In this, the first part of the Webloyalty Future of Retail research report, we look in detail at the current market, and how the retail sector has been affected. This part also discusses possible outcomes for the retail sector in terms of growth between 2013 and 2018. To view and download the full research report, head to the Webloyalty website: http://www.webloyalty.co.uk/images/webloyalty_retail_research.pdf

1. 1. The economics of retail

2. Section 1
The future of retail
The supply picture
economics of retail
The economics of retail
Introduction
• Since the beginning of the year the economy has already shown some signs
of life with modest GDP growth and a rise in consumer sentiment. While this
appears to be sustainable, and is welcome, the degree of the pick-up is very
shallow.
• The broad upshot is that by 2018 things will have normalised; growth will
have resumed, confidence will have strengthened, and spending will be
more robust. However, this will be far from a boom period and we will not
see a return to the economic characteristics of the pre-recession period.
• In our view, the recovery over the next five years is likely to remain on this
trajectory. This is mainly a function of three factors.
• Naturally, there are downside and upside risks to this view and in this
section we have presented a more optimistic and a pessimistic scenario. The
probability of these forecasts materialising is slightly lower, but they are
still firmly within the realm of possibility.
• First, the extensive levels of debt across both the public and household
sectors, which will act as a brake on growth and weaken the contribution of
a consumer driven recovery.
• Second, the negative headwinds from other parts of the global economy –
most notably the Eurozone – which lessen the prospect of an export driven
economy.
• And, third, the further unwinding of some unproductive firms which are
impelled by the current low interest rate policy and will likely fall into failure
as rates rise. This, and the need to close the productivity gap which has
opened up during the downturn, will result in higher unemployment.
• This latter point is particularly important as there is a very real prospect of
the recovery being a ‘jobless’ one, especially over the next couple of years.
This will clearly have a dampening impact on both spending and sentiment.
4
The future of retail: the supply picture
Prepared for Webloyalty by Conlumino
August 2013
• Whichever forecast materialises, as we will explore later in the report, what
will constitute economic normality as a result has some fundamental
implications for the retail sector.

3. The future of retail
Section 1
The supply picture
economics of retail
The economic context
GDP growth
•
In assessing the next five years in retail, the logical place to start is to understand
how the overall economy will perform. While GDP numbers can be fairly esoteric,
they do provide a shorthand which neatly reflects the underlying reality on the
ground which, in turn, colours consumer sentiment and decision making.
•
The chart below shows our GDP forecasts for the period 2013 to 2018. Our central
assumption (which represents a realistic view) is the blue line. This is what we
expect to happen and is the assumption on which we base our retail forecasts.
•
•
•
Comparatively, the pessimistic view assumes sluggish export growth and a rising
unemployment profile in the near term. This ‘jobless recovery’ continues to put
downward pressure on wage settlements which, coupled with high inflation,
undermines domestic demand.
•
We have also provided two other forecasts: an optimistic view (which is shown in
green) and a pessimistic view (shown in red). The likelihood of these forecasts
materialising is slightly lower, but they are both within the realm of possibility.
In very basic terms, the optimistic view assumes strong export growth, which in turn
presumes a degree of stability in the Eurozone. This helps to bolster employment
levels which, later in the forecast period, feeds through into wage and spending
growth which further boost the economy. Under this scenario we have assumed that
no further government cuts, over and above those already pencilled in, are required.
It is worth noting that the scenarios differ by degree rather than direction in that
they all broadly follow the same recovery pattern.
GDP growth pattern
Figures on the chart are percentage annual growth rates
Total growth (optimistic):
17.0%
3.6
2.7
2.1
Total growth (realistic)
13.9%
1.5
The future of retail: the supply picture
Prepared for Webloyalty by Conlumino
2.2
1.8
1.9
2015
2016
1.9
0.3
2012
Growth rates represent the total growth of
the economy over the 2012 to 2018 period.
5
2.9
1.0
0.2
9.4%
3.1
2.7
1.8
1.1
Total growth (pessimistic):
2.3
2.9
2.4
August 2013
2013
2014
2017
2018

4. Section 1
The future of retail
The supply picture
economics of retail
Scenarios
Different economic outcomes
•
GDP numbers are all well and good, but what’s more important is how they impact
the realities on the ground and what the different scenarios will look like from the
consumer perspective.
•
In the tables below we have mapped what we expect the macro-economic and
consumer environment to look like under the various scenarios.
Optimistic scenario
Realistic scenario
Pessimistic scenario
What things look like on the ground under this
scenario
What things look like on the ground under this
scenario
What things look like on the ground under this
scenario
Under this scenario the economy will bounce
back quickly after 2013 and, although some
weaknesses will remain, things will start to feel
more like they did pre-recession by the end of
the forecast period.
Under this scenario the economy will not
resume solid growth until 2015 and even then
will remain below par for the remainder of the
forecast period. Things will become more
positive, but not as they were pre-recession.
Under this scenario the economy will become
more robust in 2015 but thereafter will lack
momentum and will see growth flat-line. Things
will not be as negative as they were midrecession but many will still feel recessionary.
Unemployment (2018):
Unemployment (2018):
Unemployment (2018):
5.1% (2013: 7.9%)
6.3% (2013: 7.9%)
7.6% (2013: 7.9%)
Inflation (2018):
Inflation (2018):
Inflation (2018):
1.6% (2013: 2.8%)
2.8% (2013: 2.8%)
3.1% (2013: 2.8%)
Disposable income (2018):
Disposable income (2018):
Disposable income (2018):
3.9% (2013: 0.1%)
2.2% (2013: 0.1%)
1.3% (2013: 0.1%)
Sentiment (2018):
Sentiment (2018):
Sentiment (2018):
+19.4 (2013: -29.3)
+7.9 (2013: -29.3)
+4.6 (2013: -29.3)
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The future of retail: the supply picture
Prepared for Webloyalty by Conlumino
August 2013

5. The future of retail
Section 1
The supply picture
economics of retail
Retail spend growth
Different scenarios
•
Using the underlying economic assumptions, we have mapped out how retail
spending growth might look under the different scenarios.
•
•
The chart below shows the growth rates for each year as well as the value of all retail
spending at the start and end of the forecast period. The total growth rates for the
whole period are shown in the boxes under the chart; these represent how much
retail will have grown by 2018 from the start point of 2012.
The difference between the optimistic and realistic scenarios is £10.2bn of spending
across the period; between the pessimistic and realistic scenarios the difference is
£10.8bn.
Overall retail spend and growth rates for different economic scenarios
Figures on the chart are percentages
3.9
Retail spend
at start (2012)
3.6
3.3
3.5
2.9
£310.5bn
Retail spend
at end (2018)
3.3
3.1
3.1
£376.8bn
3.1
3.0
2.3
2.5
3.0
3.7
2.6
£310.5bn
2.7
£366.6bn
2.2
1.7
1.5
1.6
£355.8bn
0.9
£310.5bn
1.2
0.5
2012
2013
2014
2015
2016
2017
Optimistic scenario
7
Realistic scenario
Pessimistic scenario
Total growth: 21.4%
Total growth: 18.1%
Total growth: 14.6%
The future of retail: the supply picture
Prepared for Webloyalty by Conlumino
August 2013
2018

6. Section 1
The future of retail
The supply picture
structure of retail
Overview of retail
Today and tomorrow
Retail spend segmentation by sector
Figures in the pie charts are percentages
Food & grocery, health & beauty and
clothing & footwear will be the vanguard
of growth over this period, reflecting
their less discretionary nature. Food in
particular will continue to outperform,
with persistently high inflation meaning
that the sector accounts for a rising
proportion of overall retail spend,
despite efforts by shoppers to offset the
impact. Conversely, the sectors most
closely related to the housing market
will underperform.
2013:
2018:
Food & Grocery
Other retail
Clothing & Footwear
Home
Electricals
Health & Beauty
DIY & Gardening
Home Entertainment
Books
Total growth of each retail sector, 2013-18
All figures are percentages
22.9
21.1
17.2
16.1
12.8
9.1
7.7
2.5
-6.2
Food
8
H&B
The future of retail: the supply picture
Prepared for Webloyalty by Conlumino
C&F
Total
August 2013
Electricals
Home
Other
DIY
Books
-25.9
HE