Research article

Stronger headwinds facing retailers

Retailers are exposed to higher energy prices, declining consumer confidence and decreasing consumer spending

Retail can be seen as one of the more susceptible sectors to higher energy prices. In general, retailers consume larger amounts of energy and are not always able to pass this on to customers. Increasing the prices of retail goods is, in the current weaker economic outlook, especially challenging. Record low consumer confidence levels and consistent high inflation fuelling the cost of living crisis make price hikes in (luxurious/non-essential) retail goods for customers undesirable as it will impact customers spending behaviour.

This is reflected by the UK retail sale data from the British Retail Consortium (BRC). Although the data shows that retail sales rose by 5.2% in February compared to the same period last year and slightly up from January (+1%), it is driven by inflation price increases rather than volume growth. Similar results are recorded in the Netherlands, where retail sales were up by double digits (11.3%) in January 2023 compared to January 2022, whilst retail sales volume growth increased just 0.4%.

Higher energy costs cut into consumers' spending budgets as consumers have to cope with their own household energy bills

Bram de Rijk, European Research Associate, Commercial Research

The main driver behind this is higher energy costs cutting into consumers’ spending budgets as consumers have to cope with their own household energy bills. Furthermore, the BRC stated that: “High energy bills and the rising cost of a weekly shop were forcing shoppers to cut back in February this year”. This causes further concerns and a gloomier outlook for the UK and European retail sector.

That energy and its rising costs is impacting the retail sector is reflected by a recent survey that Savills conducted amongst retail (warehouse) occupiers. The survey shows that higher energy costs is the main concerns occupiers have.

However, different types of retailers are impacted to different extents. For instance, grocery operators tend to be more exposed due to refrigeration and have lower profit margins compared to luxury high-street retailers. Hospitality retailers are also impacted by higher energy bills. News articles and headlines report that some restaurants are shortening operation hours to reduce overheads when they are not busy. In addition, a group of independent brewers in the UK wrote a letter to the chancellor warning about the impact of the rising energy bills on their business. A survey by the Morning Advertiser showed that pub operators are faced with doubling or tripling utility bills. Over 35% of operators said they had seen their utility costs double, while 30% said their costs had tripled. Anecdotally, one operator had been quoted with a sixfold increase on their current contract, increasing the price per unit to 83p, up from 14p.

However, many, and typically larger retailers, have hedged their energy purchases which helped them to cope with the impact of the energy crisis. For the smaller, typically independent, retailers, this is not always the situation and are therefore faced with more challenges.

Nevertheless, the retail sector, as a whole, is facing headwinds, mainly driven by the energy crisis. Retailers are confronted with a catalogue of costs issues, some mainly fuelled by higher energy bills, some less so; higher costs of manufacturing, raw materials and products, transport and storage, and the cost and shortage of staff. Therefore, the retail sector is considered the sector currently faced with the most challenges, with the impact of the energy crisis being one of them.

Read the articles within Spotlight: The impact of the energy crisis on commercial real estate in Europe below.

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