Restoring confidence: a pathway to growth The 2011 UK retail chairmen survey
Restoring confidence: a pathway to growth The 2011 UK retail chairmen survey by Sally Elliott and Ben Twynam
Foreword November 2011
Chairman British Retail Consortium (BRC)
We at the BRC are delighted to be associated with this fascinating report which has gathered the independent views of retail chairmen, within and beyond BRC membership. Examination of economic matters – be they local, national or global – tends to focus on issues relating to banking, currency movements and the stock market. But retail is taking the temperature of British consumers every day on the country’s high streets, in our retail parks and online. Securing a successful recovery depends on reassuring those consumers that the hard work resuscitating the economy has been done and better times lie ahead. While not all views in this report reflect those of the BRC, they do provide a very clear call for action to the Government on the need to restore confidence in order to promote growth. Continuing turbulence on global markets and uncertainty in the Eurozone and the US on fiscal and monetary policy means pinning our hopes for growth on export alone is not sufficient. It is absolutely right to address reducing the deficit as the first priority so that the turbulence overseas does not engulf the UK, but the Government must also stimulate a return to normal, sustainable spending by consumers and investment by firms. Retailers in turn need the confidence to invest in new competitive multi-channel trading models so that they can emerge stronger from the recession. Opportunities to boost the retail sector and encourage consumer confidence need to be capitalised upon. Next summer’s Olympics are an obvious platform on which to showcase UK retailing, which is itself a world-beating performer. To this end, the BRC and its members welcome our growing relations with the Government’s trade promotion agency UKTI (UK Trade and Investment) to give us a springboard from which to turn round retail fortunes. As colleagues have noted, we continue to face challenging times, but great businesses innovate and find new ways to capture their customers’ imagination and loyalty. With the deficit reduction plan in place, we now need the Government to restore public confidence in the British economy so that great British retailers, and their UK suppliers, can drive growth, job creation and the regeneration of our high streets.
Scope of the research Korn/Ferry Whitehead Mann extends its thanks both to those who contributed to this 2011 survey of retail sector chairmen, and to the British Retail Consortium for its support of this initiative.
Acknowledgements David Adams
Chairman, Jessops Senior Independent Director, JJB Sports Non-Executive Director, Halfords
John Allan, CBE
Chairman, Dixons Retail
The individual contributors, who are listed on the next page, represent twenty-eight retailers in the survey in total, taking into account both their chairman and non-executive roles. Participants include the chairmen of seven of the top ten UK retailers,1 as well as ten companies from the global 250.2 All major sub-sectors within UK retail are represented in the survey, as are a mix of British Retail Consortium members and non-members.
Chairman, DFS Furniture
The interviews took place in person or by telephone between 8th September and 19th October 2011.
To preserve the frank nature of the views that were shared, none of the comments have been individually attributed. The views expressed in this report are those of the individual Chairmen who took part and not necessarily those of the British Retail Consortium.
President, Aurora Fashions Chairman, Wiggle Chairman, Republic Chairman, Euro Garages Chairman, WH Smith
Chairman & CEO, Mulberry
Sir Ian Gibson, CBE
Chairman, Wm Morrison
Dr. Keith Hellawell, QPM Chairman, Sports Direct
Debbie Hewitt, MBE Chairman, Moss Bros
Chairman, The John Lewis Partnership
In a pre-election survey in 2010, retail chairmen told us the top priority for the incoming Government should be to reduce the deficit while maintaining growth for the economy. Achieving those twin aims was seen as the way to tackle the main challenge facing retail – keeping consumer confidence up. Eighteen months on, this report explores the progress that the Coalition Government has made and sets out to address the following questions that were asked of the 24 chairmen who took part: • • • • •
What are the key challenges facing the retail sector today? What are the prospects for the economy and where will growth come from in the retail sector? How can the Government help the UK high street? How well has the Government performed since coming to office? What should be the priorities for the Government?
1. Mintel (2010) UK Retail Rankings 2. Deloitte (2011) Global Powers of Retailing
Ten messages for UK Government The sentiments of the retail chairmen can be summarised as ten key messages to the Government:1. Apply business turnaround principles. Be honest about the challenges for the UK economy and be clear on the process ahead. But above all, generate excitement for the future. 2. Stay the course with deficit cuts. Do not deviate. Go as quickly as possible.
Acknowledgements continued Luke Mayhew
Former Chairman, British Retail Consortium
3. Support the banks to facilitate lending to business, driving support for small and medium-sized enterprises. 4. Focus on the top line. What key levers will drive economic growth in the next five years? Set measurable objectives, take action, provide clarity and consistency along the way, and communicate the results.
Chairman, JJB Sports
Chairman, Halfords Senior Independent Director, Debenhams
Alan Parker, CBE
Chairman, Mothercare Senior Independent Director, Kesa Electricals
Stefano Pessina Executive Chairman, Alliance Boots
5. Attract inward investment and support export growth.
6. Create the right conditions for employers to invest and hire.
Colin Smith, OBE
7. Reduce the regulatory burden for retailers. 8. Create a vision for the UK high street that can be implemented quickly at local and central Government level, and provide real clarity on planning. 9. Find ways to convey signs of economic growth to build consumer confidence.
Chairman, Marks & Spencer
Chairman, Gala Coral Chairman, British Retail Consortium
Chairman, J Sainsbury Non-Executive Director, Burberry
Chairman, Majestic Wine
10. Capitalise on the positive spirit around the Olympics so the public gets the sense that Britain is rebuilding for the future.
Executive summary Retail chairmen are calling on the UK Government to set out a clear vision for economic stability and growth in the UK as the sector struggles to cope with the most severe downturn in decades. Less than two years ago, our panel of retail chairmen told us they were relieved that trading was not as bad as they had initially feared, but they were concerned that things were set to get worse. Those fears are now being realised: consumer confidence remains extremely low across the UK. Chairmen also said then that low levels of consumer confidence represented the most significant challenge facing retail. This remains, in their view, the biggest threat to recovery today, with 75 percent of chairmen citing consumer confidence as a real problem. The majority of chairmen (75 percent) are pessimistic about the economic outlook and many are predicting only modest growth in their own businesses, often driven by market share gains. Growth strategies that are becoming increasingly prevalent include online and international development, with UK store expansion shrinking in significance. Is there more the Government could do to drive the economy and support the retail sector? Nine out of 10 (87 percent) chairmen think so. Chairmen want the Coalition Government to stay on its current course to reduce the deficit. Other priorities in the eyes of retail chairmen include: stabilising global capital markets, easing bank lending, investing in education, holding down interest rates to consumers, tackling unemployment and pensions, and investing in infrastructure. Overall, the feeling is that the Government has performed reasonably well since it came into office, particularly on cutting the deficit. Retail chairmen, however, are anxious to see a path back to economic growth. They believe a clear vision of the future will help raise consumer confidence and give retailers the ability to plan ahead.
What is your prediction for your company’s performance in 2011? 4% Moderate decline
The challenges for retail
4% Significant decline
20% Significant growth
Consumer confidence remains the biggest challenge, according to our panel of retail chairmen. 48% Moderate growth They were asked to name the three most significant challenges facing the retail sector today. Three quarters (75 percent) of chairmen named consumer confidence and the need to give consumers hope for the future, whilst half (50 percent) raised issues relating to economic uncertainty and the challenges of a slow-growth environment. Over a third (38 Figure 1 percent) of chairmen believed What are the key challenges facing the retail industry today? that keeping pace with rapidly changing consumer behaviour was one of the most significant challenges, with a quarter (25 75% Consumer confidence percent) citing inflationary pressures. 50% Economic uncertainty
Tough economic conditions and unemployment fears are hitting consumer confidence
38% Keeping pace with consumer 25% Inflationary pressures
In 2010, our panel of retail chairmen felt things were not as bad as they feared, but many were convinced there was more trouble ahead. This instinct has proved to be correct. In 2011, chairmen say that consumers remain nervous about economic conditions, and are increasingly aware of the impact of the global and UK economies on their personal financial situation. Heavy job losses in certain parts of the country and the fear of unemployment are dragging down consumer confidence. One chairman said: “At one stage, there was much talk of a double-dip recession. The truth is the recession has never stopped. There was the economic illusion of marginal GDP growth, but it feels like it has never ended.” One summed up the stresses felt by the retail sector as follows: “It feels like we’ve sprinted 400 metres and then been told it’s actually an 800 metre race.”
“It feels like we’ve sprinted 400 metres and then been told it’s actually an 800 metre race.”
Disposable income is under pressure Some retail chairmen believe consumer confidence is low because disposable income is under pressure as a result of price inflation and higher taxes. Lower availability of credit and a general trend towards debt repayment mean that some disposable income is being used to pay down personal deficits.
One chairman said: “For the first time in around 50 years, we don’t have real growth in incomes and we have a decrease in levels of disposable income.” Another said: “Consumer confidence has been rattled by price increases. Those earning £25K to £40K will have seen brutal cuts to their disposable income.” Inflation is regarded by several chairmen to be the underlying cause behind reduced disposable income and low consumer confidence as a result. Consumers are more nervous than they need to be Several chairmen said that although shoppers had benefited from lower mortgage rates, they were putting off purchasing decisions because of the fear of unemployment. Further bad news coming from Europe is another concern. Retail chairmen want the Government to get the message out that things are set to improve. One chairman said: “Most people are not poorer than they were, but they perceive they are, or they are concerned they may become so. Recession and recovery is sentiment-led.” Another chairman said: “Retailers can respond by keeping costs and prices down to an extent, but really whether people spend depends on how they feel about their own balance sheets and availability of funds.” With so much hanging on consumer sentiment, trading continues to be highly volatile, making planning difficult.
“The combination of changing economic circumstances and evolving consumer behaviour adds up to a very different situation to that we have seen in the past.”
As one chairman put it: “It used to be that even if there was low growth, you could predict what may happen in the next three months, but this isn’t the case any more. You can still make good money in periods of slow growth – the biggest problem is consumer confidence.” Retailers need to keep pace with consumer expectations and new technologies Consumers now expect ever higher standards of service and convenience, driven by improved technology. The migration to online shopping and the expectation of being able to shop seamlessly between different channels (particularly stores and the internet) present both challenges and opportunities for retailers. One chairman said: “The combination of changing economic circumstances and evolving consumer behaviour adds up to a very different situation to that we have seen in the past.”
Another said: “It is difficult to exaggerate how profound these changes are. This is a huge shift. It is more complicated than just e-commerce. The customer has an expectation of being able to shop across channels. You can now buy anywhere you want including online and search for items in-store. Sooner or later, everyone is going to have to shed stores.” Some talked about the challenges of trading through the downturn while at the same time adapting their business to the new technological environment. One said: “When the economy is in protracted recession, it is easy to protect cash and not to spot that the market has moved.” He added: “This is precisely the time retailers need to invest to stay close to customers and to build infrastructure so they emerge in good shape.”
“Sooner or later, everyone is going to have to shed stores.”
Outlook for growth in the retail market Retail chairmen recognise that growth in the UK is likely to be subdued in the near future and have reduced their expectations accordingly. Many are focusing investment on the internet and international markets. Nearly half (48 percent) the retail chairmen we surveyed are predicting only moderate growth and say this is likely to come from taking market share from rivals. Many retailers are not expecting to see any growth at all in the year ahead (or beyond). Figure 2
What is your prediction for your company’s performance in 2011? 4% Moderate decline
4% Significant decline
20% Significant growth
One chairman sums up the general feeling: “I am not predicting any organic growth, only gains in market share and even that has to be carefully thought through in order to protect margin.” “It’s survival of the fittest,” one retail chairman said. Another said: “The pain has moved from being uncomfortable to excruciating for some because this period has gone on for longer than expected.”
48% Moderate growth
Three quarters (75 percent) of the chairmen are quite pessimistic or very pessimistic about the prospects for the economy in the next 12 months, with one commenting “There is likely to be a period of slow growth, rather than recovery, and the key Figure 1 The top challenges facing the retail industry today, as cited by chairmen question is whether and whenofwe will get back to where we were at the UK retail companies peak.” In a tough climate, retail chairmen recognise the need to raise their 75% paying Consumerclose confidence game, including attention to product mix and margins and experimenting with new products 50% Economic uncertainty or markets.
38% the Keeping pace with outlook consumer for the next 12 How optimistic do you feel about economic months? 25% Inflationary pressures
8% Very pessimistic
25% Neither optimistic nor pessimistic 67% Quite pessimistic
8 Figure 4
* No chairmen were “very optimistic” or “quite optimistic” about the economic outlook for the next 12 months.
“Profit growth will come through optimising gross margin and improving cost control,” one chairman said. Retail chairmen fear that the on-going economic difficulties could lead to industrial strife, political instability, and/or further banking collapse – any one of which could make the situation worse for retailers.
The political and economic situation in Europe is seen as a major potential source of trouble for the British economy, with chairmen feeling that there appears to be no light at the end of the tunnel for the Eurozone. One chairman warned: “If Europe goes down, we will follow along with the rest of the world and depression beckons.” One more optimistic chairman commented: “I don’t think politicians will allow Armageddon to happen [in Europe]. The most probable scenario will be a belated solution for Europe where things will be more stable, but not sparkling”. The economic outlook longer-term The long-term economic outlook is challenging, according to our panel. Some chairmen question whether the UK will see any significant recovery for up to 10 years. One chairman said: “I’m concerned that all the normal things that happen in a recovery are not there”. Another said: “It’s like going on a diet, we need a permanent change in lifestyle to sustain a better future.” Another chairman agreed: “We’ve lived above our means for many years. Consumption was so strongly ingrained in the consumer mindset that it was a necessity, more than a right, a reason for being. Now in the generations coming through, there is an understanding that the situation is not so good. And the prevailing mindset will be much more cautious.” However, some chairmen are more optimistic. They believe that, although the market may remain flat, the strongest retailers will benefit from consolidation in the marketplace. For them it’s a question of being ‘a winner rather than a loser’. One chairman, who predicted (up to) a five percent downturn in the economy, said a crisis scenario would benefit his company, which he believes to be stronger than its rivals. “A downturn would result in industry consolidation,” he said, “and we would benefit from that”.
“Companies who change their model and move quickly will be winners.”
Another chairman called the coming years a watershed moment. “Companies who change their model and move quickly will be winners.”
How can the Government help the UK high street? Retail chairmen have conflicting views on what is best for the high street. However they are in broad agreement on the need for clarity from the Government on the future of town centres so that the retail industry can respond accordingly. With consultant Mary Portas’ independent review on town centres to be published shortly, retail chairmen want the Government to move beyond media-friendly sound-bites to develop an understanding of the root causes of shoppers’ migration from the high street. “I would like them to have a vision of what the high street should look like in five to ten years and why.” one Chairman said. The thorny issue of planning regulation is seen by many as the best way for the Government to tackle the problem of empty shops in town centres. However, the retail chairmen had very different views on the topic. Relax planning laws and let consumers decide Some chairmen believe that planning laws should be relaxed. They say that ultimately, consumers will make their own shopping decisions. One chairman said that the British high street is in: “irrevocable decline and not fit for purpose for retailers.” He said that store units and car parks are too small and that a fragmented property ownership structure make reform on a major scale almost impossible. Slow down out-of-town development to protect the high street Other chairmen disagree, commenting that out-of-town development already exceeds the rate at which the market is growing, and therefore there is no need to build. Some felt that it would difficult to simultaneously achieve an increase in out-of-town space and the regeneration of the high street. One chairman said: “All high streets are under pressure apart from central London. Councils need to address this and to bring community life back to the high street.” Another said: “If we don’t give thought to the high street it will disappear and we will be left with the supermarket and the internet and nothing in between. If we want to maintain diversity for consumers and for communities, we need to make choices now.” Several chairmen believe the focus should be on improvement measures such as changes to store lay-outs and car parking to make shopping in town centres more attractive.
Invest in both the high street and out-of-town development Some chairmen say that high street and out-of-town should both receive investment in tandem. One chairman highlighted the need for a fair approach: “The Government needs to make sure there is a level playing field between the grocers at the one end and the high street boutique at the other.” Other ideas to help the high street include reform of business rates and putting pressure on landlords to be more flexible about rents. One chairman said: “Landlords are still hoping rents will continue to rise and are very reluctant to reduce rents because it would reduce the capital value of the premises. If rents flexed, a lot of stores would be occupied again, but landlords are preferring to leave stores empty.” Another chairman is pessimistic about whether the Government’s localism strategy will ultimately benefit the UK high street. “Localism as an ideology is a good idea,” he said, “but in practice it doesn’t work because the quality of decision-making from people at a local level is poor.” Another perceived there to be a lack of a customer service mindset at local level. It may not be possible for the Government to satisfy all stakeholders with an interest in this issue. Where they agree, though, is on a need for clarity on what the Government means by “the simplification of planning laws.” They want certainty about how much new development will be permitted, and when and where it will take place.
“I would like them to have a vision of what the high street should look like in five to ten years and why.”
How optimistic do you feel about the economic outlook for the next 12 months? 8% Very pessimistic
How well has the Government performed since coming to office?
25% Neither optimistic nor pessimistic
* No chairmen were
The majority of retail chairmen (79 percent) feel the Government is “very optimistic” or performing reasonably well inabout tough circumstances. They recognise the “quite optimistic” economic outlook problems and that the UK Government magnitude of thetheglobal economic for the next 12 months. has limited options to tackle the economic crisis. It is seen to be “walking a tightrope,” in showing the international markets that it is serious about deficit reduction whilst attempting to keep the economy on track.
67% Quite pessimistic
How has the Coalition Government performed to date? 17% Could do better
4% Cannot say
58% Reasonably well
While the cuts may be making things tough for consumers, one chairman sums up the general view: “The key thing is to maintain confidence in our approach in the eyes of the international markets.” Another chairman said: “The UK will prosper again and earlier than other European countries, because of the prudent and pragmatic management of the current Government.”
Most retail chairmen praise the way the governing Coalition is working together but say that the political Figure 6 leaders need to communicate its aims more clearly. Should the Coalition Government do more to stimulate consumer confidence? 13% No
“People are still uncertain as to what the cuts mean,” one chairman said. Uncertainty leads to insecurity. “Consumer confidence is not just about, ‘do I have a job?’ It is also the uncertainty of potentially losing a job.” Several chairmen say the Government has not recognised the importance of retail to the economy.
“The key thing is to maintain 87% Yes confidence in our approach in the eyes of the international markets.”
“The Government’s economic aspiration is to export more and import less,” one said. “The biggest importers are retailers. The Government is broadly unsympathetic with what is happening to retail.” While retail chairmen feel that the Government has adopted sound strategies to reduce the deficit, they are less complimentary about how these are being executed. Elsewhere, there were negative comments about the Government’s handling of health service reform and several chairmen commented that ‘the jury is still out’ on its handling of public sector pensions.
What should be the priorities for the Government? Chairmen were asked to name their top three priorities for the Government. The most commonly cited priorities are listed below, alongside the percentage of chairmen mentioning each one. Figure 5 Top priorities for the Government Reducing the deficit The most important issue for Government to address, according to retail chairmen, is to reduce the deficit, with 42 percent naming this as a top priority.
42% Reducing the deficit 33% Stabilising global capital markets 33% Easing bank lending 29% Improving consumer confidence
Cutting the UK’s budget deficit was also regarded to be the most important issue facing the Government in last year’s survey. In 2010, chairmen agreed with plans to rebalance the economy away from the public sector towards private business and they wanted to see cuts in spending rather than rises in taxes.
29% Investing in education 29% Holding down interest rates to consumers 25% Reducing unemployment 25% Tackling pensions 17% Investing in infrastructure
Over a year later, some retailers are happy with the speed of deficit reduction but others want the cuts to go further and come faster. They feel that getting the cuts out of the way quickly would reduce the period of uncertainty and allow people to focus on a brighter future. Some fear that the true impact of the public sector cuts have yet to be felt and are concerned about the impact on economic growth. Several chairmen likened the Government’s job to their own efforts in leading business change. One chairman said: “We need to go faster on this. It’s not dissimilar to a business turnaround. We need to get the pain over and done with and show people the Promised Land.”
“We need to get the pain over and done with and show people the Promised Land.”
Another agreed: “Better to go as quickly as possible but not so fast that public reaction would destroy the beneficial effect of deficit reduction.” “There is still too much rhetoric and not enough action,” one said.
8% Very pessimistic
25% Neither optimistic nor pessimistic * No chairmen were “very optimistic” or “quite optimistic” about the economic outlook the next 12 support months. almostfor universal
67% Quite pessimistic
There is for sticking to deficit cuts. Retail chairmen fear that if international markets lose faith in the Government’s plan, there will be significant implications for the UK economy as a whole and for retailers as a consequence. Figure 4
One chairman said: “In the circumstances, the Government is achieving How has the Coalition Government performed to date? a miracle. The cuts are not significant. Our borrowing costs are lower than Germany’s. This shows that the financial markets believe in the 17% Could do better wisdom of the Government.” 21% WellCreating
4% Cannot say
58% Reasonably well
conditions for improved consumer confidence
Retail chairmen want to see vision and leadership from Government in a clear plan for future growth, which will give confidence to consumers and businesses alike. Among our retail chairmen panel, 87 percent feel that the Government could be doing more to stimulate consumer confidence and the retail market. For retailers, consumer confidence is paramount and they believe this won’t return until consumers are convinced that the Government has the economy on the right course.
Should the Coalition Government do more to stimulate consumer confidence? 13% No
One chairman explained: “Consumers need signposts that things will get better. Until that happens, they will protect themselves, hunker down and reduce debt.”
That’s not unlike what’s happening to top-level retail decision-makers. “The threat and the journey is scarier than the arrival. Once retailers know what’s happening, they will build strategies around it,” one chairman said. “We just need clarity.” Another said: “The Government’s current focus is on negative things they are resisting, not positive things they are creating.” Retailers would also urge the Government to use the 2012 Olympics to galvanise the country and change the tone to one of optimism for the future. “We need to get to a place where the cuts have bitten, but we know we’ve survived,” one chairman said. “A feeling of… it will get better and we will get through it.”
Other priorities for retail chairmen Retail chairmen are acutely aware of the conflicting objectives that banks face in trying to strengthen their balance sheets, while at the same time, they are being encouraged to increase lending. Despite the recognised need to reduce both personal and Government debt, one chairman said: “The Government should encourage banks to lend prudently. This is not about advocating profligacy or increasing personal debt problems. We need to encourage those who can to spend, and to have a more positive view of the economy, and for mortgage monies to be available to them.” Education, like last year, featured strongly in the list of other priorities mentioned by retail chairmen. It is seen as a way to tackle several problems facing the British economy, including youth disaffection, unemployment, and the need for a more entrepreneurial culture. Better education is also seen as a way to reduce dependency on welfare and to raise incomes. Long-term, education is regarded as key to creating a culture of innovation and production, and to building a platform for the future. A quarter of chairmen pick up on the issue of demographic shifts, what one described as “an evil mix of an ageing population combined with fewer young people, who are not well trained or educated.” They see a worrying fall in the number of working people supporting non-working people, and are concerned about the impact this will have on the NHS, on pensions, and on the age of retirement.
“We need to get to a place where the cuts have bitten, but we know we have survived.”
Maintaining interest rates at their current low level was mentioned by 29 percent of chairmen as a top priority, and another 17 percent recommended the Government make plans to invest in infrastructure to fuel the economy.
Sally Elliott is a Senior Client Partner and leads Korn/Ferry Whitehead Mannâ€™s retail practice, focusing on chair, non-executive director, CEO and executive board recruitment activity within the UK and International retail sectors. She joined the firm in 2000, following a career with Pepsico. email@example.com Ben Twynam is a Principal in the retail practice focusing on board-level appointments within the UK and international retail sectors. He has worked in senior level recruitment for the last six years, four of which have been with Korn/Ferry Whitehead Mann in London and Hong Kong. firstname.lastname@example.org
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About the British Retail Consortium The British Retail Consortium (BRC) is the lead trade association representing the whole range of retailers, from independents to the large multiples and department stores, selling a wide selection of products through centre of town, out of town, rural stores, and online. The BRC is the authoritative voice of retail, recognised for its powerful campaigning and influence within government and as a provider of excellent retail information. For further information, visit www.brc.org.uk