ICAEW.com works better with JavaScript enabled.

UK Business Confidence Monitor: Retail & Wholesale

Q3 2021: Business Confidence Index reaches new high as recovery builds.

  • Domestic sales for the sector are slightly lower than their level from a year ago. However, this overall figure masks substantial variations in performance across sub-sectors. Online retailers have seen unprecedented growth while the high street has suffered enormously. 
  • That said, the Business Confidence Index has risen to its highest ever level in Q3 2021. The recovery in sales over recent months and expectations of further growth in the next year underpin this improvement in sentiment. 
  • Store closures and a shift towards new in-store technologies resulted in job losses over the last year. However, businesses in Retail & Wholesale expect to increase their staff levels at a faster rate than nationally over the next 12 months. 
  • Businesses are also becoming increasingly concerned by staff turnover and the availability of non-management skills. Transport problems and regulatory requirements remain widespread challenges, largely reflecting disruptions due to COVID-19. 
  • Input prices are picking up and further rises are expected over the next year. In response, businesses plan a sharper increase in selling prices, although rises here are similar to the rates seen before the pandemic.
  • Capital investment and Research & Development budgets are projected to rise at faster rates than all other sectors in the coming year. The growth of e-commerce and the need for many retailers to move to online trading are likely to be reasons for this. 

Before the pandemic, many high street retailers were facing significant difficulties as competitive pressures increased in the sector and consumers switched to online shopping. These challenges have been amplified by the pandemic. Recurring periods of lockdown and tight social restrictions resulted in a dramatic decline in non-essential shop footfall and a sharp drop in consumer confidence. A range of high-profile chains entered administration during the pandemic, and store closures reached historic highs. 

However, some sub-sectors were able to trade as normal, particularly food stores. The pandemic also accelerated the shift towards online shopping. More recently, the gradual easing of retail restrictions has led to a rebound in sales volumes as pent-up demand has been released. Online sales remain substantially higher than before the pandemic, although their share of total sales has eased slightly, as consumers return to physical stores. This, and the hope of more sales growth to come, underpins the improvement in the Business Confidence Index for the Retail & Wholesale sector. In Q3 2021, this stands at +37.5, the highest level in the sector since the survey began in 2004.

Sales growth and customer demand as a challenge

In the current quarter domestic sales are still 0.7% below their level from a year ago, a slightly sharper fall than the all-sector average. However, the overall improvement in business confidence is underpinned by bullish expectations for the year ahead as stores benefit from a recovery in footfall and a release of consumer spending. Domestic sales are projected to increase by 8.6% in the year to Q3 2022. If this were achieved, it would be more than 2 percentage points faster than the current record for the sector of 6.4% in Q4 2007.

Reflecting this sales outlook, the proportion of businesses citing customer demand as a growing challenge has fallen to 33%, compared to a pandemic peak of 64% in the final quarter of 2020.

The latest data from the Office for National Statistics (ONS) support that assessment, and show that a recovery is very much underway in the sector. The sharp rebound in activity since the relaxation of restrictions means that total sales volumes in the 12 months to June are reported as 7.0% higher than a year earlier according to the ONS. Within that, non-store retail (mainly online shopping) is nearly 30% above its level from last year. Household goods stores have also recovered strongly since April, with sales around a fifth higher than a year earlier. The clothing sector is gradually recovering too, although sales here are still down by 5.6%.

Labour market

Over the last 12 months, employee numbers in the sector declined by 2.0%, comparing unfavourably to the UK average. Weak demand, store closures and a shift away from in-store workers to digital technology are reasons for this. The decline here would have been much steeper if not for the government’s Coronavirus Job Retention Scheme, which was particularly important for Retail & Wholesale businesses during the periods of lockdown. However, as the sector continues to recover and footfall increases, businesses intend to start hiring again. Employee numbers are expected to rise by 3.6% in the 12 months to Q3 2022, a faster pace than the all-sector average. And as employment picks up, growth in average total wages (1.8%) is projected to return to more familiar pre-pandemic rates.

Business challenges

Businesses are, however, becoming increasingly challenged by the availability of labour. In Q3 2021, 22% of companies report the availability of non-management skills as a growing source of difficulty, a higher rate than reported nationally. This could be to do with temporary frictions in the recruitment process as a result of many companies all looking for staff simultaneously following the reopening of stores. Some businesses may also be facing staff shortages due to COVID self-isolation requirements. As well as this, the sector has a higher percentage of businesses reporting staff turnover (25%) as a growing issue than nationally, possibly reflecting people returning to their usual occupations after having spent the last year working temporarily in delivery or warehouse roles.

Beyond labour market concerns, several other challenges have grown in significance. Transport problems have risen sharply as a growing concern for businesses over the past year, with a rate of incidence of 40% in Q3 2021. This is 13 percentage points higher than the all-sector average and is largely related to the pandemic, with COVID restrictions creating delays in deliveries to stores. And just as demand has surged in recent months, many transport staff have had to self isolate due to coronavirus, adding to logistical disruptions in the sector. Moreover, the shift towards online commerce and retailing has increased the demand for delivery services, and it is possible that some companies have had difficulties in adjusting their operations to meet this.

Another growing challenge is regulatory requirements. 41% of companies in Retail & Wholesale report these as a more pressing issue in Q3 2021, making it the most widespread challenge in the sector. This too is mostly pandemic related. Businesses have had to adopt new precautionary measures within stores, while also complying with self-isolation rules. Brexit may also be a factor here as the sector is very import-intensive and compliance with new post-Brexit customs procedures are likely to have seen supply delays.

Input and selling prices, and profits growth

Against a backdrop of rising demand and supply constraints, there has been some upward pressure on input prices. These are 2.0% higher in the year to Q3 2021, and businesses expect a further 2.3% increase in the year ahead. This looks to be a return to pre-pandemic rates of inflation within the sector.

Businesses have been able to partially respond to this uptick in costs by increasing their selling prices. In the current quarter selling prices are 0.5% above a year ago. And over the next 12 months they expect a stronger rise of 1.8%. Again, this is in line with typical rates of increase seen before the pandemic. The net effect of these price-cost dynamics, coupled with a projected rebound in sales, is that profits are set to grow by 8.5%. This outlook is around 1 percentage point faster than the all-sector average.

Investment

Businesses in Retail & Wholesale also plan to markedly increase their investment rates over the year ahead, after restricting them during the pandemic. For both capital investment and Research & Development (R&D) budgets, businesses in Retail & Wholesale intend to increase spending at faster rates than in any other sector. The former is expected to rise by 4.3% over the next year, while the latter is set to be 2.7% higher.