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Retail dangers

Seven reasons why we should worry about the future of retailing.
May 17, 2018

Official figures next week will remind us how tough things are for retailers. They could show that sales volumes in April were no higher than a year ago. Such weakness might not be merely temporary. It could continue for a long time. Here are seven reasons to be pessimistic.

◾️ Real incomes won’t rise much. Labour productivity fell in the first quarter, suggesting that we’ve returned to the flat post-crisis trend in growth after a brief blip last year. If productivity doesn’t grow much, nor will real wages. That puts a cap upon how much we can spend.

◾️ There’s little replacement demand. One legacy of the strong growth in retail sales in 2011-17 is that lots of us have new stuff that won’t need replacing for a while. This problem is already evident in the car industry, where sales are now falling after strong growth from 2012 to 2016.

◾️ Housing transactions are low. In the first quarter they were 34 per cent down from their pre-crisis peak, and estate agents expect only the slightest of pick-ups this year. This will suppress demand for housing-related items such as furniture and carpets and also demand generally because of the lack of a framing effect: if you spend £200,000 on a house another £1,000 on a big TV doesn’t seem so much.

◾️ Technical progress seems to have slowed. Since the 1990s, consumer spending has been boosted by the availability of new goods: smartphones, flat screen TVs, games consoles and so on. Now that many of us have these, spending will fall unless more new things become available.

◾️ Demographics. Older people have most of what they want. Younger people either can’t afford it because of low wages and high rents, or have nowhere to put it because they’re living in cramped housing.

◾️ A desire to rebuild savings. Last year the household savings ratio fell to its lowest rate since the late 1950s as people tried to maintain spending in the face of a squeeze on incomes. Many will want to restore their savings sometime or repay their debt. This means that even if incomes do recover, spending might not rise as much.

◾️ Habit. Consumer spending is in part a matter of habit. This is good for retailers on the upside, but a danger when sales falter: having gotten out of the habit of going to the shops every Saturday we might stay out of the habit. There’s no iron rule which says that retail sales must grow quickly in developed economies. In the eurozone, for example, sales volumes have grown only 0.8 per cent per year since 2000, less than half the rate in the UK.

Back in 1930 Maynard Keynes predicted that by 2030 we’d be working 15-hour weeks. That was because he thought we’d use technical progress to consume leisure rather than goods. For decades, that prediction hasn’t been quite right (although the working week is indeed shorter than it was in Keynes’ day). But what if Keynes wasn’t fundamentally wrong but merely out on his timing? What if our desire to spend more and more is indeed now coming to an end, or that people now prefer experiences to things? We can’t say with certainty that this is the case. But it could be that the risks to traditional retailing are even greater than you might think.