Data: How costs will increase for retailers in the new financial year

To recap, there are changes to National Insurance with rates increasing and the earnings threshold at which employers become liable to pay lowering, too. Both the national minimum wage and national living wage are increasing, all adding to retailers’ staff bills.

Also on the horizon is the change in business rates, with a big increase in costs expected for those with high-value properties (including plenty of retailers in major high street locations).

What will all these costs add up to? According to modelling for a new report by consultancy Retail Economics and operations specialist Yoobic – £5.6bn. That equates to a 3.9% rise in costs for the industry, equivalent to 195,000 full-time retail jobs based on the sector average.

The report is based on a survey of 100 UK retail businesses with turnovers between £10m and £5bn, which allowed Retail Economics and Yoobic to find out how companies were planning to deal with the increased costs.

Cost optimisation will be a big part of it, their figures show, with retailers likely to find around £2.08bn in savings in areas such as supply-chain efficiencies. We have also known for some time that retailers are likely to bump prices and on this the report anticipates £1.7bn of these costs to be passed onto consumers.

The remaining £1.76bn will largely be swallowed, eroding margins that in lots of cases are already very tight.

“The scale of this challenge risks stalling investment, accelerating store closures, and reshaping the retail landscape in the year ahead,” said Retail Economics chief executive Richard Lim.

Let’s go into those three strategies in more detail.

Cost optimisation – £2.1bn

According to the report, retailers are optimistic that over a third of the costs can be covered by improving productivity and efficiency. The strategies of how this will be achieved vary across the industry.

Supply chain optimisation was cited by 39% of retailers, while 38% said they would look to financial engineering, such as working capital management. In layman’s terms, that means making the cost of selling goods lower, as well as better budgeting. The remainder of the strategies are laid out in the chart below.

Some major retailers have already given us a peek behind the curtain.

Kingfisher chief executive Thierry Garnier said last week that the group planned to mitigate its additional £145m in costs entirely through savings, such as decreasing the size and number of distribution centres, renegotiating leases, rolling out self-checkouts and using AI tools to improve markdowns.

Next said in January that they were expecting about £81m in cost increases in the year ahead, with around 32% of this being covered by improved operating efficiencies.

Price increases – £1.7bn

Now is not a great time to increase prices. Consumer confidence edged up slightly in March but remains subdued. The household savings ratio continues to move up and is now at its highest level since the pandemic era (Q2 2021).

Recent KPMG figures showed that some households are cutting their spending even if they feel financially secure. The positive read here is that as wages grow, there is pent-up demand building that could lead to increased consumer spending later down the line. Stronger-than-expected retail sales figures in recent months may add fuel to that hypothesis, but it is hard to see the market as anything but fragile.

The Retail Economics and Yoobic report found that online retailers are particularly cautious, while store-based retailers were likely to take strategies tailored to different geographies (with smaller retailers being more likely to take this approach).

An awareness of budget-conscious consumers appears to have helped subdue price rises so far. Drops in clothing prices have helped put downward pressure on overall inflation. BRC-NielsenIQ figures published today showed shop-price inflation at -0.4% year on year.

Yet there is no doubt that upping prices is very much the plan. A BRC survey from earlier this year found that two thirds of retail chief financial officers were planning price rises because of the budget changes.

“With retailers bracing for significant extra costs, which kick in later this week as a result of the Budget, inflation will likely accelerate in the coming months,” said BRC chief executive Helen Dickinson in a statement released alongside the consortium’s inflation figures.

Absorbing costs – £1.8bn

UK retailers already typically operate on quite narrow pre-tax profit margins. According to Retail Economics, pre-tax margins are around 5.3%. The £1.8bn hit here equates to a 6.7% drop in industry profits year on year.

The survey of retailers found that larger operators were more likely to take a profit hit, whereas smaller businesses would more likely lean on cost optimisations.

As far as stores go, a reduction in margins likely leads to some becoming less economically viable for retailers. Over a fifth (22%) of retailers said that they were looking at portfolio optimisation, with this being more likely among non-food operators.

Just 7% said they were planning to close stores, but 16% said relocation based on footfall and customer demand was on the horizon.

Separate figures published by High Streets UK in March showed that 600 trading units on flagship high streets were likely to be put at risk by business rate rises, with over 200 facing permanent closure.

To recap, there are changes to National Insurance with rates increasing and the earnings threshold at which employers become liable to pay lowering too. Both the national minimum wage and national living wage are increasing, all adding to retailers’ staff bills.