Cost of living crisis a grave threat to 'green shoots' of high street recovery

By Prof. Cathy Parker

Last week, I joined BBC Breakfast to discuss the latest six-monthly summary of UK multiple store openings and closures, published by PwC and the Local Data Company. The report concludes store closures are “at (the) lowest rate in seven years but openings continue to lag behind pre-pandemic levels”.

Vulnerable multiples and over-expansion

The report confirms what we were expecting. UK chain store closures reached their peak over the pandemic. But many of the high street businesses that closed - chain stores and department stores like Debenhams - would have gone bust anyway regardless of COVID and the impact lockdowns and other restrictions had on footfall and spend.

Too many chains over-expanded. Many were saddled with too much debt and didn’t adapt to changing consumer behaviour, like online shopping. Many didn’t do enough to improve local trading conditions, by working with their Business Improvement Districts, local councils, and other place leaders on local regeneration and revitalisation plans.

We have lost hundreds of well-known brands from our high streets and, as a result, according to Centre for Retail Research https://www.retailresearch.org/whos-gone-bust.html , sadly, nearly half a million retail workers have lost their jobs.

Need to protect independent business revival

As IPM has pointed out before, the research featured from PwC and Local Data Company data only tracks multiple retailers – those with 5 or more outlets. Recently, it has been small independent business that have driven the reinvention of the high street. In the same period last year, over 800 more independent businesses opened than closed. 

These new independent businesses were able to take advantage of more favourable lease prices and terms – there has been a significant adjustment in the retail property sector as a result of the collapse of so many chains – which has made a lot of prime retail space affordable to start-ups.

However, as overall vacancy rates are around 14% at the moment, which is what they were after the financial crash of 2008, we can’t expect small businesses, on their own, to repopulate the high street – there will be more adjustment – and that includes more multifunctional occupancy, health, education, co-working space and community owned businesses, for example.

It is also very important to understand the local situation in every town and city. Our work with The BID Foundation and the High Street Task Force puts us in touch with towns that have absolutely no vacancies at all and with others were vacancy rates may be over 25%. Obviously, the approach to place management and regeneration needs to address the local market conditions. Towns that have no vacant retail units might use pop-up stores in empty office space and markets as a way to bring new businesses to consumers. Towns that have high vacancy rates might need to understand the type of business that would be successful and work with landlords to offer incentives to attract the right retail tenant.

Low consumer confidence

Another consideration is that the PwC/LDC data only covers the first half of this year when for many retail and hospitality businesses it is the run up to Christmas that is the most profitable period. And although recent data from the ONS suggest consumers are not tightening their belts yet, making the most of what’s left of the summer spending on socialising and holidays, rising inflation and soaring energy costs have put consumer confidence at an all-time low. The GfK index saw consumer confidence fall to -44 in August 2022, the lowest point since the index began in 1974. It has now been at a record low for four successive months.

There has been a big recent decrease in spend on ‘delayables’ (e.g. clothing, furnishings). Tracking weekly card spend data this is now at 73% of what it was in Feb 2020 and has decreased 15% pts in the past fortnight; clear evidence that falling consumer confidence is resulting in falling sales. There is more of this to come. CitiGroup are forecasting 18% inflation for January, and this will obviously negatively impact consumer spend.

So far, business have been doing their best to absorb rising costs and not pass on price rises to customers - around 1 in 3 saying they do not expect to pass on additional energy costs. But this can’t go on much longer.

Acute pressures

The cost of living crisis presents the biggest risk to smaller and independent businesses, which have been a major part of bouncing back from covid-19 on high streets, but are more likely to be under capitalised and may already have debt, in the form of overdrafts and Bounce Back Loans. These are the firms feeling acute pressures and at risk of disappearing from high streets if support isn’t forthcoming for business.

For now, without immediate and realistic support measures in place, we think the picture is of SMEs holding on for Christmas and bracing themselves and we’ll likely see the swathes of closures well into 2023 when businesses run out of resilience and finance options. Especially in those areas of the country that need “levelling up”.

Of course, it is not just businesses that are feeling the pressure. Local Authorities, BIDs and public organisations are working with unchanged budgets. Delivering major regeneration projects, or even any place development project becomes challenging if not impossible with inflation running in double digits.

This is a place and place management crisis of the highest order and one we are working hard to get some resolution to with UK Governments.

Support now

We know Government can act quickly and effectively - we saw rapid responses to COVID-19 for people and organisations and some of this support could be reintroduced to support the high street. Business rate relief, cuts to VAT, Bounce Bank Loan write-offs or repayment holidays, more loans/grants etc to support with energy cost increases are all do-able and would help, but not without consequences of increasing debt and inflation.

These are short-term, 'sticking plaster' solutions - but important all the same to keep businesses afloat in the run up to Christmas, which is such a key trading period for so many retail and hospitality businesses.

Changes to energy pricing required

In parallel to a reintroduction of this type of support we need the new Prime Minister to change the way energy is priced in the UK so that it reflects the cost of the energy we use, not based entirely on the cost of the most expensive energy produced. The outcome of this (marginal) pricing method means the wholesale energy price is set so the most expensive producer (currently those using imported gas) can still make a profit from the sales they make in the wholesale energy market.

Imagine running a businesses where you set your prices based on the most expensive supply. So, if you were running a breakfast cafe, and potatoes went up by 500%, you would pass on a 500% increase in costs of not only potatoes, but beans, bacon, sausages, tea, coffee and milk etc. as well! That's what is what the energy companies are doing - charging more for energy from UK gas and renewables even though the cost of producing this power has not changed.

Even energy company CEO's like Greg Jackson at Octopus Energy think this is "bonkers". Charging customers (individuals or businesses) based on the actual cost to produce and adding some profit would is reduce the price of gas by about 40% and the cost of electricity by about 65%, according to Professor Richard Murphy, Professor of Accounting at Sheffield University.

This solution would not pose any risk to the power companies, nor would it cost the government (taxpayers) any money. It would require change in legislation - but this is a time of national crisis and it has been on the cards for a while, in fact the government is currently consulting on reforming the market.

Whilst we support the short-term 'asks' of many trade bodies (such as BIRA and UK Hospitality), our request to the new PM is emergency legislation to change energy price regulation. This would have an immediate positive impact on not only the business in our places, but education and healthcare providers, local government and other place management organisations, as well as consumers.

About the author

https://placemanagement.org/about/

Cathy is Professor of Retail and Marketing Enterprise at Manchester Metropolitan University, Co-Chair of IPM and Research Lead for the Government's High Streets Task Force.