What are shellshocked retail management c-suites doing to mitigate the Budget?

As the shockwaves from the Budget begin to settle, retailers are now crunching the numbers and looking ahead to next year and how the measures announced will affect their plans.

Along with all the fire and fury, retailers are considering how they might respond to the new costs’ impact on everything from staffing to stores, buying, merchandising and pricing.

The big intangible is the consumer reaction. Analysts say a 2%-3% increase in spending next year could effectively wipe out the added costs. However, with the latest British Retail Consortium (BRC) Shop Price Index showing that prices increased in November month on month for the first time in over a year, a spending spree in the New Year looks uncertain. 

Staffing and hiring freezes

The retail sector’s biggest gripes with the Budget are regarding the National Insurance contributions – both the flat increase and the changes to the level at which employers will have to start contributing.

Retail Week understands that, as a result, many retailers across categories are now considering hiring freezes to keep down increased employment costs.

One pureplay fashion retailer, which has just made a number of redundancies, isn’t looking to replace those being let go and has frozen hiring on a number of other vacancies it would have liked to fill but feels it can’t afford to, given the new associated costs.

The chief executive of a direct-to-consumer brand also told Retail Week that it wouldn’t be hiring as many new staff next year as it might have done otherwise.

“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. 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.”

Many retailers would likely look to apprentices and other more junior staff as a more cost-effective way to fill staffing vacancies while also bringing through the next generation of retail workers.

However, as Halfords pointed out this morning, the Apprenticeship Levy in its current state isn’t really fit for that purpose.

“The cost implications from the recent UK Budget are particularly acute for a specialist retailer that provides expert advice and assistance to customers, face to face,” said chief executive Graham Stapleton.

“While we will work hard to mitigate these costs, we urge the government to consider alternative ways of supporting businesses like ours, including the acceleration of Apprenticeship Levy reform, which would help us to upskill existing colleagues and offset some of the new headwinds.”

Technology and automation

Along with potentially not hiring new staff or replacing vacant roles, many retailers are also looking at technology and automation to cut staffing hours down next year.

Marks & Spencer’s boss Stuart Machin said he will look towards new technologies to save some 160,000 man hours in the supply chain alone next year.

“We’ve got so much to do around supply chain, we know there’s some big cost-out opportunities. We still have very old systems.

“We still have manual distribution centres; we’re still playing catch-up on legacy stores and legacy distribution centres. When we fix that, we’ve got some good cost and operational efficiencies to take out.”

Changes to the threshold mean that retailers will now be contributing towards pensions for hundreds of thousands of part-time workers as well.

Fashion giant Primark is one such retailer, its owner ABF said it would look to installing more self-checkouts across its estate and investing in more warehouse and supply chain automation as a result.

“We are very reluctant to move our prices again so we will start off by looking for cost savings, things like self-checkout units [which can] save us labour in store,” said Primark parent ABF chief executive George Weston.

“We are also automating our warehouses across Primark. I think we will be employing fewer people as a consequence of the automation in a year’s time.”

As their costs rise, retailers should also seek to make the most of allowances available, such as R&D tax relief that entitles companies to a credit on their corporation tax payments for eligible projects such as IT development or even product improvement.

Alvarez & Marsal European retail and consumer lead Erin Brookes observes: “Large supermarkets will make R&D claims for their IT projects like managing online platforms, loyalty card systems, and product innovation. Online retailers in fashion and beauty also benefit, often claiming R&D tax relief for the development of advanced systems that power their e-commerce websites and enhance their digital presence.”

Store estates

The Budget has also potentially shifted the comeback narrative around the humble retail store. Having enjoyed a post-pandemic resurgence, the added employment costs may see retailers walking away from taking on new stores.

HMV owner Doug Putman was the first retail leader to rule out taking on new stores as a direct result of the Budget.

“We would love to continue to open stores, but I think obviously with the Budget, there are some worries and some concerns,” the entrepreneur said.

“When we look at next year, we’ve got everything on pause so we could end up opening five stores. but I think more than likely we’re not. I think we’re probably getting close to zero”.

Along with not taking new stores, property managers will also be sharpening their knives across existing store estates, as added employment costs hammer tight store sales margins.

“Every retailer is going to have to take this down to the individual store level, and that’s where your margins get super tight,” says Peel Hunt analyst John Stevenson. “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.”

The Budget also singularly failed to reduce or reform business rates for larger retailers. One retail property source also says that as a result, many retailers are now coming back to landlords demanding rent holidays and other discounts or threatening to walk away.

“Retailers still have the whip hand [in negotiations],” the source said. “So, they’re making all sorts of demands of landlords, trying to pinch every penny they can. They’re banking on most landlords rather having a let store, albeit at a discount, as opposed to an empty one that no one wants to take”.

Price rises

Retail leaders have already warned the government that the measures outlined in the Budget will “inevitably” lead to inflation and higher prices for consumers at the tills. 

With the cost-of-living crisis still fresh in the minds, retailers will be looking to do everything they can to mitigate those increases as much as possible. Still, with some inflation seemingly baked in, retailers will be working as hard as possible to ensure that these price rises don’t outstrip wider inflation so as not to be seen to be profiteering. 

Whether used as a mitigating tactic to offset other costs or as a last resort, price rises will also likely lead to tough negotiations between retailers and suppliers. 

Whether constructive or more punitive, chief product officers and the like will undoubtedly have their work cut out for them negotiating to protect margins with suppliers who have already had to endure a lot of late. 

Ranging and merchandising

Silver linings have been few and far between, but Alvarez & Marsal’s Brookes said the impact of the Budget does represents an opportunity for retailers to sharpen their ranges to focus on higher-margin products.

“We see a transformative opportunity in taking a laser-focused view on assortment productivity, especially as the economics of maintaining wide, unproductive ranges becomes more challenging”, she says in a column for Retail Week. 

Such thinking has been adopted by retailers like Asos – before the Budget, as part of its turnaround strategy – who is focusing on selling more profitably.

One fashion source suggests that some businesses may also look to range and source their product from cheaper markets internationally to further save on costs, but warned that could be a risky strategy given the ongoing volatility in global shipping and supply chains.

“It’s a gamble,” the source said. “With all the international shipping issues, many retailers have looked at more near-shoring to avoid that pain. Product is much cheaper further afield, but then you’re opening yourself up to the whims of international shipping prices and any other disruption”.

While these mitigation strategies and others are all already underway, some retailers are simply hoping that the government will come to its senses and either amend some of the measures, or at least phase them in.

However, it seems that this Labour isn’t for turning. While chancellor Rachel Reeves has promised that the recent Budget would be a one-off tax-raising event this parliament, there was no indication of a middle ground being found on the measures announced.

While the feelings of anger and betrayal from the retail sector can be understood, one leading retailer still hopes a mutually acceptable way can be found to work with Labour.

“I’ve managed to get some time with the people involved [Treasury], so we’ll see how the meetings go,” the retailer said. “I think it’s important to engage properly rather than shout from the rooftops. We’ve done that for years and it’s got us nowhere.

“I do appreciate they’ve got to raise money for social services. Nobody was expecting this [the Budget]. If we get growth it will work. If not, it will be a disaster.”