The cost of living in the UK is increasing, and as yet shows no signs of abating. Inflation is at its highest rate for 30 years and is set to rise further, and wages have not risen fast enough to match this growth – leading to lower disposable income overall.
Disposable incomes are set to fall further given the recent rise in the energy price cap, which has increased energy bills for the average consumer by some 50%. Real household disposable income is forecast to fall by about 2.2% this year according to the Office for Budget Responsibility, with less affluent consumers having to finance any discretionary spending from savings and credit.
The reality is that consumer demand will continue to fall in the second quarter and potentially beyond, with recessionary behaviours increasingly evident and a renewed focus on essentials only. Retail Economics forecasts that discretionary spend could drop by as much as 19.5% among the UK’s least affluent households.
Perfect storm
Retailer costs have risen significantly owing to a combination of wage inflation, increased freight costs, the rising cost of raw materials and a return to full business rates payments from this month.
This impact has been felt across all sectors – including food, where prices are set to rise by an average of 4.5% this year, according to Trading Economics. Tesco has stated that its costs are up by 5% this year, partly driven by wage inflation given a recent 5.8% rise in hourly wages for store and warehouse staff.
Bulky goods retail has also been hit by rising costs – forcing retailers to pass some of these costs on to shoppers in the form of increased prices. Topps Tiles, Dunelm and Ikea have all increased their prices recently, with Ikea’s going up more than most with a circa 10% rise. The electrical goods sector has also been hit hard by rising costs – mainly exorbitant shipping costs coupled with a global microchip shortage. The full effect of this may not be passed on to shoppers, however, given many have already upgraded their tech and home entertainment during the pandemic.
Fashion is another sector that has seen rising costs and therefore price increases. Next has said that prices for its autumn/winter 2022 range will be 6% higher as a result of increased freight and manufacturing costs as well as wage inflation. Louis Vuitton, Inditex Group and Joules have all also increased prices, with Joules citing a massive 53% rise in operating expenses due to freight costs and wage inflation at its distribution centres. On the other hand, Primark has pledged to freeze prices for shoppers despite rising inflation but has done so while cutting about 400 jobs in-store.
A new headwind
Depending on how long the cost of living crisis lasts, we could start to see an increased rate of physical store closures, and further pressure on landlords to reduce rents. Rents have dropped considerably since the onset of the pandemic, but retailers mainly cite the return of full business rates as their major concern from a property cost perspective. The business rates support measures announced in October 2021 (50% relief on bills up to £110,000 per business) are practically meaningless for retailers with more than a couple of stores. M&S and Wilko have both recently announced store closures due to rising costs, and more retailers will likely follow suit if costs continue to remain as high as they are.
The alternative to store closures is workforce restructuring, including redundancies, as exemplified by Primark and Gymshark recently. Product innovation is also a potential solution, with Asda rolling out a new 300 product “Just Essentials” budget range. Meanwhile, Morrisons’ new owner, CD&R, has approved plans to sell off its £500m property portfolio – this will help mitigate the impact of the cost of living crisis, assuming of course that sale monies are invested back into the business.
The cost of living crisis has achieved the dubious accolade of replacing Covid as the main concern for consumers currently. As real incomes start to fall and prices rise further, retailers and property owners face yet another major headwind. As with Covid, I am hopeful that both will work together proactively to overcome this latest challenge.
Jonathan De Mello is chief executive of JDM Retail
