Reform Scotland

Acceleration rather than Revolution – How the Coronavirus Crisis will change the shape of Scottish Retail – Ewan MacDonald-Russell

In 2017 the Scottish Retail Consortium published a detailed paper on the future of the Retail Industry. Based on interviews, data, and analysis from members and partners, we spoke about how the retail industry was engaged in a long-term structural shift.  Technology, customer behaviour, and public policy were creating a series of incentives which would incentivise digital shopping whilst reducing physical retail premises. That included a prediction that 20 percent of retail premises would close within the next decade – but at the same time the overall value of sales to the economy would grow.

A three-year-old paper sounds like a tedious starting point for an examination of the prospects for Scottish retail following the coronavirus crisis. After all, everything is different now, and the kaleidoscope has been shaken.

To an extent that is true.  No one predicted a world of social distancing, of closed up high streets and locked down families. However, rather than creating a new world, it’s likely coronavirus is going to accelerate existing trends as much as create new ones.

Changing customer behaviour has been at the core of retail transformation, and that’s certainly hastened over the last few weeks. According to the SRC’s Scottish Retail Sales Monitor in March online non-food sales surged by 18.8 percent. Of course, since online sales were often the only way to get some products that may not surprise. However, the overall trend was for greater online purchasing anyway.  The 12-month average growth for online is 4.4 percent – whilst non-food sales overall have declined.  Consumers were already moving online before lockdown – and with shopping potentially subject to the same or stricter social distancing rules we already see in supermarkets it’s at least plausible the shift to online will accelerate. The pace of change may be increasing, but the direction of travel was clear for some time.

Similarly, recent weeks have seen a series of announcements as retailers have fallen into administration.  Yet that’s been the theme of recent years, with several prominent brands stumbling and tumbling under the combined pressure of rising employment and property costs. Those brands who prospered did so with a clear universal selling point, or through developing omni and multi-channel propositions more suited to modern consumers. However, even those businesses who have done that face a real struggle – especially if there is a delay until hospitality businesses can reopen. Much city centre shopping is dependent on the synergy between hospitality and retail – without coffee shops and bars footfall will be down and consequently high street sales. Only those retailers who had already adapted their proposition are likely to emerge strongly.

There was already a huge disparity between the retail proposition in different town centres and high streets before this crisis. Places with attractive reasons to encourage visits are likely to recover more quickly.  Even those reliant on tourism or culture have a network of good businesses and often affluent local communities who will be able to support those centres in the short-term.  It’s those places which were struggling, which often face competition from other shopping destinations, and are unsurprisingly economically vulnerable who are most at risk of closures.  That was the case before coronavirus. With retailers having had to exhaust reserves to survive the shutdown, stores in those areas will be under the microscope to determine if they can reopen profitably.

So much of what may lie ahead is an exaggeration of existing effects.  What makes things different is that whilst there was an expectation of limited economic growth this year, now retailers will have to operate in the context of the worst economic shock in decades. We’re already seeing the initial impacts.  Consumer confidence has been shaken by this crisis with the GFK consumer confidence index falling to -9. That’s already translating into weak sales. The Scottish Government’s Retail Sales Index reported the value of sales fell by 1.1 percent in the first quarter of 2020. The SRC’s Monitor saw an inflation-adjusted fall of -12.2 percent for March – unsurprisingly the worst figures ever reported.

The most concerning data were the sales figures for the first two weeks of lockdown. That saw retail sales fall by – 44 percent.  Even grocery sales fell in those last two weeks.

Obviously, that’s dismal news for retailers. But it is of concern for the wider economy.  Retail sales are a barometer for economic growth. A large number of the products retailers sell are Scottish or British. If they are unable to sell products, that diminished demand filters right back through the supply chain. For example, whilst food sales remain from supermarkets, the food service and export markets have collapsed.  That there is reduced demand for dairy products and certain parts of animal carcasses which are generally not sold in supermarkets.  Those examples will be true across the economy for all suppliers – both of products but also services.  Suppressed demand in other industries will exacerbate this.

Retailers must look at the reality of the economic environment when making decisions about the future.  That may mean facing uncomfortable truths. It may not be viable to reopen every shop which closed in March when lockdown ends. Furthermore, it’s likely to be economically vulnerable communities which are most at risk of store closures. That assumption is based on SRC analysis of local authority retail data – regrettably there isn’t really any countervailing evidence.

Ultimately retail businesses have fiduciary duties to their staff, directors, and where relevant shareholders. They have to run profitable businesses. If the economic incentives are aligned to drive reduced store footprints and greater online sales, then that’s what will happen.

However, whilst those incentives are fixed, the economy remains dynamic. Some store closures are probably inevitable, but the scale is most definitely not. That’s the debate policymakers must engage with now. It’s not an exciting one. There are far fewer photo calls to be had for saving a store than opening a new one.

Because it’s not a matter of economics, but of people. Once a high street stores closes, in many places it will no longer be replaced. Those jobs, and the community contribution from the business will be lost. That contribution isn’t just tax revenue but the social and charitable work done by retailers (who last year raised over £18 million for Scottish good causes). It’s the anchor stores who drive footfall, and therefore allow a local ecosystem which lets smaller and independent stores flourish around them. Some will be lost, but there is a chance to save many.

But this is the moment for action. In a dynamic environment retailers are going to make decisions now which may not have had to happen for years. The long-term pressures have met with the brutal economic impact of this crisis. This is no longer a theoretical debate about retail trends but the moment when predictions become reality.

Right now, governments are rightly focused on the enormous public health challenge. That’s obviously the immediate priority. However, it’s also clear they are looking forward to the best way to restart the engine of economic activity. There are three areas which are worthy of consideration.

Firstly, the retail industry is as well prepared as any sector to resume trading.  We already have businesses who can safely operate such as pharmacies and grocers. That experience has allowed the SRC to prepare guidance in collaboration with USDAW for non-food businesses to reopen. There are tested approaches which work to maintain social distancing and protect workers. Those will of course adapt in line with new guidance – but retailers are ahead of the curve.  Just as crucially, allowing retailers to trade restarts other parts of the economy – generating activity through the multiplier effect.  It’s also a tangible way to demonstrate that though this virus has changed lives, it won’t stop them for ever.

Secondly, once the lockdown has lifted to some degree, Governments will need to think about how to reignite consumer confidence. Whilst this crisis has been a shock to the system, and inevitably will lead to technical recession, in material terms much of the nation’s productive capacity has been frozen rather than eliminated. It’s therefore essential where possible to restart that capacity – hopefully shortening the period of fallow growth as much as possible.  With that in mind a short-term but generous consumer stimulus package may be well worth considering. If the economic harm can be limited, then that will also enormously help reduce the social consequences of recession – which is a moral imperative.

Thirdly, the tax burden on retail needs to fall. Concerningly much current discourse appears to be going in the other direction. Some appear to be looking at the evidence of retail change, and increased online sales, as a sign that the solution to retail’s challenges is through various levies or taxes on digital sales. The idea is attractive to politicians, who rarely dislike a revenue stream. However, it’s ill-considered. Eight of the ten largest online retailers in Scotland operate physical stores. In many cases online sales are about maintaining market share rather than making profits. And the last thing the over-burdened retail industry needs is another tax – all that will do is make trading harder and potentially drive up prices to shoppers to pay for it. That’s before the complexity of how online retail sales could be differentiated and separated from online sales of hotel bookings and holidays, insurance and banking services, newspaper and media subscriptions etc.

An online tax doesn’t make sense, but sadly that’s not stopped some in their advocacy. If those siren voices manage to convince politicians to pursue a tax, then any new measures would need to be at best revenue neutral for retail – and if protecting high streets and keeping stores open is the ambition then future total tax burden for the industry will need to fall.

Our high streets will look very different when we emerge from the nightmare of this crisis. It’s likely to be some time until hospitality businesses are able to trade. Tourists, who are important customers in Edinburgh and several towns, may not return in numbers until next year. 

In the interim the retail industry will remain robust and resilient. There will still be products to sell and customers to sell to.  However, to what degree, and what extent, retail remains the cornerstone of every high street will depend on the decisions made by the Chancellor and Finance Secretary over the next few months.

Ewan MacDonald-Russell is Head of Policy and External Affairs, Scottish Retail Consortium