Struggling UK retailers hoping squeeze on incomes ending
The pressure on British households in the wake of the Brexit-fueled rise in inflation is easing, a development that should help a host of struggling retailers, many of which reported acute difficulties Wednesday.
Suit hire company Moss Bros warned on profits for the second time this year and slashed its dividend, while Carpetright said it has to close some stores and negotiated an emergency loan. DIY firm Kingfisher, meanwhile, reported lower sales in Britain, and Mothercare updated investors to say it had negotiated a new funding deadline as it works with lenders to shore up finances battered by challenging trading conditions.
The series of woes revealed Wednesday add to recent troubles in retail. Some high-profile retailers, such as Maplin Electronics and the U.K. division of Toys 'R' Us, have gone into administration. Others, like bedmaker Warren Evans, have already closed their doors for good. And several restaurant chains, such as burger outlet Byron's burger and Jamie Oliver's Italian, have reported difficulties and closed stores.
The reasons behind this catalogue of gloom are varied but all have had to endure the slowdown in consumer spending since Britain voted to leave the European Union in June 2016. The vote itself stoked uncertainty about Britain's economic future, which prompted businesses and consumers to become more cautious in spending.
The vote also prompted a sharp fall in the value of the pound. Though that may have helped some exporters by making their products more competitive internationally, it hurt domestic retailers on two fronts.
Firstly, it raised costs by making imports, such as raw materials, energy and food, more expensive. It also triggered a sharp rise in inflation— from 0.5 percent to around 3 percent annually.
With wages growing by less, households faced a squeeze on incomes, to the detriment of retailers. In 2017, retail sales across the country rose by 1.9 percent, its lowest rate of growth since 2013. The problems facing retailers is exacerbated by the fact that many expanded on the assumption of higher sales.
On Wednesday, official figures showed that average weekly earnings over the three months through January rose by 2.6 percent from the previous year, up on the previous month's 2.5 percent.
In the year to January, consumer prices rose by 3 percent. Figures released Tuesday showed that falling to 2.7 percent, suggesting the gap could be gone when the next figures are published in a month.
There is some hope that the squeeze on incomes will disappear soon as wages start to rise by more than prices, though economists cautioned against any substantive rebound in consumer spending and noted that online giants like Amazon will take their high cut of any increase.
"If the current momentum in wage growth can be maintained, things are looking up for U.K. consumers and the economy," said Laith Khalaf, senior analyst at stockbrokers Hargreaves Lansdown.
One potential negative could be the Bank of England raising interest rates faster than expected, prompted by growing optimism. The central bank has hinted it could hike rates in May, largely because inflation is expected to run above the 2 percent target for a while yet.
More clarity may emerge Thursday when it publishes its latest interest rate decision and the minutes to the meeting. The consensus among investors is that the bank will have kept its benchmark interest rate at 0.5 percent.
Many economists believe Monday's deal between the British government and the EU on the outlines of a transition period after Brexit day on March 29, 2019, makes a rate hike more likely.