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Recession and retailers: a ‘cleansing effect’?

UK inflation has hit a new 40-year high as the cost-of-living crisis deepens, and two-thirds of finance leaders are now bracing for a recession. Retail Sector speaks to Deloitte and the BRC about how retailers can survive this volatile climate, and Jollyes shares their own experience of weathering tough times.

“Incomes are being squeezed, consumption is under pressure, interest rates are rising, and there’s a lot of uncertainty. These are classic ingredients for recession,” says Ian Stewart, Deloitte’s chief economist.

According to Deloitte’s UK CFO Survey Q2 2022, finance leaders have assigned a 63% probability of experiencing a recession within the next year, amid rising inflation and economic headwinds. Some 86% of CFOs now expect inflation to exceed 2.5% in two-years’ time – the highest reading on record – and most consumers are seeing real incomes “falling at the fastest rate since the 1950s”, according to Stewart.

Price inflation

Meanwhile, Shop Price annual inflation jumped to 4.4% in July, up from 3.1% in June, according to the British Retail Consortium (BRC), marking the highest rate of shop price inflation since the index first started in 2005.

Consequently, consumers are doing two things, Kris Hamer, director of insight at the BRC reveals. Customers are either trading down from premium brands to mid-tier and value based brands, or they have stopped spending altogether. “If prices are going to continue to rise, people will then reign back spending, and reigning back spending leads to a recession,” he explains.

As such, pet superstore Jollyes has seen customers trading away from the bigger brands towards the retailers’ own branded products where there is “far less inflation”. “There are 9,500 independent pet stores who have a similar product range to us, but they have nowhere near the value that we offer because they don’t buy in bulk, and they don’t have the marketing capabilities that we have. This is a huge opportunity to take market share from our competitors,” says Joe Wykes, CEO of Jollyes.

However, not every company is invincible. “A number of pet products in the UK contain grain. However, the availability of grain and its pricing there on has led to some lead time issues and some price inflation has happened.” Jollyes has seen manufacturers, such as Mars and Nestle, pass through their prices throughout the market, meaning the pet store has had to pass prices onto customers for these respective products. Nevertheless, Jollyes has held prices flat for its own branded products, and the retailer is now currently trading above pre-Covid levels, with its latest financial year experiencing 15% growth.

Staying competitive

Retailers can only survive a recession by being competitive, such as having a tight grip on costs and adding value to customers, Hamer explains. Wykes reveals: “We pride ourselves on being a local retailer, whereby 80% of our customers live within a 10 minute drive time of our stores.” Due to rising fuel prices, with a further price hike set for October, Wykes says that Jollyes’ local offering means customers can have a once a month journey which is under 10 minutes.

Maintaining the availability of stock on the shelves also means customers don’t have to make repeat purchases. “We’re trying to maintain as much of consumers’ money in their own pockets as we can, and that we’re not spread out and forcing them to do repeat journeys over long distances of time that some of our competitors do.”

According to Stewart, companies can also stay afloat by building customer loyalty and shifting offers towards products which “give the best margins”. Approximately 70% of Jollyes’ customers are regular, and the company has created a loyalty scheme to create “even better value than they will be able to get in the discount retailers”. The pet retailers’ pet club loyalty cards now have almost 600,000 active members.

Increasing productivity and employee retention

To ensure survival, retailers must build a high-skill workforce as it reduces the need to hire new employees in a tight labour market. As such, Jollyes offers a “full suite of training to help build careers” – including its Suitably Qualified Person (SQP) training that enables colleagues to go through a “rigorous” assessment before they can sell certain medicines. Overall, all of the retailers’ stores now have SQP-trained colleagues, with over 100 in total across its estate.

“A recession can cause a very sharp rise in unemployment,” Stewart adds, “and if you put people on the sidelines of the labour market, they lose skills, connections, and knowledge. It then becomes harder for them to rejoin the labour market.”

To guarantee employee retention, Jollyes has built a culture of flexible working. Some 30% of Jollyes’ employees work on part-time contracts. “Whilst other businesses have had labour shortages, we offer a unique employee experience, meaning they’re happy to work for us and will continue to do so.” However, one area in which Jollyes is finding recruitment harder is for groomers, given the proliferation of this career during the pandemic.

Despite the bleak economic outlook, 54% of finance leaders still expect revenues to rise over the next year, with most expecting business productivity, spending on skills, and investment in digital technology and assets to speed up in the next three years. “When a recession comes, activity across different sectors does not move in unison,” Stewart says. “There will still be many businesses and many parts of the economy which continue to see strong growth.”

Jollyes, for example, is forecasting to create around 100 jobs in the coming year, and is set to open one store every month. With 820 employees at present, Jollyes expects to increase the headcount to 1,000, depending on the severity of recession. “The UK economy will look more polarised in terms of the discount retailers. The Aldis and the Lidls of this world will take market share from some of the top end players,” Wyckes highlights.

Hamer concludes: “The long term effects are usually positive for retail overall. It has a cleansing effect in improving the capability of the industry, making businesses that are fit, fitter, and those businesses that haven’t understood their customers well or operate their businesses efficiently won’t survive.”

Overall, if a recession happens, it will be “short and mild”, both Stewart and Hamer believe. Deep and prolonged recessions have lasting effects on productivity and GDP growth. However, Stewart emphasises that the chances of even a mild recession “won’t dramatically change the trajectory for growth on a five-year view”.

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