A tale of two nations

Times are tough in retail, but some parts of the country seem to be feeling the impact more than others. Evidence is emerging to suggest that Scotland, the north of England and the Midlands are far more exposed to the slowdown than London and the Southeast, where sales are holding up.

The list of retail casualties so far this year – including Ethel Austin, Internaçionale and Au Naturale owner Ossian Retail and Sleep Depot – includes a high proportion whose heartlands are in the North and Scotland.

So to what extent has the downturn really transformed retail into a tale of two nations?

Kaupthing analyst Matthew McEachran thinks that regional spending variations are becoming evident and puts the disparity down to supply and demand in housing. “In the North, East and West Midlands, there are a few pockets where there has been a massive squeeze in house prices,” he says.

McEachran fears the full effects of the divergence have still to be felt and warns: “The evidence is that it does exist and it’s only going to get stronger.”

Mosaic Fashions deputy chief executive Mike Shearwood notes that regional performances always vary and he has not yet seen a clear pattern emerging across the fashion group. “We’re getting different regional performances across different brands,” he says. “But it’s not really apparent if you average it out, which leads me to believe there are other key drivers.”

The view that different parts of the UK are being affected to different degrees by tough trading is supported by a study of UK shopping centres carried out by research house CACI (see table) and based on data on financial attitudes and behaviour. The findings show a clear geographic divide between those most severely at risk from the downturn and those that are well-protected.

All of the top 15 most resistant destinations are located in the Southeast of England and the home counties, whereas the 15 categorised as most at risk are in the Midlands and the North.

Outside the Southeast, the most resistant centres are Harrogate and Chester. The study revealed that the towns topping the resilient list, such as Epsom, Guildford and High Wycombe, have a higher proportion of what the study terms “credit crunch resistant shoppers”. This group accounts for more than 25 per cent of shopping spend in those towns, compared with a national average of 14 per cent.

Similarly, Asda’s monthly income tracker shows not only that the reduction in consumers’ discretionary spending is real, but that there are big regional variations. It highlights Wales as the worst affected area by a long way. In January this year, the average household in Wales had 12.7 per cent less disposable income than in January 2007.

Of all the English regions, the Southwest showed the greatest fall in spending power, declining 4.4 per cent. This compares with a drop of just 1.8 per cent in London – the smallest overall. The Northwest dropped 3.8 per cent, the Northeast by 3.4 per cent, Northern Ireland 4.9 per cent and Scotland 2.2 per cent.

London in the clear?

Capital Economics analyst Vicky Redwood says the housing shortage in London and the Southeast has so far kept house prices relatively high and therefore protected retailers in those areas from the full effects of the slowdown. “There is high demand because of immigration and not enough new houses being built,” explains Redwood.

The health of the housing market has both a direct and indirect effect on spending. When fewer people are moving, there is less demand for furniture and fitted kitchens and bathrooms, for instance. Rising mortgage payments and the inability of people to release equity from their properties easily also hits discretionary spend.

Not only that, but a fall in house values indirectly affects consumer confidence and can therefore significantly reduce spending across the board, even among those not thinking of moving or not yet on the property ladder. “It shouldn’t make people feel significantly worse off, but it does,” says Redwood.

Retail Knowledge Bank senior partner Robert Clark warns that there is a tendency to “overcook the problem” of the general slowdown and believes consumers may well find they are not as badly affected as they expect to be. “One thing to remember is that it is a slowdown in the rate of growth,” he points out. “People tend to think that the economy has gone backwards. That has not happened yet.”

Clark observes that it is the less affluent areas of the country – in particular the traditional manufacturing regions – that tend to be disproportionately affected during tough times. At present, there is relatively high employment across the UK, but in manufacturing areas there is often a culture of people fearing for their jobs during downturns. He adds: “These are probably the same people who are well up to the hilt on credit and whose mortgages are a high proportion of their income.”

Tourist spending, higher average earnings and a resilient housing market have meant that retail spending in London has held up well so far. But many believe the London bubble will burst – and perhaps soon.

Redwood says: “The housing market in London and the Southeast has been better than the rest of the country and is still holding up relatively well. I don’t think that will continue. It’s going to be a nationwide weakening in the housing market. Like everywhere else, people in London are having trouble getting mortgages.”

Retail consultant Richard Hyman believes London and the Southeast may not be as invincible as people expect. Hyman says: “On the face of it, people in London and the Southeast are more affluent and, in theory, they are better able to deal with an economic slowdown. But it’s not quite as simple as that. Living costs are higher and, in addition, you’ve got the City of London.”

He warns that the full effects of job losses in the City have yet to be felt. “Job cuts in the City have ramifications that are quite extensive. One person loses his job, but it effects X number of people.” For example, jobless City workers are less likely to spend money doing up their homes.

Hyman adds that, compared with other areas of the country, this is quite a new phenomenon, so the effects outside London may be less drastic. “In Merseyside, they are more used to living on a budget,” he explains.

Redwood says retailers could manage the impact of tough times by targeting customers more effectively. Although that should take account of regional trends and differences, consumers need to be carefully segmented by type, no matter where they live.

Families with big mortgages and big food bills are likely to be hard hit, so retailers could balance the need to continue to cater for that core base of shoppers with increased efforts to woo those who rent, do not have dependants and may therefore still be freer with their spending.

Good managers, says Clark, will keep on top of regional trends and adjust their brand’s offer appropriately if that can make a difference. “Information technology is incredibly sophisticated these days,” he says. “They will have opportunities to tweak their regional offer if they are so inclined and the management is up to it.”

However, Clark also believes that good old-fashioned communication will be imperative. “There is a tendency towards centralisation,” he warns. “Retailers will need to talk increasingly to and get feedback from regional store managers. And store managers will need to be mindful of the feedback they get from customers.”

The biggest UK retailers are increasingly thinking globally, but they may have to act locally to ride out the downturn in their home market.