High inflation and low wages are keeping customers out of the shops

Retailers have already faced a challenging 24 months but, with inflation high and wage growth low, consumers’ reluctance will continue to present a major hurdle for the foreseeable future. Over the past 12 months, however, the CPA/Barbour ABI retail index has improved significantly, rising by 40% between May 2010 and 2011. With competitive pressure strong, retailers have been forced into a “catch-22” situation: implement a risky investment strategy to improve the offering and shore up market share while throwing yourself at the mercy of the prevailing uncertainty, or sit tight and risk the offering becoming tired in what is a highly competitive marketplace.  

Some retailers have adopted the former strategy with gusto. Notably Marks & Spencer and John Lewis plan to significantly increase their investment activity as 2011 progresses. The bullish expansion plans of many large supermarket chains, including Tesco, Sainsbury’s, Asda, Waitrose and Morrisons, are another bright spot on the retail development horizon.

Elsewhere within the retail sector prospects are more muted. In May, the British Retail Consortium reported flattening sales figures for most non-food goods and shopping centre sales. There are exceptions. Westfield in Shepherds Bush, for example, posted double-digit growth on the previous year in 2010, but regional centres face more challenging conditions.  

Retail construction activity contracted by about a quarter during the recession, but with some retailers stepping up development activity and others turning their attention to refurbishing and refreshing their portfolios, it is likely that the worst has now passed. Recovery, however, is set to be slow and retail output is not expected to return to 2007’s level until 2014 at the earliest. The stability of the economy is a risk, as too is the beleaguered consumer sector’s reaction to further falls in disposable income throughout 2011 and on into 2012.


Kelly Forrest is senior economist at the CPA