Economic Update: High Street Gloom – Online Boom
Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.
The disparity between traditional high street retailers and online shoppers continued to swell over the Christmas period. Credit card company Visa released their figures for December showing “face-to-face” spending fell 2.7% on an annual basis. Internet online sales on the other hand increased 2%, with good ‘Cyber Monday’, Black Friday and Christmas sales confirming that shoppers are increasingly shopping with convenience in mind. By contrast, in the last three months of the year, sales from high street retailers fell by 4.4% on a like-for-like basis, the worst fall recorded by the British Retail Consortium (BRC) for five years.
Online retail transactions began in the mid 90’s. This revolutionised the way we purchase goods and services. The technology for doing so has evolved making it increasingly easy to purchase goods on line rather than from the high street. The overall online sales penetration of the retail market last year is up over 1% on 2016. Online retailing now has a market share of 24.1%.
UK’s online shopping boom – Non-food sales
Source: British Retail Consortium, Financial Times, Jan 2018
The aggregate downward trend in retail sales, shown by the solid line in the chart, is reflective of inflation, currently at 3.1%, outpacing wage growth which remains tepid. As a consequence, consumers are seeing more of their spending power absorbed by essential items, such as food (stripped out of the series). This leaves less for discretionary products like fashion and leisure, and Christmas gifts.
Meanwhile, in a business context, high street retail businesses are facing cost pressures. They stem from the impact of paying a higher national living wage and increased high street business rates, which are not paid in the online world by the likes of Amazon. Sterling depreciation which is pushing up the cost of goods is also adding to pressures high street retailers face. Meantime, online competitors are offering consumers increased shopping convenience and capturing more of the available market at a time when it is shrinking in aggregate.
The recent decline in sales figures from household names such as M&S, House of Fraser and Debenhams give further tangible evidence of the secular trends underway in retailing. This squeeze on the traditional retailers has forced some companies into insolvency. Feather & Black and Multiyork both collapsed at the end of November taking the number of retailers entering administration to 118 last year, a 28% increase on 2016 according to analysts at Deloitte.
Despite the clear challenges facing the sector, some economists are expecting rising living costs and subdued wage growth to subside. The impact of the fall in the value of the pound post-Brexit result should subside and weaken inflationary pressures, easing the squeeze on households’ budgets.