UK retail sector outlook: understand the 5 key risk factors

The retail sector has been fraught with disruptions in the last couple of years. Changing consumer behaviours led to decreased footfall in stores and to closures for many businesses that failed to adopt an omnichannel approach. This shift was only exacerbated by the pandemic, which saw non-essential stores close down over the world. Global supply chain interruptions caused shortages in key manufacturing components, such as microchips, while spikes in transportation costs and raw materials expenses raised consumer prices. 

Now that many restrictions have been lifted and these businesses adapt to the new normal, my advice to clients is to choose retail partners carefully. Here are the five key pain points that UK retailers will be facing in the coming months. 

The end of financial government support will be the real pressure test of the end of 2021 and through the first half of 2022. UK retailers that have relied on now-closed furlough or job retention schemes or the self-employed income support scheme (SEISS) may face redundancies or be forced to close. Further strain is being felt by individuals and businesses due to the energy price cap rise effective on 1 October. Added to this is the recent increase in Value Added Tax (VAT) to 12.5%, as an interim measure before this tax will go back to its normal rate of 20% in 2022.

UK customers’ speedy migration to digital behaviours since the start of the pandemic is becoming embedded into their day-to-day lives. Now, smaller companies are facing even stiffer competition from players such as Amazon, especially in terms of delivery times and choice of products. For many smaller retailers, competing with the giants of ecommerce may prove too big a challenge. 

In the second half of 2021, we have seen consumer confidence drop due to fears of a squeeze in living standards, driven by increasing prices and shortages. The consumer confidence index from data and analytics firm Growth from Knowledge (GfK) continued its downward trend to fall four points in October to -17. This suggests that people feel as uncertain as they did in 2019, when the country faced a no-deal Brexit and held its third election in four years. Confident households raise spending, while cautious ones prepare for a rainy day – and since consumer spending accounts for two thirds of economic output, it is an important economic variable. 

You may have heard of the UK-wide shortage of lorry drivers, which resulted in McDonald’s running out of milkshakes, empty supermarket shelves, and fears of panic buying ahead of end-of-year celebrations. Brought on in part by Brexit and the ensuing exodus of workers from the UK, as well as factors including Covid-19-related quarantines, the logistics crisis has had a knock-on effect of a shortage of fuel and other essentials for keeping businesses going. 

The scarcity of raw materials and components worldwide has driven prices up, and the costs of manufacturing and delivery are also on the rise. Most consumer goods in the UK are imported, and the cost of importing has increased substantially, meaning retailers are forced to increase their prices. This is especially problematic for small-to-medium enterprises (SMEs), which may have thinner margins than their larger competitors. 

In August 2021, the UK saw its biggest increase in inflation since records began in 1997, with a hike to 3.2%. This not only increases costs for retailers but leads to a decrease in consumer spending on discretionary items. The current economic forecast is that UK inflation could rise above 5% in the coming months, which could lead to an increase in interest rates. This, in turn, will affect the cost of borrowing and mortgages, and place businesses and consumers under added pressure.  

As a senior risk underwriter, I speak to a lot of our clients about how we see various sectors going, and leverage the unique, global expertise of Euler Hermes to assess how macroeconomic factors may impact them or their competitors. When it comes to retail, it’s not enough to know your customer: you also need to know consumers. And in this economic context, one of the key questions is, what are the main factors that will lead to consumers showing a willingness to part with their money? 

Partnering with a global trade credit insurer such as Euler Hermes means not just obtaining appropriate cover in order to extend trade credit with peace of mind. It also gives companies access to expert credit intelligence to assist them in making well-informed credit decisions.