UK Retail Needs Therapy

British retailing suffered its own version of Black Wednesday on November 26 with two high-profile retailers – Woolworths and MFI – going bust. Unfortunately, it’s a portend of things to come.

During the late nineties many analysts were predicting devastation on the British high street due to the arrival of internet retailing. It would lure shoppers off the streets and into cyberspace, they argued, leaving much of the former to gradually wither away and die.

They were wrong, at least back then. Somehow retail therapy over the Internet isn’t quite the same as physically visiting shops and having the instant gratification of acquiring goods on the spot. However, in the end nothing quite has the kiss of death on retailing like a good old fashioned recession.

Unfortunately, this particular recession may well not be of the usual variety. Indeed, terms like “retail therapy” could become an echo of a bygone era.

Simply, put the British shopper is exhausted after having maxed out on credit to an unprecedented extent for nearly a decade. The great deleveraging is now in full swing. Banks want to reduce their exposure to consumers and they in turn will now be forced to repay debt. Recession, plummeting house prices and unemployment will also sober consumers up and turn them into savers.

And when they do spend they’ll want a bargain. This is likely to drive many towards the Internet to visit price comparison search engines. Many Internet retailers operate on a basis of only ordering from suppliers once they have a sale. Overall their whole cost structures are, anyway, much lower and more adaptable. They will easily undercut most of their bricks and mortar peers on a range of categories. And this will be a factor high street retailers will have to cope with, unlike during previous recessions.

And by 2010-11, the government will be sucking money back out of the economy as it too will need to deleverage. Its fiscal stimulus, if the bank bail-outs are included, has been nothing short of spectacular. The price could be huge tax rises that may be heavily loaded onto consumption taxes.

For the young generation thrift will be a new experience and for high street retailers it will be a challenge. Retailing could well struggle even into an economic recovery if a mentality of “save now and buy later” permanently replaces one of “buy now pay later.”

The number of retailers is set to shrink considerably over the next two to three years. Stronger well positioned brand names are likely to survive. But, consolidation seems inevitable and will force shop keepers to become more innovative in attracting those fewer available pounds.

By Justin Pugsley, of Thomson Merger News