UK Retail: Moving Forward

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1 RETAIL FD FORUM InSIght UK Retail: Moving Forward At April s /BDO Retail FD Forum held in London, delegates were briefed on factors identified by sector FDs as being critical to long-term success: the UK recovery and the continued importance of digital technologies. Ross Walker, Chief Economist,, presented on current and future macroeconomic trends which will help shape the retail business through 2014 and into He addressed the issues of currency appreciation and rising interest rates, the impact of fiscal tightening over the medium-term, the likely cooling of the UK housing market, and the prospects for continued job creation. These issues will undoubtedly impact the UK recovery and retail sector. The event went on to deliver insights into new digital technologies for retail: Stephan Shakespeare, founder and CEO of online polling and market research consultancy YouGov, Robin Collyer of web-based collaboration platform Concrete, and Simon Gordon, creator of Facewatch, the online crime reporting and intelligence sharing platform. In forthcoming meetings the Retail FD Forum will go on to explore these issues further, with sessions on how retailers can manage and profit from the overwhelming flood of Big Data, and in particular how to exploit customer analytics to help shape their brands and retail offers. The Macro View We have been through the worst recession since the 1930s however, since 2013 we have been moving towards a more sustainable recovery with some evidence of rebalancing, said Ross Walker in a presentation that examined how the UK s fairly strong Q1 retail performance track would develop over 2014 and into the following year. In the UK, 2013 was the first time the economy recorded a full calendar year of successive quarterly growth since the onset of the global financial crisis. expects that 2014 will see quite strong growth of close to 3%, but in 2015 growth will ease back again. Several factors lie behind the modest slowdown. Higher interest rates coupled with a step-up in fiscal tightening are the two major contributing factors behind the expected slowdown. In addition the positive effects of the housing recovery will be starting to fade, and PPI transfers from the banking sector to the consumer economy which have been worth 5 billion per year will also be in decline most of the PPI money appears to have gone straight into spending rather than saving. Contacts Neil Parry Head of Consumer Industries Ben Williams Director, Retail We have been through the worst recession since the 1930s however, since 2013 we have been moving towards a more sustainable recovery with some evidence of rebalancing Sophie Bevan National Head of Retail and Wholesale BDO Ross Walker, Chief Economist,

2 UK Household Income Forecasts Nominal & Real Household Income, Actual & Forecasts, % y/y Nominal household disposable income growth fell to 1.7% y/y in 2013 the slowest growth on record while real incomes (adjusted for inflation) fell 0.5%. Higher tax payments by, and lower transfers to, the household sector exerted a squeeze in We forecast a moderate recovery in 2014 as employment trends remain firm Real Nominal 2 % Consumer spending is now growing at around 2% On the positive side, growth is fairly broad-based, income growth is now back close to average levels, and employment is growing in all significant sectors except public services. Consumer spending is now growing at around 2% and is expected to continue but on the negative side macro-economic headwinds will begin to get a little stronger towards the end of 2014 and into Two macroeconomic challenges for retail stand out. The first is the challenge of interest rates, which are going to rise. Financial markets expect a 0.25 percentage point rate rise by next spring, up to one percentage point by the end of 2015 and two percentage points by the end of The forecast expects interest rises to come in just a little later but nevertheless rates will rise, and with two thirds of all household debt linked to short-term interest rates, there will be an immediate effect on the amount of disposable income available to consumers. On the positive side, growth is fairly broad-based, income growth is now back close to average levels, and employment is growing in all significant sectors except public services. 2

3 Retail FD Forum Insight UK Retail: Moving Forward BoE Interest Rate Forecasts Bank of England Bank Rate Expectations, % expects the first BoE Bank Rate hike in August 2015 (+25bp), a little later than current market pricing. We expect a cautious pace of policy tightening with Bank Rate grinding up to 1.0% at end-2015 & 2.0% by end Bank Rate Forecast M LIBOR futures minus FRA-OIS 1 % expects a cautious pace of policy tightening with Bank Rate grinding up to 1.0% at end of Jun 14 Dec 14 Jun 15 Dec 15 Jun 16 Dec 16 The big question is how households will react to the rise. At the moment the monetary environment is very benign, and as a result the UK has rising mortgage growth, with the cost of servicing debt at a 20-year low. The trouble is that it will not take much in the way of interest rate rises to bring that servicing cost back up to average levels. For the consumer economy anticipates that a one percentage point rate rise will be tolerable, but one and a half to two percentage points will feel like a squeeze. When rates reach that level margins will begin to feel stressed. However, the stress will be delayed: the forecast is that rates won t reach those levels for two years, and that for the next year at least the UK will continue to see house price inflation of 6-7% - that means many consumers will still feel as if they are getting richer. The second big challenge is on fiscal tightening. It is important to note that the Chancellor has pushed the bulk of planned public spending cuts to after the next election. In 2013 there was a fiscal tightening of 0.25% of GDP. This year that will rise to 0.5% of GDP. However, the really big cuts will occur after the next election, when there will be a doubling of fiscal tightening, with 1% of GDP taken out of the economy each year for four years. How much of that tightening will be transmitted directly to the consumer economy remains an open question, but the effect can only be negative. The UK therefore is exhibiting signals for a moderately strong near-term outlook for consumer spending. For the time being fiscal tightening is only modest, PPI payments are still supporting spending, house prices are rising, and the cost of borrowing is low. However, it is the rise in employment across nearly all sectors which is driving an increase in consumer spending. In a setting like this the retail sector should have a good year ahead of it, even if there is no prospect of a return to the super-spending boom of the early 2000s. For the next year at least the UK will continue to see house price inflation of 6-7% - that means many consumers will still feel as if they are getting richer. 3

4 Retail FD Forum Insight UK Retail: Moving Forward Consumer Spending Forecasts UK Consumer Spending, % y/y Real-terms consumer spending growth (ie, after inflation) is forecast to rise to 2.6% in 2014, easing to 2.1% in 2015 a little below long-run averages (2.7%) but comfortably above the post-crisis norm (0.0% since 2008). In nominal terms we forecast consumer spending growth of 5.1% in 2014 & 4.7% in forecast The bigger challenges will emerge as the positive spending drivers fade and indebtedness becomes a problem. The current rise in house prices is creating a wealth illusion people suddenly find they have collateral for borrowing, so they borrow. The fear is that soon people will find they have taken on too much debt the Office for Budget Responsibility is currently forecasting that household debt-to-income levels will return to their peak within five years. So longer-term, risk will be rising in the consumer economy. The retail sector should have a good year ahead of it, even if there is no prospect of a return to the super-spending boom of the early 2000s. 4

5 Consumer spending is growing at around 2% and this trend is expected to continue.

6 Digital Innovation in Retail The digital revolution is reaching into all corners of the retail sector. From the use of customer analytics to profile consumers and track their interaction with brands, to the internal brand development process, to the management of physical stores everything is being changed by the opportunities of the Big Data world. The /BDO Retail FD Forum will be exploring many of these changes in detail through the year. Stephan Shakespeare Stephan Shakespeare of YouGov gave the first of a trio of presentations on the digital transformation of retail. YouGov has created a new kind of market research, which reaches into the psyche of consumers, argued Stephan Shakespeare. Online surveys allow us to sample a huge number of panellists around 400,000 in the UK and several million worldwide with a huge number of questions and over 20,000 surveys a day. The result is an enormous cache of data that allows retailers to understand exactly what their consumers are thinking. With so much data, it is now possible to get behind the headline consumer confidence figures and track who has confidence, where they are and what they do, what they like and what they don t. The key to understanding data is correlation. And while there are hundreds of lines of correlation between confidence and brands, or jobs, or political views, or locations, what counts is where the correlations are strongest. Today we cannot only tell whether consumer confidence is rising or falling, but what it is associated with we can tell whether confident consumers prefer Cameron or Miliband, whether they prefer Waitrose or Iceland, even whether they like M&S clothes or M&S foods. It means that retailers can now track their brands and changes to the perception of the brand in something very close to real time. Robin Collyer Robin Collyer of Concrete told the Forum that using their web-based collaboration platform is the most effective way of coordinating and developing international brand retailing. International stores have to be part of retail strategy so how are you going to manage the brand internationally? asked Robin Collyer. The visibility of overseas stores is always incomplete. You will face challenges around protecting the brand, you will face challenges around communicating with people in your business and in your network. When it comes to developing the brand and how it is seen and experienced in different locations you will find yourself endlessly exchanging documents, updating documents, exchanging s, all of which is confusing and time-consuming. Web-based collaboration around the brand is the way to solve this. Retailers can use a web-based platform to bring teams (internal & external) together, reduce their investment in IT and infrastructure, achieve continuous improvement in brand management and collate the best contributions from all their international outlets and franchise partners. Is it just another electronic solution to add to all the others? The test of whether it really works is empathy is the interface attractive enough to get people using it and liking it? Is it simple enough and visual enough to set itself up without a user manual? Does it automatically become part of the management process? If there is a yes to all those questions, you will have solved many of your cross border brand management problems. With so much data, it is now possible to get behind the headline consumer confidence figures and track who has confidence, where they are and what they do, what they like and what they don t. Stephan Shakespeare, YouGov 6

7 Retail FD Forum Insight UK Retail: Moving Forward Simon Gordon Retailers see theft and fraud as a cost of doing business but it doesn t have to be that way, according to Simon Gordon of Facewatch. Big stores in London can be losing 1 million a year to theft, Simon Gordon told the forum. This is the last great unmanaged cost in retail and it s not just the cost of theft, it s also the cost of security, tracking and apprehending thieves, providing witness statements, dealing with the police, all of which is costly and most of which is a waste of money. Technology means you don t have to accept these costs any more. By uploading images and CCTV to Facewatch which can then be shared with other stores in similar business sectors you can prevent known offenders from entering your shops. You can use these services to set up news feeds between retailers, sharing groups that identify where and when theft is taking place remember that most shop thieves always stick to the same routines and locations and generating evidential packages for police automatically. Face recognition is now part of this technology. It is not 100% accurate but with continual advancements in this technology, in the near future expect near perfect facial recognition. Accuracy aside, the mere presence of the technology is enough to stop most thieves coming into your premises in the first place. You can also greatly reduce internal theft by outsourcing your CCTV management to monitoring stations making the fraudsters realise that they no longer control the technology that can ultimately prove their guilt. The only real question now is why more retailers aren t using this technology especially when you consider the minimal cost and massive benefits. Retailers have not yet woken up to the fact that you no longer have to accept theft as a cost of doing business. Big stores in London can be losing 1 million a year to theft Simon Gordon, Facewatch 7

8 About the Retail FD Forum Retail FD Forum was established in 2003 and is run in collaboration by BDO and. The Forum is designed for Financial Directors in the UK Retail sector and is dedicated to the exchange of genuine thought leadership and the development of a long-term network. The Forum provides access to a series of educational events on relevant topics and issues facing the sector as identified by our members, regular economic updates specific to the retail market and an opportunity to network with industry contacts and peers. Today we have over 250 FD members. Contacts: Neil Parry Head of Consumer Industries T: E: Sophie Bevan National Head of Retail and Wholesale BDO T: E: Ben Williams Director, Retail T: E: No representation, warranty, or assurance of any kind, express or implied, is made as to the accuracy or completeness of the information contained in this document and accepts no obligation to any recipient to update or correct any information contained herein. The information in this document is published for information purposes only. Views expressed herein are not intended to be and should not be viewed as advice or as a recommendation. You should take independent advice on issues that are of concern to you. This document does not purport to be all inclusive or constitute any form of recommendation and is not to be taken as substitute for the recipient exercising his own judgement and seeking his own advice. This document is for your private information only and does not constitute an analysis of all potentially material issues nor does it constitute an offer to buy or sell any investment. Prior to entering into any transaction, you should consider the relevance of the information contained herein to your decision given your own investment objectives, experience, financial and operational resources and any other relevant circumstances. Neither nor other persons shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this communication. The products and services described in this document may be provided by The Royal Bank of Scotland plc, The Royal Bank of Scotland N.V. or both. The Royal Bank of Scotland plc. Registered in Scotland No Registered Office: 36 St Andrews Square, Edinburgh EH2 2YB. The Royal Bank of Scotland plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The Royal Bank of Scotland N.V. is authorised by De Nederlandsche Bank and regulated by the Autoriteit Financiele Markten (AFM) for the conduct of business in the Netherlands. The Royal Bank of Scotland plc is in certain jurisdictions an authorised agent of The Royal Bank of Scotland N.V. and The Royal Bank of Scotland N.V. is in certain jurisdictions an authorised agent of The Royal Bank of Scotland plc. Copyright All rights reserved. This communication is for the use of intended recipients only and the content may not be reproduced, redistributed, or copied in whole or in part for any purpose without s prior express consent. May /15

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