 1% of the world’s population yet its biggest retailer, a grocer, is the third largest in the world, with a seventh of the whole of retail going through its tills. One analyst reports that just nine supermarket operators control more than 95% of the entire UK grocery market.4 All nine of the large grocers operate out of a total of fewer than 10,000 units.5

2.4 Does this concentration matter? Perhaps, if it causes prices to rise beyond where they otherwise be for consumers (food inflation has been ahead of non-food for several years whole non-food inflation has been negative for 14 of the past 15 months6). Perhaps, if the size of incumbents in a market acts as a barrier to entry for new competitors. Would the founder of Tesco be able to start a grocery business on a market stall today and be able to grow as large as one of the big nine supermarkets as his business did in a time when there were no multiples?

3. Locations

3.1 The UK market is served by retailers in towns and cities,in street locations and shopping centres, by edge of town and out of town outlets and by pure-play (non-shop) online e-tailers. Some retailers sell through all types of location. Understanding the relative advantages and otherwise of each of these as well as the trends in their fortunes is vital.

3.2 Most independents are in towns. Town locations operate on the highest cost of occupancy basis in the market. Historically rents in urban retail locations have been high relative to others as high customer footfall has ensured high turnover. Business rates, based on increasingly outdated rental values, make up and increasing proportion of cost as the RPI uplift mechanism increases rates each year regardless of the fortunes of the shop. Town centre footfall has been falling, for some years. This is partly due to the increasing availability of lower cost alternatives such as out of town shopping and the newer sales channels such as e-commerce.

3.3 At the same time taxes on customers themselves, in the form of rising car parking charges, have been acting as an increasing disincentive to visit towns for shopping. One estimate indicates that this disincentive is over £1.25 billion per year7.

3.4 Out-of-town centres have taken an increasing share of investment in retail and a growing share of footfall. They benefit from lower costs of occupancy, reflected in lower Business Rate costs (based on real or estimated rentals) and the advantages of being able to control their environment for transport and parking free from the inheritance of historic urban areas. Free customer parking does not attract an explicit rateable value, so customers avoid the effective tax of parking charges and the associated disincentive.

3.5 Pure-play ecommerce retail has grown quickly, to around 10% of all sales. The BRC trend rate of growth, just over 10% per year, indicates that it will reach 20% of retail sales by 2020. Operating from a fulfilment centre paying warehouse rents and business rates as a proportion of those, with an online shopfront free of tax the pure-play online operator has an unassailable operational cost advantage over shops based in all other locations. As Comparison shops sell standard products that can be sold by other retailers and have no obvious advantage in sheer volume throughput it is possible to answer the question “Why are goods bought on the internet cheaper than those from real-world shops?” with “Because they can be.” The availability of comparative price information is tending to depress all non-food prices, but not all shops have a basis that will support ever-lower prices as Business Rates rise inexorably.

3.6 There are several things that retailers can do about this. One is to close shops where they can: as examples, both Mothercare and B&Q have been doing this. Another is to open online channels and there is an explosion of activity in this area. The online sales channel is, of course, available, in theory, to all retailers and the trend is towards shops becoming “omnichannel” operators. Some independents have made significant advances here, but many find the development resource requirement challenging. There is a role here for both trade associations and government to help promote online activity for independents.

3.7 Some speculate that disinvestment from bricks and mortar could signal the end of an era of Big Capital in retail, as even the most expensive website costs less than a nationwide chain of premises. This could assist independents and increase choice within the economy. It could also provide a boost to growth, because cross border trading, particularly within the EU, should be as easy for independents as PLCs. Independents have engaged keenly with online channels, particularly social media such as facebook and Twitter.

3.8 A note of caution here, however: feedback from independents with e-commerce channels suggests that they trade almost entirely in the UK, partly because of the differing consumer law regimes among the member states. There is an opportunity alongside the adoption of the Consumer Rights Directive (CRD) to create a Europe-wide consumer rights regime, releasing businesses small and large grow cross border trade.

4. Employment

4.1 Retail employs about 10% of the UK workforce,8 some three million workers. A survey of 4,000 bira members indicated that the average small shop sustains eleven jobs.9 Even if this was twice the norm it would indicate that independents provide more than a million positions.

4.2 The majority of independents have one shop and the majority of shops are in street locations in towns, rather than shopping centres. The employment they provide is local and its benefits stay local, which is not true of internet-only operators.

4.3 The potential in the growth generating abilities of this sector to create jobs en masse should be recognised and supported by government.

5. Trends

5.1 The overall retail market is growing only very slowly, restrained in part by the fact that inflation is running at about twice the rate of income growth. Spending is being supported by the low interest rate mortage “holiday” driven by historically low central bank rates: eight million variable rate mortgage payers have enjoyed this for the past four years.

5.2 Within the market the fortunes of retailers are varying widely and in ways which are not obvious—yet they are very important for the prospects for growth.

5.3 Shop vacancy has been a concern since it exceeded 14% for the first time in late 2010. It has been just over 14% ever since, which may be puzzling given the growth of alternative trading locations. The answer, derived from research by bira and LDC10 is that independents have been opening more shops than closing for the past two years, while multiples have been closing outlets, although the rate of gain is now slowing.

5.4 For the past three years the figures are.

	Openings	Closings	Nett	Sample Towns
2010	6,432	8,730	-2,298	300
2011	15233	12669	+2564	500
2012	15885	15072	+813	500

5.5 Small shops are taking advantage of opportunities presented by empty units to get new businesses established. Evidence from the property industry suggests that retail rents have fallen 20% since 2008: a common form for the discount a rent free period, often up to one year on a five year lease. The latter is becoming the norm as retailers are less confident of a long term future and bira supported the creation of a new five year small business lease with the BRC and RICS in 2012.

5.6 The openings figure is vital to the state of our towns. Understanding the “churn” is vital for policy-making. Taking the low end average turnover of a small shop based on 4,000 bira members, £250,000 per year, the 15,000 shops that closed in 2012 represented a loss of £3.75 billion in turnover and 75,000 jobs. It is less easy to create than destroy, yet if a small proportion of the shops that close could be helped to stay open net occupancy would rise dramatically as demonstrated by the growth in 2011.

5.7 Despite the relatively small turnover of these shops their large numbers mean that a small improvement in occupancy would improve government’s finances by significantly more than the 2013 £175 million increase in business rates. Also, as recent FOI requests by others have shown government lost £1 billion in unpaid taxes as unsecured debts of failed retailers in the past year.11

5.8 Internal figures for members leaving bira show that half of losses are due to shop closures.12 Government should be aware that, according to one analyst half of all retail leases are due to end within two years—potentially the end of many businesses13.

6. Regulation and Enforcement

6.1 Regulation is necessary. Compliance inevitably creates costs for business. Those costs weigh more heavily on smaller businesses than large, so a compliance task that costs one person day to complete will be a burden on a ten employee retailer two orders of magnitude greater than on one with 1,000 employees.

6.2 This association strongly supports the intentions of the Red tape Challenge and has consulted in detail. We hold that both in regulation and enforcement Clarity and Consistency should be the key words. The unintended consequences of regulation may be low in probability, but will inevitably occur: in any issue involving hundreds of thousands of retailers carrying out billions of transactions with tens of millions of consumers each year, even problems with a very low probability, say 1/10th of 1%, will crop up millions of times a year.

6.3 We have been involved particularly with the revision of Poisons Licensing advice and improving clarity on knife sales, although we believe that the latter indicates the need for a fully coherent regime on age related sales covering 18 regulations. The next consumer rights regime must be crystal clear, both in conception and in the language used to express it.

6.4 On Regulation bira encourages BIS to go further. While 1 in 2 out sounds even better than the original, the number of regulations removed is as yet small and most of the removals, including rules about trading with the enemy, have reduced no burden as they were in disuse.

6.5 On Enforcement, where Regulation is open to local interpretation, we have long worked with the BRDO and fully support the potential for trade bodies to bring to independents the same benefits from Primary Authority long enjoyed by multiples.

7. Initiatives

7.1 Independents support local initiatives including BIDs, Town Teams, Chambers of Trade, Charitable events, Independents Day, Independent Retailer Month, Christmas and Easter. At a national level bira took part in the Portas Review and is with the new Future High Streets Forum. We also believe that local web-based initiatives such as MyHigh.st offer localities novel ways to extend their selling capacity and competitive abilities.

7.2 All of these initiatives are good. None is, on its own though, enough to overcome the effects of the deeper changes in the retail economy and the imbalances in cost structures that exist.

8. Skills

8.1 Retail training is provided both formally and informally to the employees of small shops, but they find it less easy to provide paid for training. So, while bira is proud to organise the three parts of the residential Oxford Summer School (Foundation, Academy and Masters) it knows that independents need more support in funding attendance, a subject that should be of interest to BIS itself and perhaps one where the department could help. Apprenticeships can be of vital importance here.

9. Planning

9.1 The association took part in the consultation on the National Planning Policy Framework (NPPF) and was pleased to see the Town Centre Principle, the Sequential Test (for offices as well as retail) and relevant impact assessments embedded in the final form of the Framework. That so many planning authorities have yet to put in place local plans and that there are examples where out-of-town positions and seriously damaging assessments of impact on existing centres have been ignored are causing increasing concern.

9.2 There is pressure in certain areas for a loosening of Use Classes and for the conversion of empty shops to residential use. The latter is surprising: there are fewer than 30,000 empty shops in towns so that could not solve the housing shortage, the loss of business rate income would be damaging, the Flat Conversion Allowance (FCA) has recently been abandoned due to lack of takeup and the property industry has shown no taste for the new freedom to convert office blocks to flats. We argue that it would be more beneficial for towns, taxation and employment to promote growth in small business numbers by reducing the cost disadvantage of trading in towns and increasing the profitability of the businesses that trade in them.

10. Information

10.1 We believe that government needs to be as well informed as possible on the state of the retail economy in order for policy to be most effective. While ONS trading figures are doubtless statistically sound, the HMRC, which has recently moved to Real Time Information for PAYE, could easily provide a detailed and fully current dashboard of retail and the wider economy by using the Big Data in the 1.33 million tax returns per month provided by the 4 million VAT registered businesses.

10.2 The same is true of big data sources such as the commercial Local Data Company data, reports from which have driven the debate on retail trading for some years but to which government does not subscribe or contribute.

11. Taxation

11.1 The imbalances in the Business Rate regime are helping to drive cost differentials and hence the profitability of different sectors. Going beyond the need to break the damaging link to RPI and the pressing need for a revaluation bira believes that the rating regime has failed to keep up with changes in the market and should be the subject of its own inquiry. It matters less whether one rises or another falls, it is the differential that causes the damage in the market.

11.2 Recent changes to Corporation Tax are welcome, especially as they go some way to making it less attractive for multinational retailers to opt to pay their taxes elsewhere.

12. Finance

12.1 Government is rightly concerned to ensure that small businesses are not starved of the finance that they need for growth and is taking steps to help the market provide that. This organisation contributes by providing loans through its own wholly-owned bank, bira bank, but it is worried that regular member surveys have shown that in each of the past two years more than half of members surveyed have reported that the everyday overdraft is being systematically eradicated.

13. Conclusion

13.1 The government pointed out in the preface to the Portas Review report that the world is changing and that retail must change with it. That is true. It is equally true that the economic and regulatory environment in which retail operates has to change as well, as imbalances driven by state policy have differential and sometimes damaging effects on sectors of the market which become more challenging over time.

13.2 Sales are driven by consumers but the cost side of the regulatory and taxation regime within which the different sectors operate is entirely in the control of government. It is therefore vital that government understands how its policies impact on the players in the market, how it needs to change to react to structural change how it can best create the environment to foster growth in the separate parts of the market.

14 April 2013