Every year people complaining about Christmas starting earlier every year starts earlier.
I get that people get a bit huffy when Christmas starts in mid-October.
Personally I don’t mind it because if our stock is in store in October it means we will get paid for it before Christmas. For our biggest stockists if the delivery is after the end of October I won’t get paid this year.
For some local craft producers the long lead in time for production means that their last order dates for Christmas aren’t far away. If you want to shop local and buy craft you need to start shopping now.
Retail and leisure/food and drink are big employers in the UK. Retail employs over 3m, although this has been falling for a couple of years. Another 3.2m work in Hospitality. Lots of these jobs are female and relatively low paid – they are the UK’s 2 largest private employment sectors, and the biggest employers of woman, bigger even than the care sector.
Both of these sectors have been hit hard recently. High Street retail has never really recovered from the credit crunch, and employment is falling year on year. 85,000 jobs have been lost this year alone, with another set of high street casualties; Bonmarche, Karen Millen and Coast have gone; New Look, Debenhams, House of Fraser, and Mothercare are all closing stores.
If you want a vivid image of the decline of UK retail visit House of Fraser in the Metrocentre. Once a temple of shopping it now staggers on like a Sports Direct discount warehouse.
The stores which aren’t closing are cutting back on staff, investing in self service tills for example to cut back on costs. Across the sector companies are extending the time they take to pay invoices (which hits my cash flow), and reducing their stock levels (which increases my costs).
The Government’s response has been depressingly familiar. Bill Grimsey (former boss of Iceland) had been appointed retail Tsar, and a future high streets fund established. This is pretty much exactly the same approach that David Cameron tried in 2012 except he picked Mary Portas, and her funds targeted a different set of failing high streets with a lot less money. The main recommendation that both of them made was ignored – a business rate freeze for struggling high streets.
Labour’s policy response is to pass legislation to force landlords to hand control of empty shops back to Local Authorities so they can be used for co-ops or start ups. Why a local council would be able to find a tenant when a private landlord can’t isn’t explained, nor is a source of capital investment identified to fund these start-ups or co-ops. Amazon recently invested in a small number of high street start ups, most of which failed, some within weeks of opening.
The hospitality sector is equally stressed. Household name chains are falling over every month. Jamies Italian and Prezzo are closed, Pizza Express owe an average of £1.3m for each restaurant they operate.
Headline unemployment statistics have been positive for several years now, but we can see the fall off in retail and hospitality jobs in recent labour market statistics.
While male employment rates are stable there has been a recent and sudden fall in female employment:
The woman who are leaving employment aren’t becoming unemployed, they are leaving the labour market altogether:
There’s a sudden big fall in vacancies:
And a similar fall off in earnings growth, albeit less dramatic
Something bad is happening to female employment, and the crisis in retail and hospitality is at the centre of it.
Uncertainty – the Brexistential Crisis
The proximal cause of the problem is Brexit. There is lots of uncertainty in the UK economy, mostly due to Brexit, and it is making people nervous about spending too much.
I can see this visibly when I work Christmas markets. Customers come with tight budgets, carefully measured out in cash, and no amount of incentives or clever patter can upsell them.
I say mostly due to Brexit because we have seen this behaviour on and off since the credit crunch. Normally there is a relationship between interest rates, spending and saving; low interest rates mean more spending and less saving; high interest rates mean more saving and less spending.
When this relationship breaks down, as it has right now, it is called a liquidity trap, and it means that traditional tools of monetary policy have stopped working. This shouldn’t be as surprise after 10 years of low interest rates and quantitative easing – the tools of monetary policy have been blunted by over-use. Only a increase in Government spending or business investment can release us from the trap.
But Brexit isn’t the whole of the story.
Peak Stuff
People just aren’t buying as much stuff as they used to. The physical volume of stuff consumed every year is falling. People want experiences not more possessions. This is part of the concept behind our new Distillery – people want a personalised experience not just something to clutter their house.
For a while casual dining chains filled the hole on the high street, but the chains which offer standardised consistent products nationally are in big trouble. I am still baffled how Jamies, Carluccios, Gourmet Burger Kitchen and Prezzo could go out of business, while Chicitos survives?
What people want is a more individual experience, they want something that is unique or unusual, which is the opposite of what the chains offer.
On line shopping and home delivery
Any product which is standardised, in size or shape can be supplied more cheaply on-line without a high street prescence. The great and terrible irony is that woman are the most enthusiastic on line shoppers, but it is woman’s jobs that are being lost as a consequence.
Amazon dominate the on-line shopping market, not just through their website, but through their delivery systems. We use Amazon for our fulfilment.
James Bloodsworth’s recent book Hired, has revealed the regressive labour practices inside Amazon, while Ken Loach’s new film “Sorry We Missed You” offers middle class cinema goers the chance to vicariously experience the life of a delivery driver.
I would strongly recommend Bloodworth’s book, but sadly I think Ken Loach has been a bit underwhelming since Kes.
The sad fact is that Amazon is by no means the worst distribution company.
We have worked with a number of local delivery companies, and at times I have had to run round with a white van myself dropping off parcels. Conditions throughout the industry; drivers, warehousing, logistics, are uniformly dreadful.
Problems in the industry go all the way back to the fuel duty protests nearly 20 years ago.
Back then small hauliers profits were being squeezed, and they blamed fuel duty. The real culprits however were the big supermarkets who had come to dominate the warehousing and distribution industry driving down prices. People are familiar with the idea of a monopoly – a market dominated by a small number of powerful suppliers. Distribution is a monopsony – a market dominated by a small number of powerful consumers.
I have a deep sense of satisfaction at being able to use the word monopsony in an blog.
The rise of Amazon has made things worse. Together with the supermarkets they were able to drive down prices for distribution. As prices fall, so do profits, and as profits fall so does investment. The UK suffers from a decades long lack of investment right across the warehousing and distribution sector – not enough buildings and lorries, out of date tracking software and systems, under-paid and unhappy staff.
Our decision to switch our distribution to Amazon was pretty much forced on us when our local delivery partner, Simpson Bros of Birtley, went bankrupt. Royal Mail/Parcel Force dumped all their small business customers like us when they were privatised, and there is so much unhappiness that I think they are heading for a prolonged industrial dispute.
For the industry as a whole I would rate the chances of getting to Christmas without serious disruption through a strike or bankruptcy are less than 50%. Another reason to shop early.
The lack of investment is why when things go wrong with deliveries they go badly wrong. This is a Chinese language text book;
At least it was meant to be a Chinese language textbook, but there were problems with Amazon, and the pink hairbrush arrived instead. Amazon deny all knowledge of the hairbrush and it is sat, sad and lonely, on my sideboard.
On-line shopping has also hit the high street food chains. People order at home, and get food delivered using apps like Just Eat. A delivery based business doesn’t need to be on the high street, it can be in an industrial unit with cheap rents. These are the most popular Curry Houses on Just Eat in East Durham; they operate out of an industrial units just outside Seaham. Rents are much cheaper there than a high street shop, and mostly exempt from business rates
Let’s Lynch the Landlords
One of the biggest problems in high street retail is that the actual landlords are distant property funds, miles away from the actual streets they own.
Chunks of Durham are owned by BNP Paribas and REEEF, a subsidiary of Deutsche Bank. Foreign investors own about 23% of UK retail, but the largest owners are UK pension funds and insurers. People like to think that these are fat cat city institutions, but they are the pensions and policies of ordinary people, i.e. you and me.
Landlords far from the high street cause a number of problems – they are reluctant to rent to start ups and independents because of the quality of their covenant. The property funds who own them have high levels of borrowing. The banks who lend to them want re-assurance that their investment is protected by good covenant- long term leases with well known names. They prefer mutliples and franchises – some will only rent to these clients. The “sameiness” of every high street isn’t a co-incidence. it’s the consequence of business decisions made by remote investors.
High levels of debt also create a high risk of a margin call. To explain a margin call lets create a fictional property transaction.
A property investor buys a property for £1m and rents it for £65,000 per year. It puts £100k of it’s own money in, and borrows £900k against the value of the property. The lender places a series of conditions on the loan, requiring the borrower to increase their investment to make up for a fall in the value of the property (the margin call). For example; if the value of the property falls by £1k the borrower has to increase their investment by the same amount.
Because of the high levels of leverage this has an escalating impact if the property starts to lose value. A 1% fall in the value of the property requires the borrower to increase their contribution from £100k to £110k. A 10% fall requires the borrower to double their contribution.
Imagine then that property can’t be rented for £65,000 and instead can only attract a rent of £50,000, a fall of 23%. If the rental yield falls so does the value of the property. If it is now only worth £770,000 to reflect the lower yield the investor has to make up the £230,000, over double their initial investment.
Thats why a landlord would rather have a void property and forgo a years rent (£65,000) then rent the property at £50,000 and face a £230,000 margin call.
At the end of a blog like this I like to promote some policy solutions for Government, but frankly there is little that central Government can do.
Activist local authorities can help, and a cut in business rates would work well. But what we really need to do is the switch High Streets from homogenised cut price consumption to lots of small businesses, locally owned, offering a high level of customer service and individuated products.
There are, of course, parts of the country which still have lots of locally owned, independent small businesses, offering individual shopping experiences, a wide variety, alongside traditional butchers and green grocers. But almost without exception these are areas with a very high immigrant population, and both main parties are determined to keep non-white immigration low so as not to upset older racists.
This means a switch in the expectations of investors, many of which are a long way form the high streets that they own. Without a reduction in rent expectations a cut in rates is of reduced value. Sadly I don’t think this will happen without some kind of credit crunch type event in which investors and lenders face up to the losses on their historical investment. While interest rates are low these investors can stumble on. An interest rate rise will expose the extent of the losses, with a devastating impact, not just on foreign property owners but ordinary peoples pensions and investments.
There is however something that you can do to help the situation.
Stop moaning about Christmas coming earlier, and get out there and join in the festive spirit. It’s been a tough year for the retail and hospitality sectors and a good Christmas will save lots of businesses from bankruptcy and protect 10,000s of jobs. Don’t be churlish. Go with the tinsel. It’s not like I’m asking you to become a monk or vote Tory.
Because a collapse of the high street will have repercussions way beyond the people who lose their jobs, or the investors who will get a haircut.
Do not ask for whom the jingle bell tolls.
It tolls for thee.
https://www.bpf.org.uk/sites/default/files/resources/PIA-Property-Data-Report-2017.PDF
https://www.retaileconomics.co.uk/library-retail-stats-and-facts
https://publications.parliament.uk/pa/cm201719/cmselect/cmcomloc/1010/report-summary.html
Excellent article. Very informative.