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Retail Industry in the UK for the Last Quarter of 2011 - Coursework Example

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The coursework "Retail Industry in the UK for the Last Quarter of 2011" describes the UK retail industry. This paper outlines the overview of the retail sector, top retailers - UK, causes of decline in consumer shopping, retail sector in the last quarter, future prospects…
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Extract of sample "Retail Industry in the UK for the Last Quarter of 2011"

Retail industry in the UK for the last quarter of (October – December) Table of Contents Background 2. Overview of the retail sector 2.1 Top retailers - UK 1 2.2 Causes of decline in consumer shopping 1 2.3 Competitor analysis 2 3. Retail sector in the last quarter 3 4. Future prospects 3 5. Sector analysis 4 6. Discussion 5 7. Conclusion and Recommendations 6 References 8 Appendices 10 1. Background The UK retail industry employs over three million people and is the largest service industry. It is predicted to increase by 15% in the next five years which is a very low rate of growth compared to the sector’s performance in the past few years. The UK retail sector contributes 8% towards the country’s GDP which includes the UK retailers going overseas and expansion of e-commerce beyond the borders of the United Kingdom (Farfan, 2011). However, retailers in the UK face a huge challenge as they struggle to cope with the sudden deterioration in consumer demand and willingness to purchase. This report presents an in-depth analysis of the key factors that influence the development of the retail sector while evaluating which sectors offer the most potential. 2. Overview of the retail sector 2.1 Top retailers - UK The top four retailers in the UK include Tesco, Asda, Morrisons and Sainsbury and together they account for about 80% of the retail food sales in the UK (Farfan, 2011). Even though recession impacted the individual retail chains, there were not many substantial changes in the largest retail UK chains. The largest retail chains held their ranking order because there were no changes observed. Two major changes that occurred in 2011 in the UK retailing industry were that the apparel retailer Arcadia group and department store Debenhams lost their spots in the World’s largest retailing list completely. The weakened British Pound has been attributed to their decline but the 16 UK retailers retained their ranking and did not lose ground in the global rankings. Co-operative Group Ltd, a supermarket chain, and specialty retailer HMV Group registered significant positive change during the year. The chart (Appendix A) demonstrates the lead position that Tesco holds and the difference in sales volume between the fourth and fifth position (Retail-Index, 2012). 2.2 Causes of decline in consumer shopping The retail sector witnessed a healthy start to 2011 as figures showed that sales on high street were up 9% year-on-year which provided a new boost to the British mid-market retailers (Sillitoe, 2011). Fashion sales, non-fashion trading and homeware sales had all witnessed growth in sales. However, the economic and survey data suggest a slowdown in activity, which poses a challenge for the UK retail sector. Following the recession the economic growth has been slow which reflects the weak consumer sector and the rising unemployment. The economy is expected to grow by 2.0% in 2012 but the retail sector continues to be grim (Retail Economics, 2011). Consumer spending had fallen for four consecutive quarters before September 2011. Consumer spending in the second quarter of 2011 declined by 1.7% compared with the same period last year. Real disposable incomes have been affected due to high levels of inflation and low earnings growth. Besides, taxes have been imposed and benefits cut, which further affects the household disposable income. Fears about job security and personal finances have contributed to low consumer spending. The consumer spending is expected to slow down further as consumer debt rises, assisted by rising interest rates and inflation (Prospects, 2012) and stagnant wage growth and rising unemployment (Leach, 2011). House prices and job security also affect how people shop. Consumer confidence has waned because people will shop only if they feel optimistic about the situation. When they lack confidence in their own financial security, naturally the spending will be reduced. There has been a slow growth in the retail sector as the operating costs and the cost of credit have risen. The retail sector faces challenging times as the companies that cannot compete against shrinking margins will suffer. The home sector is the most affected as falling house prices has made people cautious about moving home. 2.3 Competitor analysis Tesco revealed a grim Christmas sales figure and profit warnings which was a cause of concern among investors who had come to rely on the world’s third largest retailer as a reliable profits machine (The Observer, 2012). Asda, the UK’s second biggest supermarket, has not yet updated on the sales during the last quarter but has plans to invest and create 5,000 additional jobs in a massive £500m expansion drive later this year (The Guardian, 2012). This is despite the negative growth registered and grim prospects predicted by experts in the retail sector. They plan to open new stores as small supermarkets and their initiative is expected to give a boost to the economy as it would reduce unemployment and enhance the purchasing power of the people. Budget Fashion retailer Peacocks has slumped with debts of £600m leaving more than 9000 staff facing an uncertain future (Bowers, 2012). The retail world is shocked because no rescue investor has been found yet. The majority of senior creditors led by the RBS have refused to support a debt for equity swap as this would call for injecting further funds into the retailer. This suggests that net growth in the retail sector would still be negative even if Asda were to add jobs. 3. Retail sector in the last quarter In end October 2011 the KPMG/Synovate Retail Think Tank (RTT) concluded that the retail health would be hit the hardest in the last quarter of the year as the margins had shrunk having a negative impact on the sector (Retail Think Tank, 2011). The Retail Health Index (RHI) dropped two points to 82 in the quarter which brought down the levels to the same as in the banking crisis and recession of 2009. The RHI was expected to plunge further to 80 which would be the lowest since 2006. Even though demands have reduced but the main concern of the sector is the declining margins. Falling food demand, weakened margins and changes in shopping patterns are the main areas of concern as people prefer to buy locally to avoid fuel expenses. They are also cautious to avoid wastage and compare prices before buying. However, the last quarter of 2011 has registered a growth in consumer spending as also an increase in the proportion of annual total spend as per Appendix B (Office for National Statistics, 2012). Consumer spending was high in both food and non-food sectors in December 2011 which can be attributed to the festival season. The retail sales was much lower than anticipated in November as consumers carried out bulk of their Christmas buying in October which resulted in a weakened demand (Leach, 2011). Early discounts were offered in October of which the consumers took advantage leading to a calmer November. There was reduced demand in sectors such as jewelry, computers, mobile phones, and watches and negative growth is definitely disappointing. However, as a whole, retail sale in the last quarter was actually one of the brighter spots in the UK economy. The last three months as a whole posted a growth of 0.7%, which is the largest since August 2010. 4. Future prospects The retail sector is expected to struggle the most in 2012 as consumers would back out severely after the Christmas spending. Even though festivals and seasons such as the Easter and the Olympics would improve consumer spending, consumer confidence would continue to be low. While the large retail chains would manage to carry on the small to medium sized retailers have been struggling to maintain their business and lack the resources to turn things around. Consumer spends for the last week of December is the most lucrative for the retailers. However, pre-Christmas takings were down by 15% compared to last year (Cowling, 2011). Prices have gone up but consumer spending during Christmas has not reduced. High-profile retail collapses are expected as trade credit insurers have decided not to extend levels of cover to the UK retail sector despite requests from the clients. The insurers charge a premium to protect the suppliers providing goods on credit against the risk of retailer default on payments. They expect a number of defaults in the retail sector in 2012 and the electrical and the clothing sectors in retail were of the highest concern. Even though the number of retail companies becoming insolvent is expected to reduce in 2012 the position remains grim. Based on the performance of the last quarter of 2011 the retailers are planning for a difficult outlook against planning for growth four years ago. One-fifth of the quoted retailers issued a profit warning in the last quarter of 2011 (Barrett, 2012). There were 30 profit warnings from retailers as per Ernst & Young’s latest Profit Warnings report and this was more than any other FTSE sector. The retailer warnings were much greater than in 2009 and 2010. 5. Sector analysis Sector analysis demonstrates that internet sales has been steady compared to other parts of retail. Internet sales include online sales from supermarkets, department stores, clothing stores, and predominantly non-store retailers. During the whole of 2011 the non-store retailing sector had the highest proportion of retail spending accounting for 11.4 percent which dropped to 11.2 percent for December 2011 as shown in Appendix C (Office for National Statistics, 2012). The value of internet sales in November 2011 was much higher (11.5%) than in December (10.9 percent). The value of internet sales in December was estimated at £837.1 million which was approximately 10.9 percent of retail sales excluding automotive fuel. The proportion of annual retail spending on both food and non-food sectors were higher in December than at any time of the year. Overall the proportion of non-food retailing (12.1 percent) was higher than the food sector (9.9 percent) as shown in Appendix C. However, spending on food sector was one-third higher in December than in January while February saw the lowest proportion of annual retail spending in the non-food sector. Automotive fuel sector was evenly distributed throughout the year. Overall, an estimated £42.1bn was spent in the retail sector in December 2011 compared to £39bn in November 2011. Predominantly food stores registered an increase of 1.2 percent in December 2011 compared to December 2010. Sales value increased as well but that can be attributed to the increase in the price of the goods. In the non-food stores sales volume increased by 1.1 percent compared to December 2010 (Office for National Statistics, 2012). This was due to an increase in the textile, clothing and footwear stores and non-specialized stores while there was a decrease in the household goods stores. Warm weather has also resulted in decline in winter wear. The clothing sector appears to be hit the hardest as Barratts and Priceless Shoes collapsed and Blacks Leisure is looking for a buyer for one or more of its brands. While Irisa plans to close some of its stores discount fashion chain Peacock may close some of 200 stores. Women’s wear chain Talbots received a takeover bid from its leading shareholders (Barrie, 2011). Mild-autumn has also hit the sales of cold-weather items and the ongoing eurozone crisis is also exerting pressure on consumers. 6. Discussion The top four retailers may not have suffered in their ranking but they have definitely delivered profit warnings. Asda has also planned to increase employment but several smaller retailers and even large chains such as Peacocks have closed down units. The UK economy has certainly affected the retail sector as consumer debt has arisen; consumer spending has reduced as unemployment has increased. Inflation and low earnings are other reasons that have negatively impacted the retail sector. Despite these factors consumers do spend during festivals as the last quarter saw a rise in overall retail spending. Many did avail of the early discounts which affected the November sales but Christmas spending has been as usual. This implies that consumers do save up for special occasions. Nevertheless, the retail sector is under pressure which has cautioned the insurers not to expand their cover for the suppliers. This implies that the insurers expect a lot of bad debts when the retailers would not be able to pay the suppliers. This may not be applicable to the larger retailers. This then suggests that the fittest can survive. The retailers that have their own financial backing can expect to survive the economic condition. They would be able to tide over the current crisis despite profit margins being low. This is because of the sheer volume they deal in. The smaller ones are unable to sustain with low profit margins and succumb. The ONS statistics suggests that sales value has increased in the textile and apparel sector but the clothing sector is the hardest hit as per Barrie’s report. It can thus be assumed that the sales value increased due to rise in the prices but overall the clothing and apparel sector has been severely impacted. This also gives an insight into consumer behaviour. While food is an essential category, the sale of non-food retailing has been higher than food retailing. However, non-food includes various items and hence it is difficult to conclude that food sale has declined. In fact the main sector in which the largest four retailers concentrate is on food. Thus food seems to be the priority with consumers, a basic need. Non-store retail has increased suggesting that consumers prefer to engage in internet shopping thereby economizing on automotive fuel. Besides, internet buying can also be associated with changes in the consumer lifestyle as it offers convenience and comfort. Thus the UK economy has impacted the retail sector in several ways. 7. Conclusion and Recommendations An analysis of the UK retail sector in the last quarter of 2011 suggests that the prospect for the future is grim. The retail sector would continue to be adversely impacted and hence the retailers should focus on essential and affordable items. As clothing and apparel have been the hardest hit, focus on clothing and textiles should be given during special occasions such as Easter and Christmas. During other periods of the year retailers should focus on fast moving goods and consumables that form an essential part of the retail sector. Competition is prevalent among the top retailers but all of them focus on food. The smaller retailers need to plan their investments and attention. Household good should be dealt with only sparingly as the sales have decreased. As non-store sales has gone up retailers should make a conscious effort and focus on online stores. This would also help them reduce their in-store labour costs. Certain products such as household goods have seen reduced purchases and hence these products could be shipped directly from the suppliers thereby reducing the need to invest and hold inventory. Pressure on the retail sector is intense and hence short-lived factors have to be relied upon till the economy undergoes a change. Since warm weather has affected the sale of winter wear discounts can be offered to release inventory. This affects the profit margins but would help the retailers to tide over the current situation. Retailers should go in for a different promotion every week like clubbing two different products leading to substantial benefits for the consumers. Alternatively they could come with volume discounts on particular day/days of the week to push sales. Word count 2507 References Barfrett, C. (2012) Credit insurer remains wary of UK retail sector. Available from: http://www.ft.com/intl/cms/s/0/b2d8f21a-450d-11e1-be2b-00144feabdc0.html#axzz1kNJtr140 (accessed 24 January 2012). Barrie, L. (2011) UK retail sector under pressure. Just-Style. Available from: http://www.just- style.com/the-just-style-blog/uk-retail-sector-under-pressure_id2039.aspx (accessed 24 January 2012). Bowers, S. (2012) Peacocks collapse rocks retailers as creditors blame each other. The Guardian. 20th January. Available from: http://www.guardian.co.uk/business/2012/jan/20/peacocks-collapse-rocks-retail-industry (accessed 24 January 2012). Cowling, J. (2011) Retailers face tough time as consumers cut back. BBC News, 28th December. Available from: http://www.bbc.co.uk/news/business-16344208 (accessed 24 January 2012). Farfan, B. (2011) 2011 Worlds Largest UK Retailers - The Biggest United Kingdom Retail Chains. Available from: http://retailindustry.about.com/od/largesteuropeanretailers/a/united_kingdom_uk_2011_worlds_largest_retailers_biggest_retail_chains.htm (accessed 24 January 2012). Leach, M. (2011) UK retail sector suffers larger contraction than expected. Available from: http://www.freshbusinessthinking.com/news.php?NID=11781&Title=UK+retail+sector+suffers+larger+contraction+than+expected (accessed 24 January 2012). Office for National Statistics. (2012) Retail Sales - December 2011. Statistical Bulletin. Available from: http://www.ons.gov.uk/ons/dcp171778_250868.pdf (accessed 24 January 2012).Prospects. (2012) Retail: Overview. Available from: http://ww2.prospects.ac.uk/cms/ShowPage/Home_page/Explore_job_sectors/Retail/overview/p!egiLLL (accessed 24 January 2012). Retail Economics. (2011) Outlook for the UK Retail Sector Q3 2011. Available from: http://www.retaileconomics.co.uk/outlook-for-the-uk-retail-sector-q3-2011/ (accessed 24 January 2012). Retail-Index. (2012) Top retailers in the United Kingdom. Available from: http://www.retail-index.com/HomeSearch/TopretailersinEuropebycountry/ToprankingretailersintheUK.aspx?gclid=CLuVgNOX5q0CFUkb6wodzza14A (accessed 24 January 2012). Retail Think Tank. (2011) The Health of UK Retail will hit a new low in quarter 4 says Retail Think Tank; weaker retailers will cling on until January. Available from: http://www.retailthinktank.co.uk/news/uk-retail-will-hit-new-low-quarter-4 (accessed 24 January 2012). Sillitoe, B. (2011) Healthy start to 2011 for UK retail industry. Available from: http://www.retailgazette.co.uk/articles/11340-healthy-start-to-2011-for-uk-retail-industry (accessed 24 January 2012). The Guardian. (2012) Asda reveals plans to create 5,000 new jobs. The Guardian, 23rd January. Available from: http://www.guardian.co.uk/business/2012/jan/23/asda-create-5000-new-jobs (accessed 24 January 2012). The Observer. (2012) Carrefour shows Tesco what a real retail crash looks like. The Observer, 22nd January. Available from: http://www.guardian.co.uk/business/2012/jan/22/tesco-carrefour-profit-warnings-sales-slump (accessed 24 January 2012). Appendix A Rank Name of Retailer Turnover in MIO euro Year   Number of outlets Main Sector(s) 1 Tesco Plc 43,278 2010 2,482 Food 2 Sainsbury 24,053 2010 828 Food 3 Asda Group Plc 19,272 2009 379 Food 4 WM Morrisons Supermarkets Plc 18,582 2010 437 Food 5 Marks & Spencer Group Plc 10,120 2010 690 Food 6 Boots 7,617 2010 2,618 Personal Care 7 Toys R Us, LTD 7,360 2008 75 Toys & Games 8 Waitrose 6,899 2010 243 Food 9 Somerfield 5,589 2008 980 Food 10 B&Q 4,620 2010 321 Furniture & Decoration   Source: Retail-Index (2012) Appendix B Source: Office for National Statistics (2012). Appendix C Source: Office for National Statistics (2012). Read More

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