Cost of living squeeze for UK consumers
At the primary income line, cashflow looks reasonable with earnings after tax set to rise c.3% or so next year. However pretty much every cost line is rising above the rate of wage growth, in particular energy and transport costs. Also, although mortgage rates are currently low, there is a high risk that these will increase next year. As such, overall we see potential for household cashflow pre savings to fall slightly yoy next year, meaning that the average household will feel a little poorer.
However the UK savings rate remains fairly elevated at around 12% and there should still be potential for this to fall and offset various cost inflation pressures. Our assumption is that the rate falls to 10% by the end of this year, then down to 7% next year, and to 6% in 2023. This should mean that for middle to higher income consumers, household cashflow post savings should remain positive next year.
The other factor that’s a major influence on the UK general retail sector is the housing market, where we expect a moderation in activity, versus tough comparisons caused by the stamp duty holiday last year, but still transactions at a strong level historically. Although we expect mortgage rates to rise off a low base, continued low supply should support pricing which should support the later cycle home improvement sector, along with hybrid working, wear and tear, energy efficiency projects and consumers’ desire to save money.
What kind of structural trends have come from the pandemic?
Various structural trends are likely to reassert themselves now. We think these will include:
1) A polarization in performance, with the stronger retailers benefitting from their scale, supplier relationships and pricing power.
2) Omnichannel retailers gaining share, as space reductions ease off and as consumers look for more convenience to suit their more flexible lifestyles – industry data from Germany suggests we have already starting to see bigger chains gaining share.
3) Discount - with customers becoming more price conscious and discounters appealing more to middle income shoppers, albeit discounters are likely to face margin pressures in 2022.
4) Healthy lifestyles - due to increased consciousness of the benefits of healthy food and living. This is contributing to a still buoyant sports fashion sector.
5) Subject to Covid variants, we expect to see travel and experiential spend returning, with some spend rotation away from Covid winning categories such as home related retail. On this subject, our Digital Intelligence team, headed up by Michael Tran have created two indices, the GOAT (go-out-and-travel) index and the GOAL (go-out-and-live) index. Earlier this year we could see that people slowed down their travel activity related to Covid and were showing better activity in their normal life activities. As of late, the two indices have been more correlated.
How has the pandemic changed the competitive landscape in Retail?
Since the start of the pandemic we have had a thesis that "the strong will get stronger" as a result of it. Now that sounds a bit Darwinian but it does seem to be playing out now, if we look at market share data. As ever we are seeing some pretty dynamic shifts in market share, and we have seen some significant capacity coming out of the market, such as here in the UK, where we have seen around 10% of the UK clothing market exit over the last two years, including the highly promotional Debenhams and Arcadia chains.
We’re now seeing more evidence of strong specialist omnichannel players gaining LFL share, after all they're typically the ones with strong supplier relationships, a broad range and a healthy inventory position.
Which ESG developments would you highlight heading into next year?
The biggest themes are fair living wages, climate change and fashion circularity. In terms of circularity we are seeing apparel rental and resale gaining in importance. This was one of the themes that we highlighted in a recent report under the RBC Imagine brand, in which our global research team identified 5 key global and cross-sector themes designed to prepare readers for opportunities and challenges ahead.
We expect the majority of growth in secondhand clothing to come from resale, with online platforms helping to drive peer-to-peer selling. We expect the rental market to grow more gradually, and we see potential for traditional retailers to look to expand more into this market, to add an incremental revenue stream.
