LONDON — While foreign investors and brands may be salivating at the prospect of securing hot property or setting up shop on the U.K. high street, the reality for local retailers is increasingly grim.
A confluence of factors, including the uncertainty surrounding Brexit and the prospect of new trade international deals — or no trade deals at all — the weaker pound, expiring hedging contracts, higher taxes and consumers’ preference for experiences over shopping are making the business of retail ever harder for local brands.
The pound, which is tracking about 13 percent below last year’s pre-referendum level at $1.29, has proven a boon for Chinese, American, Danish and continental European investors, not to mention many retailers, whose goods have been flying off shelves because of the weaker sterling and the comparatively stronger euro and dollar.
Foreign investors have poured billions into central London property in particular, and the Chinese now own some 15 percent of the property around Oxford, Regent and Bond Streets.
U.S. brands such as Polo Ralph Lauren, Tory Burch, Michael Kors, Coach and Stuart Weitzman have all opened units on Regent Street over the past year, spurred on by Britain’s Crown Estate, the property company that has redeveloped the neighborhood, and by cheaper costs due to the weak pound.
For British businesses, though, reality is beginning to sting. Earlier this month, the publicly quoted fashion and home giant Next said sales in the first quarter were down 2.5 percent.
“The U.K. consumer environment remains challenging, particularly in the clothing and homeware markets, and real wage growth is now close to zero,” said the company, adding that full-price sales could fall 3.5 percent in the current fiscal year.
For the first time in 18 years, Next’s chief executive officer Simon Wolfson failed to collect his annual bonus for fiscal 2016-17. Next’s board also missed out on theirs.
Next is not alone — and things could be worse. Over the past year, British high-street stalwarts BHS, Austin Reed and Jaeger all shut up shop due to diverse factors, while Marks & Spencer and Burberry set major cost-cutting and efficiency drives in response to low rates of growth and consumers’ new appetites and ways of shopping.
On May 11, the Bank of England cut its U.K. growth forecast for 2017 to 1.9 percent from the 2 percent it had predicted in February. It cited slow income growth and rising inflation. In the first quarter, the economy grew by 0.3 percent, compared with 0.7 percent in the fourth quarter of 2016 while inflation stands at a three-year high of 2.3 percent.
When rattled consumers do decide to splash some cash, they prefer to spend it on experiences rather than plain old shopping. According to Barclaycard, which gauges consumer behavior on a monthly basis, year-over-year spending in April was up 5.5 percent due in part to inflation and a later Easter.
During the month, the in-store spend on women’s and men’s clothing dropped 0.5 and 2.8 percent respectively, while department store sales were down 0.9 percent. By contrast, spending in restaurants was up 16.1 percent and money spent on cinema, theater and dance rose 12.7 percent.
“It’s clear consumers are recognizing and responding to the inflationary pressures being placed on household budgets,” said Paul Lockstone, managing director at Barclaycard. “Despite growth across a number of categories, the spending picture in real terms is one of growing caution, as seen by declining confidence levels among the U.K.’s consumer.”
Further fuelling retailers’ woes are local taxes, known as business rates, which have soared for many brands after property prices were re-evaluated for the first time in seven years. The new rates took effect in April.
In the U.K., business owners pay taxes based on the value of the property they occupy rather than on the turnover of the business. On Mayfair’s Dover Street, home to brands such as Victoria Beckham, Acne Studios, Golden Goose, Jimmy Choo Men’s and Christian Louboutin, rates rose 200 to 300 percent, while in other parts of the West End, the spike will be more like 80 to 120 percent.
The pound, too, is becoming troublesome on a number of fronts. While it proved a short-term boon for retailers that rely on tourists, it’s begun to eat away at margins due to higher import costs.
During a recent parliamentary hearing examining the potential implications of Brexit on the British fashion business, U.K. Fashion and Textile Association chief executive officer Adam Mansell said the lion’s share of U.K. high-street goods is imported from non-EU sources. “Bangladesh is our second largest supplier of clothing in the U.K., and the tariff rates on goods coming from the country will go up 25 percent,” he said, unless the U.K. strikes a trade deal similar to the one it has as an EU member.
Those calculations didn’t even take into account the impact of the weaker pound on companies’ sourcing costs.
Many post-referendum currency hedging deals are expiring, which means that over the next few months, firms that import goods priced in dollars will see their expenses rise 13 percent, in keeping with the pound’s decline.
It will be up to the individual companies to decide whether to absorb the extra costs, or to pass them onto an increasingly spooked consumer. It’s going to be one tough decision given that fashion retailers typically operate at margins around 10 percent.
Less attractive hedging deals are also cutting into companies’ bottom lines.
In April, Burberry said it is expecting a 10 million pound, or $12.7 million, drag on the reported, adjusted retail-wholesale profit figure in the current fiscal year, due partly to new hedging rates that are less favorable.