From “disappointing” to “clobbered”, the retail backlash to last month’s Budget has only grown with every passing day. The next question is what the sector will do in response?
The retail sector’s response to last month’s Budget has been punchy, to say the least. For a sector that has long had to grit its teeth and roll with the fiscal blows and policy punches of successive governments and Budgets, retailers of all sizes and across categories have been uncharacteristically vocal in sticking the boot in.
So, what is it about Rachel Reeves’ effort that has so excised the industry?
“There’s a sense of betrayal,” one source fumes. “We thought we were getting a more business friendly government.”
Marks & Spencer boss Stuart Machin summed it up best when he described Labour’s changes to national insurance contributions and lowering the threshold at which employers start paying that as a “double whammy”.
For M&S alone, this will add some £60m to the bottom line annually.
But, as the source points out, changes to national insurance contributions are just the tip of the iceberg for retailers on taxation from the Budget.
“Between everything, the Budget adds £5bn in costs to retail’s bottom line from next April. That’s before you consider things like the new packaging levy, which comes in later this year. That’s an extra £2bn. All-in-all that’s another £7bn the sector needs to find.”
A leaked draft letter from the British Retail Consortium to the chancellor shows the membership body is in no doubt about what that will mean.
“The effect will be to increase inflation, reduce jobs and pay growth, especially at the entry level, and bring investment down”.
Is it all, as the BRC seems to think, “inevitable” though?
The efficient coefficient
In a note issued yesterday, three analysts from investment bank Peel Hunt laid bare the “big numbers” associated with the changes in the Budget.
In simple terms, they said, with average retail payroll costs at c.18% of total sales, the proposed changes represent “an average 7.5% PBT hit before mitigation”. A nearly 8% hit to the average profit line – ouch.
“While mitigation efforts will be prioritised,” the note continued, “some stores may become unviable, projects may be shelved, and prices may rise”.
Retailers are already saying as much. M&S’ Machin said that despite embarking on a £500m cost reduction programme less than three years ago, there’s still efficiencies left to be found – not least in the supply chain, where he said new technologies could save it 160,000 staff hours.
At dinner in an upmarket Knightsbridge restaurant, the chief executive of a UK fashion brand, which is merrily outperforming the market in the UK, agrees both with Machin’s diagnosis of the challenges the Budget poses and the solutions it will require to navigate.
“Stuart [Machin] said it best,” he sighs, a hint of regret in his eyes as he waves away a circulating plate of canapes. “About it being a double whammy. It’s all take and no give.
“It’s really going to mean that we will have to go through every single line of outgoings next year and explore every avenue we can to find efficiencies,” he adds, before politely shifting the topic, to perhaps conserve what little appetite he has left.
Hiring freeze
But it’s not just operational efficiencies that some retailers are looking at.
The chief executive of a fast-growing direct-to-consumer brand says the changes mean that he will be looking to hire less new staff in the New Year.
“I’m already looking at next year’s budgets and having conversations with my finance and HR teams I’ve not had for years. Not since we were in the start-up phase,” he says, staring out of the ninth-floor window of a central London office block towards the lights of St Paul’s in the distance.
“Conversations like: ‘Do we really need this new role we’re looking to hire?’ Or whether we really need two people working similar jobs that could only be done by one person.” He shrugs sadly. “I think we’ll definitely not hire a few people we may otherwise have next year.”
And these are businesses that are doing well. As John Stevenson, one of the authors of the Peel Hunt note explains, businesses without cash in hand and the budget flexibility to absorb some of the cuts may be in an impossible position.
“If you’re just now coming out the other side from a tough couple of years, you may have already stripped out just about every cost and found every efficiency there is to find. Now this has landed on your mat. You’ve got to be thinking, where is all that extra money coming from?”
Slash and churn
One last area where retailers may look to cut costs is around stores and, by extension, jobs. And that’s not just the struggling retailers, warns Stevenson.
“Every retailer is going to have to take this down to the individual store level, and that’s where your margins get super tight,” he explains. “Say you’ve got a store making a sales contribution in the mid to high teens now, then that store is doing pretty well.
“But then from April, with the added costs per employee, that maybe takes that percentage down to 10%, or into single digits. Suddenly, you’ve got a store that’s gone from performing well to one that might be on your closing list.”
Closing stores means slashing jobs, and the process is already underway. Homebase plunged into administration overnight, putting thousands of jobs at risk.
Asda leader Lord Stuart Rose meanwhile has promised to “pass on as little” cost as possible to customers next year, which will come as small comfort to the hundreds of staff let go in twin redundancy rounds in the last few weeks.
The only ray of hope, according to Stevenson anyway, is the possibility of the consumer riding in to save retail. “You’d only need a 2-3% increase in spending to wipe all of this out,” he says optimistically.
With inflation “inevitable” from April, that particular ray of hope seems less than a sliver. But at this juncture, something is better than nothing.
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