How will the struggling retail sector cope with major business rates and minimum wage rises?
May 23, 2024
The retail sector is crucial to the UK economy. It generates 6% of our GDP, receives a third of all consumer spending and employs 2.9m people (around 10% of all employment). Yet, it accounts for 9% of insolvencies and, as our latest sector report identifies, a further worrying decline in its overall financial health in recent months.
Just at this crucial time, after a festive season that delivered little positivity in terms of profits despite some surprisingly good revenue figures, and as preparation is well advanced for the next Christmas period, it is facing very significant increases to its cost base from hikes in business rates and the national minimum wage (NMW).
The economy
After the ravages of the pandemic and the impact of the Ukraine conflict, the economy is finally showing some positive signs. GDP rose by 0.6% in Q1 2024, while the latest consumer inflation figure of 2.3% is down very close to the Bank of England’s target rate of 2.0%. Unfortunately, inflation has a concerningly ‘sticky’ feel. As a result, the much anticipated and needed early cut in interest rates is likely to be delayed until the summer or, even worse, the autumn.
Average pay increases are running at around 6% and clawing back some of the damage caused by previous high inflation. The business community is showing signs of increasing confidence, though it is unlikely that this extends to the majority of consumers.
The cost of living
Despite the relief at seeing inflation so far down from its peak of 11.1% in 2022, the reality for consumers is that prices aren’t actually falling, they’re just not rising as fast as before. Price stability might be within reach, but they’re settling at far higher levels than in July 2021 when inflation started its stratospheric ascent. Some examples are:
- Food ↑31%
- Clothing ↑20%
- Air fares ↑19%
- Eating out ↑21%
- Mobile phone costs ↑21%
- Package holidays ↑27%
- Domestic energy bills ↑53%
It will take a number of years of above inflation wage rises to restore consumer spending power to where it was in 2021.
Business rates
Just like the even more challenged hospitality sector, UK retailers have grown weary and cynical waiting for years of vague promises to reform the iniquitous and regressive business rates system to be retrieved from the political long grass and implemented.
Instead, they have to absorb a £400m rise in their business rates bill, an increase of three times the consumer inflation rate. Scottish retailers will have to deal with a £31m increase. According to the British Retail Consortium (BRC), the UK is the most expensive place in Europe for business property taxes.
National minimum wage
The start of April also saw the biggest-ever rise in the national minimum wage, with the core hourly rate soaring by almost 10% and some other NMW rates going up by 15% or even over 21%.
According to a detailed report by the Low Pay Commission, the NMW governs 1.6m workers’ pay (5.3% of all jobs). Unfortunately, the coverage in retail is far higher, with 14% of jobs paid at NMW rates.
Can retailers cope?
Our latest research shows that 44% of retailers are at heightened risk of insolvency because of their financial vulnerability. 13% are ‘zombie’ companies with negative balance sheets and a combined shortfall of £3.6bn. 15% have negative working capital, where their short-term liabilities are greater than their ‘quick’ assets like cash, debtors, and inventory.
All of these adverse indicators have worsened in the past year, suggesting that the business rate and NMW cost increases will be a major threat to the survival of marginal retailers, particularly smaller, independent retailers with limited financial resources. For many of them, the scope to pass on the extra costs through price increases to cash-strapped consumers will be limited.
Getting independent advice
For retailers badly affected by the cost increases, it makes sense to reach out to expert professional advisers early enough to take advantage of constructive options while they’re still available. Our guide to the warning signs and the upside of prompt remedial action can be found here.
If you are seeking professional advice for your business, Opus is here to help. You can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.