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It’s a headline that’s repeated itself for most of 2022 – “retail sales plunge as consumer confidence hits an all-time low.” And it shows little sign of abating.
The cost-of-living crisis continues to squeeze consumer disposable income, manifesting as lower sales which disproportionately hit vulnerable small businesses: an observation supported by Xero’s recent Business Insights reports that show the overall (modest) growth in sales of small businesses over the summer months is purely down to higher prices (absolute volumes have dipped).
Kwasi Kwarteng’s Mini-Budget announcement on 23 September aimed (in part) to alleviate the pressure on household income by lowering tax rates. But as we watch the value of the pound crash, hear speculation of further huge interest rate rises, and receive serious warnings from the International Monetary Fund (IMF), the fallout could well be the opposite.
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Sales volumes are dropping
According to the Office for National Statistics, the volume of retail sales in the UK fell by
1.6%
in August – a continuation of the decline seen since summer 2021 and three times the decline predicted by economists.
In-store sales aren’t the only victim: online sales also dropped by
2.6%
. However, despite this dip, the overall pandemic-induced boost in e-commerce persisted – online sales continue to comprise over a quarter of total retail sales and remain above February 2020 levels.
Five and a half million
small businesses (99% of all UK businesses) contribute over half of all UK private sector turnover – around
£2.3 trillion
in 2021. Collectively large, but individually compact, small businesses within the retail sector are the worst hit by dwindling sales.
Small companies generally function with tighter cash flows and have less resilience to the hardship of recessions (the Bank of England predicts a further GDP fall of
0.1%
this quarter). Whereas larger companies can cut costs through employee redundancy or changes to capital spending, smaller businesses don’t usually have the scale to protect themselves in the face of an economic downturn.
The cost-of-living crisis is depleting consumers’ disposable income
The British Independent Retail Association (BIRA)
claims
the sales decline represents crushed consumer confidence caused by the higher cost of living: households simply don’t have as much cash to spend on non-essential items.
Aldi featured in the
news
this week, reporting a gain of 1.5 million customers in just three months, as consumers strive to save money on groceries. They are seeking value; they need to save money wherever they can to meet rising energy and fuel costs.
The UK government have introduced emergency measures to curb gas and electricity costs by subsidising energy bills with a £100 billion package. The Energy Price Guarantee will limit annual energy costs to
£2,500
. While this intervention is welcome over the initially predicted October cap rise to £3,549, it’s still above the current £1,971 cap, and households will feel the strain of the rise over the winter months.
The
Mini-Budget
on 23 September 2022 included several measures to increase the income available to consumers: a planned reduction in the basic and additional rate of income tax, reduced dividend tax rate, and reversal of this year’s National Insurance rise of 1.25 percentage points. But it will take time for confidence to return and given the market’s response to the announcements, this could take some time.
The pound continues to weaken
Monday 26 September – three days after the Mini-Budget – saw the weakest pound
on record
against the USD (£1:$1.03). The slow decline has been happening for a few months – a combination of a strengthening US economy, persistent inflation, and weaker than expected sales figures last month – but the enormous tax cuts announced last week were the final straw.
In response to doubts about the government’s plan, investors rapidly sold off their GBP currency, reducing its overall value.
A weaker pound is bad for businesses who rely on importing goods from overseas, or customers purchasing from businesses abroad – these costs will go up purely from a currency conversion point of view. It will also add further pressure to gas and fuel prices, which are largely imported, as well as food (
almost half
the UK’s food is imported). Anything purchased in the UK containing parts from overseas will also be prone to price rises.
Andrew Bailey – Governor of the Bank of England – has indicated we could be facing further significant rises in interest rates to combat inflation, particularly given the recent tax announcements. While no further increases are set to happen before November, the message is clear: the BOE will increase rates by “as much as is needed”, adding more pressure on individuals and businesses holding variable rate debt.
Wages aren’t keeping pace with inflation
The summer months have been peppered with strikes, from Barristers to Postal Workers, all demanding higher pay. Wages have not kept up with price inflation, leaving workers across most industries facing real-term pay cuts.
It’s argued rising wage costs add pressure to business profit margins. Businesses respond by increasing their prices to cover the additional costs, adding fuel to the burning fire of inflation. Wage restraint is encouraged by top policymakers trying to avoid this, but it leaves households and consumers short of money and facing, in some cases, extreme hardship. The result? Less spending on non-essential items, and often even on essential products.
Late customer payments add extra pressure to cash flows
Xero – the accountancy software developed with small businesses in mind – publishes monthly Business Insight Reports using anonymised data from its small business. They aim to use this information to improve their understanding of the sector and its current trends.
The
most recent report
supports the decline in sales we’ve already covered but also shows a trend towards longer waits time for small businesses waiting to be paid. This is the fourth successive increase, with average payment times now at 30.4 days – breaching the traditional 30-day credit term. On average, payments are received 8.3 days beyond their due date.
Efficient
cash flows
are essential to small businesses, which often have less wiggle room compared to larger companies. Until the cold hard cash is received, it’s difficult to reinvest back into the business. Late payments pile the pressure onto cash flows and could have a domino effect resulting in late creditor payments and supply chain problems.
But it isn’t all doom and gloom….
Poor sales figures are undeniably bad for businesses, but some of the driving factors could help some businesses, at least in the short term.
A weak pound could increase exports
A weak pound is generally undesirable, but it is an opportunity for businesses that export overseas. Poorer GBP exchange rates reduce the relative price of UK products to overseas nations, making exports more attractive. Ultimately this can boost sales. In July 2022, UK exports increased by
7%
, driven many by exports to the EU.
Inflation remains high but decreased in August
Inflation soared during 2022 but shrank by 0.2 percentage points in August 2022 to
9.9%
from 10.1% in July. The decline – partly due to lower fuel costs – could be short-lived, as the BOE predicts a peak of
11%
next month, down from its initial projection of 13%. Until we see a sustained decrease in inflation, consumers will continue to be prudent with their disposable income.
No one can predict the future
We’re facing yet another period of uncertainty as we navigate the early days of the new government, and the economy gets to grips with their new policies. Many of the announcements aim to increase long-term investment in the UK, but this might not be enough for businesses struggling to meet their sales targets now.
Sources
(Viewed 27 September 2022)
Lewis R 2022,
Retail sales, Great Britain: August 2022
, Office for National Statistics
Anon 2021,
UK Small Business Statistics
, Federation of Small Businesses viewed
Simpson E 2022,
Aldi boss: shoppers are switching in their droves
, BBC News
HM Treasury 2022,
The growth plan 2022
, GOV.UK
Anon 2022,
Pound hits record low after tax cut plans
, BBC
Xero Small Business Insights 2022,
Xero Small Business Index United Kingdom Monthly Update
, Xero
Donnarumma H 2022,
UK trade: July 2022
, Office for National Statistics
Gooding P 2022,
Consumer price inflation, UK: August 2022
, Office for National Statistics
By Lesley Slack
By Lesley Slack
