UHY Hacker Young | Chartered Accountants

Subdued Christmas cheer on the High Street

11 January 2019

The big retailers have now revealed their performance during the vital Christmas period, and one of them has already appointed administrators. Can lessons be learned from the misfortunes of others?

An icon on the brink

Just before Christmas the music and DVD retailer, HMV, announced that it had appointed an administrator for the second time in six years. Hilco, which bought the company out of administration in 2013, claimed that a number of factors were to blame including business rate levels and live streaming of music and film.

Mixed results

Despite dire expectations, not all retailers reported bad news. Due to a late surge, Next reported an overall increase in sales of 1.5%, but a fall in High Street sales of 9.2% was offset by a rise of 15.2% online. John Lewis also experienced brisk last-minute trading: sales were up 4.5% in the week before Christmas and 11.2% in the week after.

The losers included Sainsbury’s, down 1.1% and Mothercare, who reported a decline in sales of 11.5%.

Expectations were low following a November that Sports Direct boss described as “the worst on record”. Retailers blamed uncertainty over Brexit which caused customers to curb their spending. Other challenges were rising rents, price rises and squeezed margins caused by the falling pound. And of course, online trading continues to take footfall off the High Street.

In search of a level playing field

The British Retailers Consortium repeatedly stresses that our High Street retailers do not have the benefit of a level playing field when it comes to costs. Its particular bugbear is business rates. Its headline-grabbing assertions include that retailers pay 25% of all business rates (totalling £7 billion annually) even though they constitute only 6% of the UK economy.

According to the Daily Mirror’s High Street Fightback Campaign, HMV, with sales of £277 million, paid £15 million in business rates last year, while Amazon, with £8.8 billion sales, paid £38 million. Statistics abound in support of the unfairness theory: for example, a report from the Centre for Economics and Business Research states that UK’s bookshops pay 11 times what Amazon does in corporation tax.

Business rates are a major issue. As they are based on a market value of business premises and High Street locations are intrinsically more valuable than out-of-town warehouses, large online retailers will always have the advantage. Lobbying by the British Retail Consortium has brought some relief for smaller retailers but our High Streets also need to have the large retailers in residence to create a market.

It seems unlikely that the BRC will succeed in its aim to get business rates replaced by some kind of local income tax. The advantages of rates are their predictability, low risk of avoidance, and the fact that they effectively represent a charge for local services.

The online challenge

It cannot be denied that online shopping has made serious inroads into traditional retailing. Most retailers have now responded to the challenge by launching their own online shopping sites. However, this is only the first step. Retailers now need to downsize, to shed floor-space, overheads, and regrettably, jobs. They need to be represented on the High Street and to maintain their profile, but they have to change the habits, acquired over decades of growth, to open more and ever larger stores, and they have to do more to sign up loyal customers who visit regularly. The ‘shopping experience’ is still a draw; you only have to visit the premises of a well-known Swedish homeware store to witness its popularity.

Stay relevant

And as for HMV, there is still a market in CDs and DVDs even though it has no doubt shrunk. For music lovers, the sound of a downloaded MP3 may not be as good as a CD (and certainly does not compete with vinyl), and of course, there is the joy of ownership that Spotify cannot bring. So the mistake is to see these two markets as one. The lesson to be learned is relevance. All of us in business need occasionally to carry out a reality check. If you are still trying to sell something equivalent to what is portrayed in the iconic HMV logo (the dog and trumpet gramophone) you are probably no longer in touch with your customers.

Why not start the New Year by examining your products and services and deciding which are in danger of becoming irrelevant? Be careful to avoid emotional attachment to any of your products. If you need dispassionate advice, please don’t hesitate to contact me or your local UHY adviser