The UK economy had a poor start to 2018. Manufacturing output was flat in January and fell slightly in February. Construction remains firmly in recession. Retail (high street in particular) continues to face growing pressure, culminating in a number of high profile insolvencies.
The unexpectedly cold weather, especially the snow at the end of February and the beginning of March clearly had an impact, stopping work on building sites and preventing consumers from getting to the shops.
The economy has quite simply lost momentum in recent months.
There are reasons factory output has stalled. Sterling has been rising on the foreign exchanges which makes exports more expensive at a time when demand from the rest of Europe has faltered. After years of underinvestment, manufacturing has lacked the capacity to meet rising demand.
The past year has been tough for the retail sector. The relentless growth of online shopping has coincided with a cyclical downturn caused by the impact of higher inflation on family budgets. Almost 6,000 shops across the UK closed last year – the biggest casualty list since the economy was clawing its way out of recession in 2010.
The most recent of these – Conviviality – came as a complete surprise to analysts and investors alike. Rapid acquisitions helped the Bargain Booze owner to grow but left it vulnerable, and it took less than four weeks for the company worth more than half a billion pounds to fall apart. The failure was ultimately blamed on an arithmetical error by one of the finance team, combined with a forgotten £30m HMRC bill.
On 8 March, Conviviality – not a household name, but a big firm with more than 4,000 staff – had a stock market value of more than £550m. Fast-forward less than a month and its finances have fallen apart – it will be remembered as one of the quickest corporate collapses ever seen in the UK.
They were a big player in the drinks business, being the wine and spirits supplier to JD Weatherspoon’s 900 pubs, and also large chains such as Slug & Lettuce, Yates and Hilton’s UK hotels. They owned Wine Rack and Bargain Booze, as well as upmarket wine merchant Bibendum and wholesaler Matthew Clarke.
They expanded rapidly, delivering impressive growth and becoming a darling of the stock market. That strategy is where it all went wrong – whilst the acquisitions delivered stunning revenue growth, it ended up exposing underlying weaknesses in it’s management. Former investors are considering a law suit, and the role of auditor KPMG has been questioned as they were also auditors for Carillion prior to their failure. Chairman David Adams was also director at Jessops, JJB Sports and HMV (all of whom entered administration).
All of which makes the performance of Britain’s biggest retailer – Tesco – impressive. In the year to February, the company saw operating profits rise by 28% and gained market share in food despite the strong competition from Aldi and Lidl.
Tesco recently released their results and investors liked what they saw. For a start, they seem to have recovered from the time three years ago when they announced a £6.4bn loss – the biggest in British high-street history. Secondly, while it is still early days, investors think the takeover of the food wholesaler Booker will pay off.
The impact of the recently announced Sainsburys / Asda merger remains to be seen. Sainsburys results had been somewhat lagging – share price has jumped 20% following news of the merger. They have vowed to slash prices following completion of the merger – definitely one to watch.
Food retail has become a fiercely competitive sector – and it’s not just food anymore. The ever increasing number of hypermarkets, combined with their incredibly strong buyer power is placing huge amounts of pressure on smaller shops on the high street. The same can be said for their suppliers, with the ability to pretty much dictate payment terms and special offers.
The biggest threat to high street retailers is online competition – the costs of running a shop (rent, staff, rates, utilities) puts you on the back foot before you’ve even started. An online offering is all but essential for a retailer these days. This comes with its own threats – competition comes in the form of an ever increasing number of daily deal sites. You also face the threat of being listed on a glitch site (official or through social media) where consumers are always on the lookout for pricing mistakes, and are very quick to share this information with like-minded people. Great for your company if it was a genuine deal – not so great it was a pricing error.
Construction has never truly recovered. There have been periods of improvement, but with companies competing heavily to win contracts, profit margins have been squeezed to the point that they can no longer afford for jobs to overrun. When so much is outside of your control (weather, delays in planning permission, and lack of available skilled staff to name a few) it is impossible to guarantee that all jobs will finish on time. Cost cutting within the sector has been prevalent in the news with some disastrous outcomes. The impact of the failure of construction giant Carillion at the end of 2017 is so widespread, it is as yet unknown just how many within the supply chain will be affected and how many will recover.
There is one success story to speak of and that’s creative industries (Design, Arts, Music, and Animation to name a few) which are driving jobs and growth UK wide. It has been the fastest growing sector of the UK economy since the 2008 crash, worth £87 billion, more than car manufacturing or aerospace. Cities throughout the UK are recreating themselves through culture with one in eleven jobs now being in the sector and it is anticipated this growth will continue. Education is being reviewed in such a way that creative skills have an equal focus to the more traditional English, Maths and Science in order to try and ensure sufficient supply of people for the ever increasing demand.