UK retaiL:

Leading gLobaLLy, Serving LocaLLy

01 02 03 04 05

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WHAT ROLE DOES RETAIL PLAY IN THE UKS ECONOMIC SUCCESS?

DO UK CUSTOMERS GET A GOOD DEAL, COMPARED TO OTHER COUNTRIES?

ARE UK RETAILERS AS PRODUCTIVE AS OVERSEAS RETAILERS?

WHAT VALUE DO RETAIL JOBS HAVE FOR THE UK ECONOMY?

DOES RETAIL MAKE A FAIR CONTRIBUTION TO THE PUBLIC PURSE?

WHAT IS THE IMPACT OF MULTICHANNEL RETAILING?

Retailing plays a central role in British life. Unlike many other business sectors, we are close to people wherever they are. Whether as a customer or as one of the three million people who work in shops, almost every one of us comes into daily contact with retailing. Yet, as the UKs retail trade association, we are regularly and rightly asked some very tough questions. Do customers get a good deal from our retailers? Does retail make a fair contribution to the public purse? What is the true value of a retail job? Are we as efficient as overseas retailers? This landmark independent study, carried out by Oxford Economics and the Oxford Institute of Retail Management, provides a clear and positive answer to these, and other, crucial questions. It shows the unique and significant role the sector plays in the UKs economy and society. We generate very significant wealth; are a leading investor in both our communities and our people; are the largest private sector employer; and work tirelessly to ensure that our customers receive the very best value and service. But thats not the end of the story. Against the backdrop of testing economic conditions, this report clearly demonstrates that retail has a fundamental role to play in the economic recovery. Given the right conditions, we will remain a great British success story. This report sets out the breadth of our contribution.

WHAT IS THE CHANGING SHAPE OF RETAIL?

Stephen Robertson director general british retail consortium

06 07
UK Retail: Leading Globally, Serving Locally | 2

INTRODUCTION

AN APPRAISAL OF THE RETAIL SECTOR TODAY

A British success story

The British love affair with shopping, and shopkeeping, has been disparaged by economists industrialists and a French general over the centuries, but remains central to the economic and social welfare of the UK. A key driver of economic prosperity, the retail sector generated 303bn of retail sales in 2011 equivalent to one fifth of UK GDP and plays a vital role in the regeneration of towns, cities and local communities. Retail is Britains largest private sector employer, providing jobs for almost 3 million people and so is responsible for more than 10% of total UK employment. The exceptional flexibility of retail work, with a higher proportion of part-time roles than other sectors, gives workers greater freedom and wider opportunities for career development. Parents, usually mothers, are better able to achieve a sustainable work/ childcare balance, students are able to fund further education, and people without formal qualifications are able to gain an important first step on the career ladder. Also, retail is often the first opportunity for paid employment for many young people. In fact, 42% of all working 16-17 year olds are employed by retailers. Commendable investment in training by retailers 1,275 per employee per year, compared to just over 800 in the financial sector gives retail workers invaluable, transferable skills from which other sectors of the economy benefit. Many successful careers have started in retail before

blossoming elsewhere. Equally, long-term investment in people has helped to foster employee loyalty and developed retail leaders from the shopfloor. The retail sector is, in many ways, a paragon of UK business excellence. Intense competition means UK consumers get a better deal than in the rest of Europe, paying approximately 5% less than their European counterparts for a standard basket of goods. Despite legislation that curtails the free market, labour productivity rose by 40% between 1995 and 2007 (as opposed to just 10% in France or Germany). UK retail is at the vanguard of international, multichannel shopping, well ahead of European rivals. Enthusiastic, educated and technologically aware consumers have been a key factor in boosting internet sales to 23.4bn in 2010. Globally, with an estimated 11% of sales, the UK is the third largest market for internet shopping, equivalent to Germany and France combined. The retail sector also pays its fair share to the public purse approximately 18bn in net VAT payments, National Insurance, PAYE and Business Rates and makes less use of exemptions than other sectors, including banking, oil and gas. UK retail is a significant exporter. Flagship retailers, particularly at the luxury end of the market, are driving growth through international expansion as well as strengthening the UK brand, leading to increased spending by overseas tourists here in Britain.

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its importance as a wealth creator, tax payer, jobs provider and innovator at the heart of british life.
Future Challenges
The foundations are strong but there are challenges ahead. The effects of the worldwide economic downturn continue to dampen demand and test business, while the uncertain future of the Euro has already toughened trading conditions. There is no disguising the fact that many UK retailers have struggled in recent years, and will continue to struggle if conditions remain tough. Long-term perspective is essential. The eyecatching success of e-commerce and superstores in out-of-town locations needs to be balanced against the decline of many smaller town centres. A steady hand on policy is required in the coming years to ensure the viability of our high streets with all their colour, character and convenience. The BRC believes a healthy mix of small and large retailers in diverse locations is the route to sustained profitability. Even the largest, multichannel retailers were once small start-ups, and smaller retailers can be incubators for innovation. Most of all, we should never stop learning. While UK retail productivity has increased over the last decade, that of the US has grown even faster in large part because of a less regulated marketplace so there is room for improvement. The inexorable move to multichannel retailing presents a steep learning curve, with real costs as well as enormous benefits. What works in a purely online environment does not necessarily transfer seamlessly to established store-based retail. More channels do not always mean more demand. Recently retailers have chosen to secure jobs at the expense of temporary setbacks in labour productivity. With the recovery we expect productivity growth to pick-up once more. Awareness of technology, as a driver of shopping patterns and behaviours, is crucial. Government ambitions to widen access to high speed broadband are to be applauded, but what is next? How will wireless payments and specialist apps affect retailers? What role will social networks play in the way we shop? If smartphones and tablets provide new ways to shop today, what devices can we expect tomorrow? What are the consequences of buy-and-collect shopping? And, as consumers rapidly become better informed, how will that affect pricing, staffing and skills needs? There are many questions to be answered and real challenges ahead. Overall, the prospects for UK retail are promising and many of the ingredients for success are already in place. Our greatest assets remain our unquenchable passion for shopping and the inexhaustible entrepreneurial spirit of the British shopkeeper.

UK Retail: Leading Globally, Serving Locally | 4

THE BIG QUESTIONS

01 WHat roLe doeS retaiL PLay in tHe UKS econoMic SUcceSS?

Retail sales totalled 303 billion in 2011, equivalent to around 20% of UK GDP. The retail sector consistently accounts for around 5% of Gross Value Added in the UK economy. 14% of all UK investment made by large non financial-sector firms is made by large retailers. Retailers purchase around 180bn worth of goods for resale, supporting 47bn of output from other sectors. Retailers pay out 4 billion every year in dividends to shareholders, around 5% of the UK total. UK consumers currently pay around 5% less for their basket of goods than citizens of the Eurozone. UK retailers are less expensive in every sub-category of goods except for alcohol and tobacco, which are more expensive due to much higher duty rates. The price of food in the UK remains lower than the European average, despite strong cost-push inflation driven by the sharp depreciation of sterling. UK clothing retailers have been more effective in shielding consumers from rising cotton prices than their European counterparts. UK retailers are increasingly more productive than their European counterparts. Labour productivity in the UK retail sector rose by over 40% from 1995 to 2007, compared to less than 10% in France and germany. Overall productivity in the US has risen more quickly due to a lighter touch regulatory environment, particularly on planning. Expanding UK retailers generate an increasing proportion of sales and profits from overseas customers, both abroad and as tourists to the UK. As well as earning export revenue, retailing strengthens the UKs brand overseas. Around three million people work in retail, the largest private sector employer in the UK, accounting for 10.5% of total employment. Retail employment is far more flexible than most other sectors - the sector has a much higher proportion of part-time workers, and of these 84% combine their jobs with other commitments, such as studying or caring, or are enabled to remain in the labour force despite illness or disability. Retailers account for over 12% of the total training spend in the UK. On average, retailers invest 1,275 in training per employee per year, compared to just over 800 in the nancial sector and 1,200 in manufacturing.

02 doUK cUStoMerS get a good deaL, coMPared to otHer coUntrieS?

03 are UK retaiLerS aS ProdUctive aS overSeaS retaiLerS?

04 WHatv aLUe do retaiL JobS Have For tHe UK econoMy?

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the vital statistics of retails role in the UKs livelihoods, living standards and localities.
05 doeSr etaiL MaKe a Fair contribUtion to tHe PUbLic PUrSe?
The retail sector pays 17.5 billion per year, 9% of the UK total, of the four largest taxes (VAT, Business Rates, National Insurance and Income Tax). This is made up of: Around 8 billion (4 to 5%) of National Insurance and Income Tax, reflecting its role in employing part-time workers and those new to the world of work. Around 5 billion per year (9% of the total) of VAT payments. Around 5 billion per year (28% of the total) of Business Rates. Around 5 billion per year (over 11% of the total) in Corporation Tax is paid by the distribution sector (wholesale and retail),which makes less use of exemptions than other sectors. Retailers also make substantial contributions to the public purse through fuel duty, landfill tax, the Climate Change Levy and, in future, the Carbon Reduction Commitment. As shopping habits change, town and city centre retailing needs to adapt to meet ever strengthening competition from other channels and locations. These challenges are separate from, but magnified by, the current economic downturn. Successful retail locations combine small and large retailers, with the most successful smaller firms a critical source of innovation and future growth. Historically retail births and deaths have been roughly equal, at around 23,000 in 2007. Births subsequently declined to 21,000 in 2009, with possible implications for future innovation. Constant innovation and adaptation to customer demand means that there will always be winners and losers. total non-store retail sales were 30.3 billion in the UK in 2010, of which internet sales comprised 23.4 billion. With an estimated 11% of global internet retail sales, the UK was the number three market, equivalent to Germany and France combined. Consumer power has been enhanced by internet retailing, which enables ready access to greater information, price comparisons and other consumers recommendations. New mobile platforms, including smartphones and tablets, are being adopted by consumers and are leading retail into new territory. A substantial minority, 41%, of UK households reported never using the internet for shopping in 2010 and traditional channels remain important to these consumers.

06 WHatStHe cHanging SHaPe oF retaiL?

07 WHat iS tHe iMPact oF MULti cHanneL retaiLing?

UK Retail: Leading Globally, Serving Locally | 6

WHAT ROLE DOES RETAIL PLAY IN THE UKS ECONOMIC SUCCESS?

Figure 1: Consumer spending as a share of GDP Source: Oxford Economics/ Haver Analytics
GOODS AND SERVICES (EXC. TRANSPORT) AS % GDP

34% 32%

12%

11% 30% 28% 26% 9% 24% 22% 20% 7% 18% 16% 1988 1992 1996 2000 2004 2008 6% 8% 10% TRANSPORT % GDP

Goods as% GDP (LHS)

Services exc. Transport as % GDP (LHS)

Household transport spending as % GDP

Figure 2: Retail sector value added demanded from other sectors (m) Source: Oxford Economics/ Haver Analytics

Ag, forest & fish 323 Mining & quarry 24 Manufacturing 8,466 Utilities 1,149 Construction 835 Distrub & hotels 3,568 Transp & comms 4,638 Fin & bus servs 26,855 Public admin & defence 112 Education & health 273 Other servs 398

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01
The retail sector consistently accounts for around 5% of Gross Value Added in the UK economy. 14% of all UK investment made by large non nancial-sector rms is made by large retailers. Retailers purchase around 180bn worth of goods for resale, supporting 47bn of output from other sectors. Retailers pay out 4 billion every year in dividends to shareholders, around 5% of the UK total.

What is the role of retailers in serving UK consumers?

Over the past decade the retail sectors role in the UK economy has evolved significantly. Greater competition has led to wider choice, better quality, lower prices and more transparency in pricing, sourcing and labelling. Factors such as market share, number of outlets and location have helped drive efficiency, while improvements in shopping experience, targeted advertising, loyalty cards, the provision of credit, delivery and the internet have helped deliver growth and streamline business operations. With retail sales consistently accounting for around a third of total consumer spending, the sector remains as central as ever to British life.

% OF TOTAL HOUSEHOLD CONSUMPTION (LESS HOUSING, BILLS & FUEL)

Figure 3: Spending on retail goods as a % of total household consumption less housing, bills and fuels Source: Oxford Economics/ Haver Analytics

52% Forecaast 50%

48%

46%

44%

42%

40% 1996 2000 2004 2008 2012 2016 2020

UK Retail: Leading Globally, Serving Locally | 8

Figure 4: Detailed components of household spending Source: Oxford Economics/ONS

% OF HOUSEHOLD SPENDING

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1988 1992 Transport Restaurants & hotels 1996 2000 2004 2008 2012 2016 Goods Financial & other services 2020

Housing & bills Personal care, health & education

Recreation & culture Comunication services

Much of the increase in spending on services has been driven by non-discretionary spending, the most obvious example being the increase in housing and utility costs over the past 20 years, from just over 15% of household spending in 1988 to over 22% in 2010. As a result households have less flexibility to spend on discretionary goods.

Figure 5: Goods and services Source: Oxford Economics/Haver Analytics

35%

30% 30% GOODS AND SERVICES 25% 22% 27% 26% 26% 22% 22% 28%

20%

15% 12%

10%

11%

11%

11%

5%

0% 1990 Discretionary services 2000 2010 Non-discretionary services 2020 Total goods

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Looking forward, we expect retailings share of total spending to remain broadly stable. Although expenditure in the next few years will be slightly weaker as consumers tighten belts, spending on goods as a share of GDP will be broadly stable over the decade to 2020. We expect food, alcohol and tobacco to decline modestly as a proportion of spending, while audio-visual and other leisure-related goods increase.

What is the importance of UK retail to other sectors?

In addition to employing over 10% of the UK workforce, retailers play a vital role in supporting other sectors of the UK economy. For example, around 80% of the UKs farm produce reaches its market via UK retailers. Retailers source around 60% of their intermediate inputs from UK financial and business services, 20% from manufacturing, while other retail and wholesale firms, and transport and communications firms each contribute around 10%. Within financial and business services, over half of retailers demand (12bn) is real estate, with market research and consultancy (4.4bn), and advertising and computer services (2bn) also substantial beneficiaries.

Figure 6: Retailers use of banking and finance services, 2007 Source: Oxford Economics/ONS
Banking and finance 5.5% Owning and dealing in real estate 49.2% Computer services 8.0% Market research, management consultancy 18.0% Advertising 6.8% Other 12.6%

What is the role of UK retailers as wealth generators and investors in the future?
Retailers do not generate wealth merely by purchasing from other sectors they also add value to these inputs and generate profits to invest or distribute to shareholders. At around 5%, the dividends paid on equity by UK listed retailers are broadly in line with retails share of total GVA. A number of non-retail firms paying dividends in the UK make the vast majority of their profits overseas, especially in banking, and oil and gas. Excluding these two sectors, the share retailers pay is in the region of 7-9% of the total.

UK Retail: Leading Globally, Serving Locally | 10

Figure 7: Retail sector dividends

% OF TOTAL DIVIDENDS

10%

4.5% 4.0% 3.5% TOTAL RETAIL DIVIDENDS (BN)

Source: ONS/ Haver Analytics

9%

8%

3.0% 2.5%

7% 2.0% 6% 1.5% 1.0% 5% 0.5% 4% 2007 2008 2009 0% 2010

Retailing punches above its weight in investing in the UK economy. In 2008 large retailers accounted for around 14% of investment by all large non-financial sector UK firms (firms with 250+ employees). However, small and medium size UK retailers underperform, with implications for their growth potential.

% OF NON-FINANCIAL SERVICES WHOLE ECONOMY INVESTMENTS

Figure 8: Retailers investment and GVA by size class, 2008 Source: Oxford Economic/Eurostat

16% 14% 13.7% 12% 10% 8% 8.0% 6% 4% 2% 0% micro small medium Share of investment SMEs large total 4.6% 4.8% 5.4% 3.8% 2.2% 2.5% 5.4% 10.9% 9.4% 8.1%

Share of GVA

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What is the economic outlook for UK retailers?

The growth in household spending slowed from 3.1% to 0.4% between 2005 and 2010, in real terms. Higher food and energy prices have outpaced wage increases and are likely to continue to do so until unemployment eases. As the economy recovers, we expect interest rates to rise, unwinding the positive impact of lower mortgage payments. Cuts to public spending as well as increases in taxes will also erode consumers ability to spend, so it could be the middle of this decade before significant growth returns. Thereafter, household spending is expected to increase by nearly 60% by 2020, not accounting for the change in prices.

Figure 9: Spending on essentials (current prices) Source: Oxford Economics/ONS

38% Forecast 37% 36% 35% 34% 33% 32% 31% 30% 29% 2000 2005 2010 2015 2020
31.7% 31.8% 36.5% 37.0% 36.6%

7 .0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%

Share of spending on essentials (LHS)

5 year average growth rate of spending on essentials (RHS)

Source: Oxford Economics/ONS

% OF HOUSEHOLD SPENDING

Figure 10: Spending on non-food retail goods (current prices)

24% Forecast

23%

23.2%

23.2% 23.0% 22.6%

22% 22.0%

21% 2000 2005 2010 2015 2020

Although spending on non-food items is not forecast to grow by as much as it did between 1995 and 2005, it will still be a major driver of overall demand, at an average of 4.6% per year.
UK Retail: Leading Globally, Serving Locally | 12

DO UK CUSTOMERS GET A GOOD DEAL, COMPARED TO OTHER COUNTRIES?

Figure 11: Price of overall consumer basket, 2010 Source: Oxford Economics/Haver Analytics
110 105 100 EUROZONE = 100 100 95 90 85 80 75 70 Eurozone France Germany Poland United Kingdom 89 98 95 108

Figure 12: Food price indices Source: Oxford Economics/Eurostat

HICP INDEX (1996=100)

200

180

160

140

120

100

80 1996 1998 2000 2002 2004 2006 2008 2010

EU27 Spain

Eurozone France

Belgium Poland

Germany United Kingdom

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02
UK consumers currently pay around 5% less for their basket of goods than citizens of the Eurozone. UK retailers are less expensive in every sub-category of goods except for alcohol and tobacco, which are more expensive due to much higher duty rates. The price of food in the UK remains lower than the European average, despite strong cost-push ination driven by the sharp depreciation of sterling. UK clothing retailers have been more effective in shielding consumers from rising cotton prices than their european counterparts.

Do retailers offer customers a good deal, compared to other countries?

Figure 13: UK prices relative to Eurozone, 2010
EUROZONE = 100 150 140 130 120 110 100 90 80 70 Alcohol & tobacco Clothing & footwear Food & non-alcoholic drinks Furniture & equipment Housing & bills Recreation & culture Miscellaneous goods & services 99 90 80 92 92 91 144

Source: Oxford Economics/Haver Analytics

On the whole the typical UK consumer basket is 5% cheaper than that in the Eurozone. German consumers pay 2% more, while French consumers pay around 10% more. A category breakdown shows that the UK is more competitively priced in all categories but alcohol and tobacco. Tobacco duty is almost double the rate of that in France and Germany, while the UK is one of a few countries to impose any substantial duty on wine. Clothing and footwear prices are about 20% cheaper in the UK than abroad.

UK Retail: Leading Globally, Serving Locally | 14

Source: Oxford Economics/Eurostat

EURO PER 1000 LITRES

200

150

100
82 73

50
47

63

57

70

0 RO SI SK FI
Sep-10

40

SE

211

DK

HU

Have UK retailers insulated consumers from commodity price increases?

115

Figure 15: Clothing and footwear price indices Source: Oxford Economics/Haver Analytics
PRICE INDEX (JAN 2008=100)

110 105 100 95 90 85 80 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Nov-10

EU

Germany

France

Poland

United Kingdom

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UK

BE

BG

CZ

DE

EE

EL

ES

FR

IE

IT

CY

LV

LT

LU

MT

NL

AT

PL

PT

259

250

262

283

Figure 14: Duty on wine across EU, 2011

300

UK consumers have faced a more rapid escalation in their food bills in recent years than in other parts of Europe but this follows a period of softer price increases. In the 10 years up to 2007, food prices in the UK had risen by only 17%, compared to 22% in France, and more in other parts of Europe. Sterlings sharp depreciation against the dollar in 2008 has meant that commodities priced in dollars such as foodstuffs and cotton as well as products made using these commodities, have become more expensive. Despite that, Europe has seen a greater degree of volatility in clothing prices, which may be down to more intense competition among UK clothing retailers. Despite these recent currency movements, food costs have fallen as an overall proportion of family budgets. Family spending surveys show that in the 1950s UK households spent almost a third of their disposable income on food, as opposed to less than 10% in 2010.

Figure 16: Exchange rates, 2008-2011

$ PER DOMESTIC CURRENCY UNIT

2.1 2.0 1.9 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 Jan 08 Jul 08 Jan 09 Jul 09 UK Jan 10 EURO Jul 10 Jan 11

Source: Oxford Economics/Haver Analytics

Official food price indices inevitably compare constant shopping baskets. In reality, consumers have changed their shopping behaviours in order to stretch household budgets. Retailers have increasingly used promotional activity to drive sales and protect market share. The BRCs Shop Price Index shows that 39% of grocery spend now goes on promoted goods which increasingly include multi-purchase discounts. These discounts make direct price comparisons difficult, so that official data (based on unit rather than multiple purchases) exaggerate the rate of inflation experienced by consumers. The figures may also be obscured by greater availability of value ranges, regular own brands and premium own brands which have allowed consumers to respond to rising prices by trading up or down. If multi-purchase discounting and the proliferation of value brands has increased more in the UK than in Europe, relative food price inflation may be exaggerated. Overall, it is clear that UK consumers get a good deal. In spite of sharp rises in commodity prices over the past few years, and much higher duties, the UK remains more competitively priced than the Eurozone.

UK Retail: Leading Globally, Serving Locally | 16

ARE UK RETAILERS AS PRODUCTIVE AS OVERSEAS RETAILERS?

Figure 17: Labour productivity growth, retailing, selected countries, 1995-2007

INDEX (1995=100)

150

140

Source: Oxford Institute of Retail Management/ EU KLEMS

130

120

110

100

90 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

UK

FRANCE

GERMANY

USA

How does UK retail productivity compare to foreign markets?

There is widely perceived to be a productivity gap between the UK and overseas markets. UK retailers that trade extensively abroad have found this is not supported by their own experiences. Data on labour productivity confirm this view. Structural and accounting issues make international comparisons extremely difficult and potentially misleading. However, official figures suggest that while UK distributive trades exhibited low growth in labour productivity between 1970 and 1995, they have pulled away from much of the rest of Europe since.

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03
UK retailers are increasingly more productive than their European counterparts. Labour productivity in the UK retail sector rose by over 40% from 1995 to 2007, compared to less than 10% in France and germany. Overall productivity in the US has risen more quickly due to a lighter touch regulatory environment, particularly on planning. Expanding UK retailers generate an increasing proportion of sales and prots from overseas customers, both abroad and as tourists to the UK. As well as earning export revenue, retailing strengthens the UKs brand overseas.

ANNUAL AVERAGE VOLUME GROWTH RATES (%)

Figure 18: Labour productivity growth, distributive trades, selected countries, 1970-2004 Source: Oxford Institute of Retail Management/ EU KLEMS

5%

4%
3.6%

4.4%

3%
2.8% 2.9% 2.3% 2.4% 2.6%

2%

1%

1.5%

1.6%

1.6%

0% FRANCE GERMANY EU UK USA

1970-95

1995-04

UK Retail: Leading Globally, Serving Locally | 18

Figure 19: Total factor productivity growth, retailing, selected countries, 1995-2007 Source: Oxford Institute of Retail Management/ EU KLEMS
INDEX (1995=100)

140.0 135.0 130.0 125.0 120.0 115.0 110.0 105.0 100.0 95.0 90.0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

UK

FRANCE

GERMANY

USA

Other factors have affected the efficiency of UK retailing over this period. Bigger businesses (both in terms of firm and store size), along with mergers and acquisitions, have led to economies of scale. Structural changes, such as large supermarkets moving into higher margin general merchandising, have increased margin contributions and output per worker hour. Improvements in efficiency can also be down to other considerations such as quality of management or innovation. The development of a firms competences, innovativeness and, ultimately, profitability are also influenced by the business and regulatory environment. How innovative are UK retailers? Innovation in retail is more difficult to record than in manufacturing since manufacturers tend to innovate in staircase fashion with clear jumps in product development. Most retail innovation occurs in a continuous mode of organic change. However, in the 2009 Community Innovation Survey, 54% of UK retailers claimed to be innovation active the equivalent figure in France in 2008 was 33%. In addition, the retail sector was well ahead of the national average in adopting innovations which were new to market. Two recent factors have had a major effect on retail labour productivity: the economic recession and faster than average growth in non-store shopping, particularly via the internet. The impact of these is hard to measure. Evidence in the US suggests retailers responded relatively quickly to the economic downturn from 2008, enabling them to return to positive, albeit small, rates of labour productivity growth in 2009 by adjusting staffing levels, extensive discounting and price promotion.

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Although the UK also benefits from a flexible labour market, retailers here have chosen to retain jobs at the expense of temporary setbacks to labour productivity. As the economy returns to full capacity, labour productivity should pick up once more. The UK is leading the way in multichannel retailing. The growth of e-commerce can boost productivity by providing a more efficient business model than one based on stores alone. But purely online retailers use very different business models to store-based retailers, more akin to direct mail businesses. Efficiency is also measured rather differently: We are very different, because 85% of our business is online-based, and 15% is through the traditional call centre. So, a lot of our efficiency metrics are based on key ROI stats, and we look at things like cost per order, cost per new customer, which are sort of probably typical direct mail type efficiency [measures]. (UK e-commerce retailer)

450 400 350 300 250 200 150 100 50 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Oxford Institute of Retail Management, Annual Reports, 2010

Pure play

Store based

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OPERATING REVENUE PER EMPLOYEE (TH)

Figure 20: Operating revenue per employee between an online and a store-based retailer, 2000-2010

500

80 70 60 50 40 30 20 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Oxford Institute of Retail Management, Annual Reports, 2010

Pure play

Store based

Online retailers have very different cost bases and productivity ratios. While there are phenomenally successful UK multichannel retailers, efficient integration across channels is not without its challenges. Store-based retailers developing multichannel capabilities can learn from the efficiencies of e-commerce but more channels do not automatically lead to more growth. Store-based retailers risk adding to cost base without securing equivalent sales increase. Tighter cost control and creative integration solutions are required and there may be significant transfer of skills and experience between channels. Despite the potential of non-store retailing, the present limitations on opening hours and planning requirements constrain UK retail competitiveness and productivity compared with the US. These regulations reflect the scale, nature and location of retailing preferred by the two different cultures, but there is a clear productivity trade-off.

Are UK retailers globally competitive?

World retail sales reached 7.2 trillion in 2010, a quarter of which were generated in Western Europe and 4% in the UK. The UK stands out as having the highest composite retail sales growth of the mature markets from 2005-10. Retailers from low growth, mature markets are seeking opportunities internationally. European retailers tend to be more international than their US counterparts because they have reached domestic saturation more quickly. European retailers in the top 250 by sales in 2009 generated a third of their revenue outside their domestic market.

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COST OF EMPLOYEE / OPERATING REVENUE (%)

Figure 21: Cost of employee per operating revenue between an online and a storebased retailer, 2000-2010

Table 1. Major UK retailers with physical overseas operations, 2010 Source: Updated from Burt, Sparks & Teller, 2010

Retailer Tesco Kingfisher Marks & Spencer Dixons Retail Ltd Alliance Boots KESA Electricals Next HMV Group

Sector Grocery Home Improvement Mixed goods Electricals Health & Beauty Electricals Clothing Music, videos & books

Overseas Markets 13 7 42 8 12 8 42 2**

Group Sales (bn) 62.5 10.5 9.7 8.2 7.6 5.1 3.4 2

Overseas % Group Sales 28.0 59.0 10.0 43.0 12.0 74.0 2.2 2.9

Overseas % Group Profit 25.0 68.0 18.0 60.0* 8.0 100.0 1.7 n/a

* - % group retail profit; ** - continuing activities 2011

UK plc benefits from British retailing successes abroad in three ways. First, export trade brings in revenue and is important for the rebalancing of the UK economy. Second, retailing can benefit from the repatriation of ideas and experiences and by boosting the international talent pool. Expatriate managers bring expertise to the domestic operation. Finally, UK retailers promote the UK as a tourist destination and as a source of British produced goods. Luxury British brands, in particular, have had great success in international markets. Expenditure from inbound tourism, classed as an export, held up much better between 2009-10 (+6%) than that from domestic tourism (-5%). It has been estimated that 1 in every 4 spent on luxury brands in the UK over 2010-11 came from overseas visitors.

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WHAT VALUE DO RETAIL JOBS HAVE FOR THE UK ECONOMY?

2,800 RETAIL EMPLOYEES (000s) 2,700 2,600

Source: Oxford Economics/ONS

10.5% 10.0% 9.5%

2,500 2,400 2,300 2,200 1996 1998 2000 2002 2004 2006 2008 9.0% 8.5% 8.0% 2010

Retail employees (LHS)

Retail share of employees (RHS)

% EMPLOYEES

Figure 23: Share of different types of employees in the retail sector and whole economy, 2010-11 Source: Oxford Economics/ONS

90 80 70 60 50 40 30 20 10 0 Part-time Female Under 25yrs old NVQ 3 or less 12.6% 31.2% 55.4% 49.4% 60.4% 62.3% 82.3%

30.5%

Retail

Whole economy

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SHARE OF TOTAL EMPLOYEE (%)

Figure 22: Retail employment

2,900

11.0%

04
Around three million people work in retail, the largest private sector employer in the UK, accounting for 10.5% of total employment. Retail employment is far more exible than most other sectors - the sector has a much higher proportion of part-time workers, and of these 84% combine their jobs with other commitments, such as studying or caring, or are enabled to remain in the labour force despite illness or disability. Retailers account for over 12% of the total training spend in the UK. On average, retailers invest 1,275 in training per employee per year, compared to just over 800 in the nancial sector and 1,200 in manufacturing.

What is retails role in providing employment for UK workers?

Retail is the largest private sector employer in the UK providing jobs for around three million people, about 10.5% of total UK employment. This proportion has remained stable over the past decade. Whether it is the high street, out-of-town complexes or local shopping parades, retailing creates new markets and plays a vital role in the regeneration of towns, cities and local communities. It is an integral part of the UK economy and will continue to be a major source of employment. We expect retail employment to edge down in 2011 before beginning to recover in 2012 or 2013. Retail employment is currently expected to grow by around 1% per year from 2013 to 2016, around the same rate as for the economy as a whole.
% TOTAL RETAIL EMPLOYMENT

Figure 24: Local authorities most dependent on retail employment Source: Oxford Economics/ONS

26% 24% 22% 20% 18% 14% 12% 10% 8% 6% Harborough Castle Point Ellesmere Port & Neston Dartford Welwyn Hatfield Weymouth & Portland Watford Tamworth Kensington & Chelsea Mendip Conwy Thanet Havant Blaby Bournemouth Broxbourne North Norfolk Eastbourne Havering Thurrock

1998

2008

1998 UK average

2008 average

Some parts of the UK such as the South West, East of England and Wales are more dependent on retail. In some cases this is likely to be related to tourist activity, for example in historic towns or near major landmarks, or the presence of major retail developments such as Bluewater or Lakeside.
UK Retail: Leading Globally, Serving Locally | 24

45%

% TOTAL EMPLOYMENT

Figure 25: Employment in retail and public sectors, 2008 Source: Oxford Economics/ONS

40% 35% 30% 25% 20% 15% 10% 5% 0% Monmouthshire Weymouth & Portland Carmarthenshire Taunton Deane Vale of Glamorgan Sotuh Ayrshire Conwy Torbay Inverclyde Merthyr Tydfil Gwynedd Sefton North Ayrshire Hastings
0.6 Residential care

Retailing

Public sector

Retail average

Public sector average

In other areas, particularly those with a large reliance on public sector activity, it is more likely to reflect an absence of other private sector employment. In these areas retailing is both more vital to sustaining local economic activity and, at the same time, more vulnerable as public sector jobs are lost. Retail is the largest provider of private sector jobs in the UK. As most parts of the public sector will experience job cuts 330,000 during this Parliament according to the Office for Budget Responsibility retails role as a provider of jobs will become even more important.

% TOTAL EMPLOYMENT

Figure 26: Employment in the ten largest sectors of the UK economy, by employment, 2009 Source: Oxford Economics/ONS

3.5 3.0 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 0.5 0.0 Wholesale trade Social work Specialised construction Employment activities Retail Education Health care Food & beverages Public admin 1.5 1.1 0.9 0.8 0.8

25 |

What is retailings role as an employer?

The retail workforce differs from the rest of the economy in a number of ways. Retailing employs a far greater proportion of part-time staff (55% versus 31%), women (60% versus 49%), under 25s (31% to 13%), and people who do not hold a degree (83% to 62%). All of these groups find it easier to find opportunities in retailing that match their needs than elsewhere in the economy. Other sectors do not offer the same flexible employment opportunities. Contrary to some perceptions, many people who undertake part-time work do so because it suits their preferences rather than because they are unable to obtain a full-time job. ONS interviewed people working part-time as part of the Labour Force Survey (LFS). In 2010 , 48% of respondents in retail said that they did not want a full-time job, 34% were in education, 16% could not find full-time work and 2% were ill or disabled. The overwhelming majority, therefore, choose to work part-time or are unable to work fulltime. Many women choose retail because of the availability of part-time work. Most women in retail work less than 40 hours per week. Part-time roles are sought by women with dependent children as this allows them to combine employment with childcare commitments. Without this flexibility, many would not be able to achieve a successful combination of work and family life. Through part-time work, retailing provides a valuable boost to household incomes as well as to overall employment.

UK Retail: Leading Globally, Serving Locally | 26

Figure 27: Gender of employees, 2008

% TOTAL EMPLOYEES

70 60 50 40 30 20 10 0 Retailing Whole economy Full time Part time Retailing Whole economy Male Female

Source: Oxford Economics/ONS

The retail sector is also an important source of jobs for young people at a time when youth unemployment is at a record high. It provides 42% of 16 to 17 year olds in employment with a job, 40% of 18 to 19 year olds and 25% of 20 to 24 year olds.

PROPORTION OF EMPLOYEES

35% 30% 25% 20% 15% 10% 5% 0%

Source: Oxford Economics/ONS

40.0% 24.6% 17.6%

Figure 28: Retails share of total employment, by age group, 2010 Q2

45% 40% 42.4%

14.6%

12.7%

11.5%

10.7%

10.2%

10.0%

9.8% 60-64

16-17

18-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

AGE RANGE

27 |

65-69

9.9%

By providing employment to young people, retailing is delivering two benefits to society. First, a significant proportion of young workers are students and part-time work helps them support themselves through higher education. Second, retail is often regarded as a gateway employer. Other sectors benefit from workers who have gained prior work experience and skills in retail. Retail fulfils a similar role for those without formal qualifications. One in six (16%) employees without qualifications work in retail. Similarly, one in seven (15%) of those with a Level 1 NVQ work in retail. Retailing offers the opportunity to gain work experience and skills that will benefit employees and other future employers. Retailers invest substantial sums in training and development, so many employees remain in the sector to build successful careers.

How much do UK retailers invest in education and training?

According to the National Employer Skills Survey (NESS), retail and wholesale employers in England spent 4.9 billion on training staff in 2009, accounting for 12% of total training expenditure. Only business services (9.1 billion) and health and social work (5.7 billion) spent more. Retailers investment equates to 1,275 per employee, slightly more than the manufacturing sector, but less than the utilities sectors. Retail employees who received training, spent 6 days a year being trained on average.

UK Retail: Leading Globally, Serving Locally | 28

DOES RETAIL MAKE A FAIR CONTRIBUTION TO THE PUBLIC PURSE?

TOTAL RATEABLE VALUE (ACCOUNTED FOR BY PREMISES TYPE)

Figure 29: Non-domestic rates, 2005 and 2010 Source: Oxford Economics/CLG

30% 25% 20% 15% 10% 5% 0% Retail & wholesale Manufacturing 2005 2010 Hotels & restaurants 6.3% 6.5% 18.6% 16.7% 25.9%

25.8%

% GROSS PROFITS

Figure 30: Effective corporate tax rate by sector, 2008-09 Source: Oxford Economic/HMRC

25% 20% 16.5% 15% 10% 5% 0% Agriculture, forestry, fishing Other manufacturing Construction Transport & communication Energy, water supply Extractions, metal mfg, chemicals Distribution & repairs Business services Metal goods Hotels & catering Financial services Other services All industries 23.5%

15.8%

17.3%

15.5%

14.9%

11.1%

10.9%

11.5%

Retailing makes significant direct tax payments to the public purse. Retail also collects tax on behalf of the Government, including tax paid on income earned by retail employees and dividend recipients, indirect taxes such as VAT, as well as fuel and other duties. Retailers also enable people to make other local government payments, such as the London Congestion Charge.
29 |

7.6%

13.3%

13.6%

16.9%

05
The retail sector pays 17.5 billion per year, 9% of the UK total, of the four largest taxes (VAT, Business Rates, National insurance and income tax). this is made up of: Around 8 billion (4 to 5%) of National Insurance and Income Tax, reecting its role in employing part-time workers and those new to the world of work. Around 5 billion per year (9% of the total) of VAT payments. Around 5 billion per year (28% of the total) of Business Rates. Around 5 billion per year (over 11% of the total) in Corporation Tax from the distribution sector (wholesale and retail),which makes less use of exemptions than other sectors. Retailers also make substantial contributions to the public purse through fuel duty, landll tax, the Climate Change Levy and, in future, the carbon reduction commitment.

What does retail employment contribute to tax receipts?

Retail accounts for around 10% of total UK employment. Wages in the sector tend to be lower than in the rest of the economy with an average wage in 2010 of 284 per week compared with around 480 across the economy as a whole. This is largely due to the greater proportion of part-time workers and their age profile. Retail also plays an important role in drawing people into work from unemployment, which reduces the burden on taxpayers of Jobseekers Allowance payments. Overall, government receipts from National Insurance and Pay As You Earn income tax are around 4-5% of the total.

Figure 31: Retail employment and PAYE Source: Oxford Economic/HMRC

5,800 5,600 5,400 PAYE RECEIPTS M 5,200 5,000 4,800 4,600 4,400 4,200 4,000 2005-06 2006-07 PAYE receipts (m) (LHS) 2007-08 Share of total PAYE (RHS)

4.6%

4.5% % OF TOTAL PAYE

4.4%

4.3%

4.2%

4.1% 2008-09

How much VAT does UK retail pay?

The retail sector made around 9% of total VAT payments in 2008/09, a significant figure that compares favourably with its share of total value added in the economy, which was around 5%. Retailers net VAT payments since 2008-09 will have risen because the cut to 15% on 1 December 2008 (which would have depressed the net sum paid during the final four months of the 2008-09 financial year) was reversed on 1 January 2010 and followed by a rise to 20% on 4 January 2011.
UK Retail: Leading Globally, Serving Locally | 30

Figure 32: Net VAT paid by sector, as % of total VAT receipts, 2008-2009 Source: Oxford Economic/ HMRC

Construction 7.7% Motor trade 7.3% Wholesale 13.3% Retail 8.6% Hotel & restaurants 8.0% Other business activities 24.8% Computer & related activities 6.5% Other 23.8%

How much corporation tax does UK retail pay?

It is difficult to determine exact figures for retails total Corporation Tax payments but analysis suggests that this is broadly in line with the average across the economy. HMRC places wholesale and retail businesses within the broader grouping of Distribution and Repairs, which accounted for 14% of total GVA in 2008, generated just under 12% of gross profits, and paid 11.3% of total Corporation Tax in the financial year 2008/09. Comparing the Corporation Tax paid by the distribution sector with its gross profits indicates the effective tax rate paid on profits was 15.5%. However, the whole economy average is distorted by the especially high rate paid by utility firms, which made over a quarter of all profits in 2008-09. Removing this sector from the calculation lowers the corporate tax rate across the economy to 14% The Distribution and Repairs sector, therefore, paid a higher than average effective tax rate.

Figure 33: Shares of corporation tax and gross profits, 2008-09 Source: Oxford Economics/Haver Analytics

30% 25% 20% 15% 10% 5% 0% Agriculture, forestry, fishing Construction Hotels & catering Energy, water supply Extractions, metal mfg, chemicals Other manufacturing Distribution & repairs Transport & communication Financial services Metal goods Business services Other services

Share of tax

Share of gross profits

31 |

How much does UK retail pay in business rates?

National Non-Domestic Rates, otherwise known as Business Rates, are levied on properties used for commercial purposes. The retail sector accounted for around 25% of total rateable values in 2005 and 2010, but over a similar period (2005-06 to 2007-08) the sector contributed 28% of actual rates paid, so the sector pays more than its fair share of Business Rates.

Figure 34: Retail national non-domestic rates (NNDR) paid Source: Oxford Economics/CLG

20 18 16 14 12 BN 10 8 6 4 2 0 2005-06 2006-07 2007-08 2008-09 2009-10

Non-retail NNDR

Retail NNDR

How much tax does the UK retail sector pay?

We estimate that the retail sector contributed between 6.5% to 7% of the total tax yield in 2008-09, based on the five main taxes considered above. Retailers also bear a substantial cost in terms of fuel duty and motoring related taxes, both directly and through contracting to external logistics firms. However, published records do not allow quantification.

UK Retail: Leading Globally, Serving Locally | 32

WHAT IS THE CHANGING SHAPE OF RETAIL?

Figure 35: Growth in retail sales, by location, 2000-2009 Source: Oxford Institute of Retail Management, Verdict, 2011

20%

15%

10% % CHANGE (YOY)

5%

0%

-5% 2001 2002 2003 2004 2005 2006 2007 2008 2009
2009

Out of town sales Neighbourhood sales Non store sales

Town centre sales Total sales

NUMBER OF ENTERPRISES

Figure 36: Births and deaths of retail enterprises, 2004-2009 Source: ONS, 2011

30,000 29,000 28,000 27,000 26,000 25,000 24,000 23,000 22,000 21,000 20,000 2004 2005 2006 2007 2008

Births

Deaths

33 |

06
As shopping habits change, town and city centre retailing needs to adapt to meet ever strengthening competition from other channels and locations. these challenges are separate from, but magnied by, the current economic downturn. Successful retail locations combine small and large retailers, with the most successful smaller rms a critical source of innovation and future growth. Historically retail births and deaths have been roughly equal, at around 23,000 in 2007. Births subsequently declined to 21,000 in 2009, with possible implications for future innovation. Constant innovation and adaptation to changing customer demands means that there will always be winners and losers.

What are the challenges facing high streets?

The geography of UK retail is changing. The growth of large-scale formats in edge and out-of-town locations over the past 30 years has been accompanied, more recently, by a rapid expansion in non-store retail sales. While total sales were growing, the impact on retailers bottom lines was largely concealed. However, as overall sales have fallen since the start of the recession in 2008, the locational impact has become more apparent. In particular, the long-term decline in the proportion of sales going through town centres has accelerated.

17%

17%

17%

17%

17%

17%

Figure 37: Retail sales mix, by location, 2000-2009 Source: Verdict, 2011

100% 90% 80% 70%

5%

5%

6%

6%

6%

6%

7% 17%

7% 16%

8% 16%

9% 16% 2009 31% 43%

48%

47%

46%

46%

60% 48% 50% 40% 30% 49% 48%

45%

31%

31%

31%

10% 0%

2000

28%

2001

29%

2002

29%

2003

30%

2004

30%

2005

2006

2007

Out of town

Town centre

Neighbourhood

Non-store retail

At the same time, sales through out-of-town locations have continued to grow, albeit at a slower rate than at the beginning of the decade, as customers enjoy benefits such as easy access by car and the convenience of key retail brands situated in the same location. Shopping patterns have changed. The average number of shopping trips per person fell by 18% between 1995 and 2009. Before sharp increases in fuel costs, the trend was to longer, less frequent car trips that had replaced more frequent shopping trips on foot. More recent data suggest this may be reversing, at least temporarily.
UK Retail: Leading Globally, Serving Locally | 34

2008

31%

20%

45%

Neighbourhood shopping has seen a slow, but relatively consistent, rate of decline in sales growth over the last decade. It is here, as well as town centres, that most small and independent retailers are located. To continue to trade successfully these locations need to offer comparable levels of access and convenience. In terms of turnover, the average size of UK retail firms nearly doubled between 1996 and 2009, a transformation mirrored in every developed economy and increasingly a feature of many emerging markets. Larger firms have economic advantages in terms of reach, buying power, supply chains and marketing. But successful small retail firms are a seedbed for innovation and are often more agile in delivering tailored choice and personalised service. A healthy retail economy benefits from the co-existence of both large and small firms. Town centres are not simply retail locations. Their importance to their local communities rests on the broader range of activities which take place there.

Are town centres different?

Town centres with property designed to meet Victorian or older needs may not be able to adjust to all modern requirements. The long-term diversion of trade is not so much from town centres to out-of-town as from old shopping stock to new, and from small space to big, irrespective of location. Retailers want to trade from efficient premises with access to the largest shopping populations. Developers build in low risk, high yield locations. And shoppers want more choice, better value for money and easier access. Retails role will continue to change. About half of the population shopped in the 90 largest trading locations in 2009; compared to over 200 locations in 1971. Smaller towns have fallen behind as town centre redevelopment schemes and satellite out-of-town centres have focussed on areas of high population. Irrespective of where they are, high quality, well managed shopping locations continue to attract footfall and maintain high levels of profitable retail. For example, between January and May 2011, Land Securities reduced the vacancy rate in its shopping centre portfolio from 4.5% to 4.1%. Similarly, Anglo-French shopping centre developer Hammerson reported little impact from the recent rise in UK retail administrations. Falling demand and cost pressures have had disproportionate effects on smaller businesses. Between 21,000 and 28,000 retail enterprises were born each year from 2004-2009, but that number has fallen since. The number of deaths of UK retail firms exceeded births in 2009 (25,500). More recent unofficial data suggests the closure rate of retail firms has increased in the last two years. The survival rate of new retail firms is constant: with two-thirds remaining in business at the end of year 3 but only around half at the end of year 4.

35 |

% OF SURVIVAL FROM BIRTH IN 2004 TO 2008

Figure 38: Percent survival rates of newly-born retail enterprises, 2004-2008 Source: ONS, 2011

100%

90%

80%

70%

60%

50%

40% Births Year 1 Year 2 Year 3 Year 4 Year 5

2004

2005

2006

2007

2008

What does the future hold?

The outlook for all kinds of retail locations is very uncertain. The downturn has exposed struggling trading locations as well as retail categories such as furniture and jewellery shops which are always disproportionately affected by a recession. However, supermarkets have continued to expand with 41 million square feet of new developments in the pipeline at the end of the first quarter of 2011. When definitive action is taken, improvements are possible. The BRCs 21st Century High Streets report makes clear that wider adoption of best practice can ensure that town centres have a successful future. This includes creating a unique sense of place, an attractive public realm, planning and working with partners in developing accessible, safe and secure locations in the context of supportive regulatory and fiscal regimes. These are not quick fix solutions but longer term strategies, which must be shaped to individual circumstances. A clear strategic view must be taken of each local high street within its broader catchment. Out-of-town strategies will also need to evolve to meet changing customer demands. Retail warehouses are currently delivering an above average return to investors, but shifts to other channels could alter the dynamics in these locations. There has already been substantial differentiation of centres according to their offer and target audiences. This has, for example, led to the emergence of outlet centres and fashion parks. Small and independent high street and neighbourhood retailers still have the advantage where convenience is the main consideration. Time constrained customers are willing to pay a higher price for less stress and ease of access. Whatever their location or size, it is clear customers expect retailers to contribute positively to their communities. As well as delivering services and providing jobs, successful retailers contribute to social and environmental projects, which deliver tangible benefits to the people living in their localities. This expectation is only likely to increase as government looks to redefine the relative roles of private, public and other bodies.

UK Retail: Leading Globally, Serving Locally | 36

WHAT IS THE IMPACT OF MULTICHANNEL RETAILING?

Figure 39: Estimated internet retail sales per capita, selected countries, 2010 Source: Oxford Institute of Retail Management, Verdict, 2011

China Italy Canada Spain Belgium Germany Nertherlands Switzerland Japan Sweden France South Korea USA Denmark United Kingdom 0

6 36 50 52 123 155 157 185 191 192 202 216 222 291 378

50

100

150

200

250

300

350

Figure 40: Smartphone adoption and use of smartphone shopping apps, by age and socioeconomic group, 2011 Source: Ofcom, 2011

60% 50%
50%

40% 30%

42%

32% 29% 25% 26% 20%

20% 10% 0%

24% 18% 19% 18%

16%

7%

16-24

25-34

35-44

55+

ABC1 C2DE

AB

C1

C2

DE

Smartphone

Shopping app

37 |

400

07
Total non-store retail sales were 30.3 billion in the UK in 2010, of which internet sales comprised 23.4 billion. With an estimated 11% of global internet retail sales, the UK was the number three market, equivalent to germany and France combined. Consumer power has been enhanced by internet retailing, which enables ready access to greater information, price comparisons and other consumers recommendations. New mobile platforms, including smartphones and tablets, are being adopted by consumers and are leading retail into new territory. A substantial minority, 41%, of UK households reported never using the internet for shopping in 2010 and traditional channels remain important to these consumers.

What is the extent of multichannel retailing in the UK?

The internet is transforming economies and societies, and UK retailers are at the forefront of this change. Sales growth via non-store channels is increasingly important to traditional retailers, so understanding the implications of multichannel retailing has become vital. In 2010, total non-store retail sales in the UK were estimated at 30.3bn, of which internet sales comprised 23.4bn. By the beginning of 2011, the internet was responsible for nearly 10% of all retail sales, up from 6% in 2009. A quarter of the UKs most popular websites are online retail sites. More than 80% of the UKs internet users visited at least one of the UKs top 200 retail sites in August 2010. Ofcoms consumer research in April 2011 suggested that 72% of adults used their broadband connection for purchasing goods and services, making it the third most popular online activity after emailing and web browsing.

RETIAL SALES (INTERNET) (M PER WEEK, CURRENT PRICES)

Source : Oxford Economics/ONS

700 650 600 550 500 450 400 350 300 250 200 jun-09 aug-09 oct-09 dec-09 feb-10 apr-10 jun-10 aug-10 oct-10 dec-10 feb-11

11 10 9 8 7 6 5 4

Total internet retail sales (LHS) Internet retail sales as % of total retail sales (RHS)

UK Retail: Leading Globally, Serving Locally | 38

RETIAL SALES (INTERNET) AS % OF TOTAL RETAIL SALES

Figure 41: Internet retailing sales and penetration, 2009-2011

Multichannel retailing is more than simply offering store and internet sales; it includes sales from catalogues, vending machines, mail order and TV shopping. While 53% of all shoppers bought over the internet in 2008, between a fifth and a quarter used catalogues or mail order and 9% used TV shopping.

Source: Verdict Research, 2009

% OF RESPONDENTS

Figure 42: Use of remote shopping channels, by age group, 2008

80 70 60 50 40 30 20 10 0 all Internet 15-24 25-34 Catalogue 35-44 Mail order 45-54 55+

TV shopping channel

As new technologies and software have become more widely available, internet sales have come from a broader range of channels. At the beginning of 2011, 27% of UK adults were smartphone users, 18% of whom reported having used their phones to make a purchase. The ownership of tablets more than doubled, from 2% to 5% of UK households, in the six months to March 2011. The proportion of users making purchases using this new technology also doubled to 38%. Although retail apps account for fewer than 0.5% of the total, Apple reported that three out of its top 25 apps were from retailers. The UK mobile commerce (m-commerce) market in 2010, was estimated to be worth 561m (2.4% of all online spending). This is expected to double in 2011. Click-and-collect purchasing is becoming increasingly popular and is expected to increase from a fifth to a third of non-food retail purchases by 2020.

39 |

How does the UK compare to other markets?

Figure 43: Western European non-store retail sales estimates, 2010 Source: Euromonitor, 2011

Direct selling 11% Home shopping 21% Internet retailing 58% Vending 10%

Internet sales account for the majority of non-store retail sales across Western Europe, with global non-store retail sales via the internet estimated at 206bn for 2010. The UK generates approximately 11% of total global sales, making it the number three market in terms of size, equivalent to Germany and France combined.

Figure 44: Estimated non-store retail sales via the internet worldwide, ( mn), 2011 Source: Euromonitor/ Passport GMID, 2011

USA 82,969 Japan 28,467 United Kingdom 27,495 Germany 14,967 France 14,910 South Korea 12,862 China 8,881 Netherlands 3,075 Spain 2,770 Italy 2,563 Sweden 2,099 Canada 1,999 Denmark 1,884 Switzerland 1,654 Belgium 1,554 Rest of the world 31,163
UK Retail: Leading Globally, Serving Locally | 40

UK per capita internet sales were also the highest in Europe last year, at 374 per annum. Pre-disposing factors include: fewer, larger retailers; cheaper and ubiquitous broadband; more reliable and cost-effective delivery; and increased confidence in online security. As UK consumers have grown increasingly confident they have become habitual online shoppers. The reasons for shopping online are changing. In 2010, 14% of online shoppers bought goods on a weekly basis, compared to 4% in 2007, and price is no longer the sole motivation. The convenience of 24/7 shopping, the ease of comparing products and prices, and ready access compared to visiting the shops are all cited as increasing in importance since 2007.

2010 RESPONDENTS (% OF ONLINE SHOPPERS)

Figure 45: Factors attracting consumers to online shopping, 20072010 Source: PWC, 2011

80 70 60 50 40 30 20 20 30
Easier than visiting shops Increased in importance since 2007 Decreased in importance since 2007

I can shop whenever I want Easier to compare products and offers Lower price / Better offers

Easy home delivery Buy products cant buy elsewhere

Quicker than visiting shops

Better variety of products Easier to find my favourite brands

40

50

60

70

80

2007 RESPONDENTS (% OF ONLINE SHOPPERS)

From a retail perspective, strategic innovation by large UK companies, the attractiveness of the UK to purely online US businesses, and innovative online start-ups, have broadened and strengthened the offer. The dramatic growth of internet sales is dwarfed by its indirect effects in influencing offline sales. These range from developing interest to product evaluations and price comparisons, reinforced by customer recommendations. Around 1 in 7 internet users in the UK visited price comparison sites in April 2011 and 15 million used voucher or reward sites. Stores can, conversely, play a key role in influencing online purchasing. Around a fifth of all internet transactions in the UK involve some in-store research. The growing use of mobile product scanning apps also means that stores themselves enable online price comparisons. Shoppers are consequently better informed than ever and, to be successful, retailers need to meet and exceed growing expectations.

41 |

What is the extent of the digital divide in the UK?

A significant minority, 41% of UK households, report never using the internet for shopping. They do not see a need, prefer in-store shopping or have concerns about payment security and privacy. This reflects differences in familiarity and engagement with the digital world. While 73% of UK households had internet services in 2010, these were largely younger and more affluent homes. Over 65s were half as likely as 16-24 year-olds to be online and only 30% of the lowest income households had internet access. Daily access to computers, smartphones and other devices also reflects similar social trends as does willingness to buy online. This is gradually changing over time.

% UK HOUSEHOLDS

80%

73%

54%

Source: BRC, ONS Family Spending, 2005-10

50% 40%
30% 35%

60%

10% 0%

Lowest ten percent

17%

Second decile

19%

20%

29%

30%

42%

Fifth decile

47%

Sixth decile

65%

60%

Seventh decile

71%

70%

Eighth decile

78%

Figure 46: Penetration of internet access, by income decile, 2005-2010

100%
97% 95%

Fourth decile

Ninth decile

Third decile

83%

80%

89%

2005-6

2009-10

ADULTS USING DEVICE PER DAY (%)

Figure 47: Daily reach of devices, UK, 2010 Source: BRC, Ofcom Technology Tracker, 2011

90% 80% 70%

34% 79% 80%

60% 50%

12%

10% 0% Computer Mobile phone

25%

20%

32%

30%

42%

40%

60%

Handheld devices

Adults 16+

Adults 16-24

Adults 55+

UK Retail: Leading Globally, Serving Locally | 42

5%

Highest ten percent

93%

90%

97%

PERCENTAGE OF UK ADULTS

Figure 48: UK adults who purchased over the Internet, by age, 20082010 Source: BRC, ONS Internet Access, 2010

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 16-24 24-44 2008 2009 45-54 2010 55-64 Internet access 65+

The newer digital technologies smartphones and tablets attract users from broader social backgrounds. With 26.5 million users in the UK, product endorsements on social media play an increasingly important role. 16-24 year olds spend up to an hour a day on social media, whereas over 55s spend only 6 minutes on average. However, lower socio-economic groups are extensive users of social networking.

MINUTES PER DAY ACCESSING SOCIAL NETWORKS

Figure 49: Daily usage of social media, by age and socio-economic group, 2010 Source: OXIRM, Ofcom Technology Tracker, 2011

50 45 40 35 30 25 20 15 10 5 0 all 16+ 16-24 25-44 3 20 12 11 1 45-54 0 6 10 24 31 47

55+

ABC1

C2DE

Mobile

Computer

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What is the impact of multichannel retailing on the sector?

Changes in buying and researching have consequences for retail business models. Online customers shop more frequently, often with a smaller basket size, focussing on fewer retailers. This is partly for reasons of convenience, partly for reasons of trust. Most online shoppers, 60%, have between two and five favoured retailers, based on a trusted brand and a broad product range. Over half of online shoppers reported spending more with their favourite brand as a result. Multichannel retailing has changed customers expectations, including when visiting stores. Innovative retailers are responding with new store layouts, in-store services, downsizing or closing stores, or redeploying staff across their multichannel operation. As customers choose to research and purchase goods in varying combinations of location and channel, retail operations need to flex and respond accordingly. Multichannel offers shoppers greater choice and transparency between discount and high service retail, which sets new challenges for the sector. Multichannel retailing requires a new set of skills and competences. Although it may be possible to transfer learning between channels, there can be significant cultural barriers at Board, as well as shop floor level. Research for Skillsmart Retail in 2011 commented: One of the perceived barriers to the acquisition and utilisation of employees with technical skills was seen by some retailers to be the lack of technical literacy at senior management level. They have secretaries and drivers; they dont even know how to use Google Maps said one respondent. Such managers are often digital immigrants who have come late to ICT; or are simply cocooned from it by their support systems. It makes it difficult for such managers to see the opportunity and potential both in new hires of digital natives, embedded in IT and with often superior skills, and the growing capability of the customer base. (OXIRM, 2011)

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ABOUT THE BRC

The British Retail Consortium (BRC) is the lead trade association for the retail sector and the authoritative voice of the industry to policy makers and the media. We campaign to promote and defend retailers interests, and advise retailers of threats and opportunities to their business. We also look to improve the perceptions of retailing in the UK. Retail is one of the UKs success stories, but currently faces a challenging trading and regulatory environment. The BRCs aim is to bring about policy and regulatory changes that will ensure retailers can maintain their outstanding record on job creation, consumer choice and product innovation.

ABOUT OXFORD ECONOMICS

Oxford Economics - formerly Oxford Economic Forecasting - was founded in 1981 to provide independent forecasting and analysis tailored to the needs of economists and planners in government and business. It is now one of the worlds leading providers of economic analysis, advice and models, with over 300 clients.

ABOUT THE OXFORD INSTITUTE OF RETAIL MANAGEMENT

The Oxford Institute of Retail Management (OXIRM) was established within the University of Oxford in 1985, to relate sound scholarship to the practical needs of retail and consumer service companies. It is now based at the Said Business School. In this bridging role for the past 25 years, OXIRM has created and contributed to an active applied, interdisciplinary research programme, teaching on degree and executive education programmes, a series of revenue-generating research workshops as well as being engaged in active networking through its Oxford Retail Futures Group, and its publishing of The Retail Digest, a quarterly journal. British Retail Consortium. The information contained in this publication is for general guidance and information only. You should neither act, nor refrain from action, on the basis of any such information. Whilst the BRC endeavours to ensure that the information in this publication is accurate, the BRC shall not be liable for any damages (including without limitation, damages for loss of business or loss of profits) arising in contract, tort or otherwise from this publication or any information contained in it, or from any action or decision taken as a result of reading this publication or any such information. Concept/Design: Tapestry Photograph: Google, Shutterstock.com and Jenny Solomon / Shutterstock.com, joyfull / Shutterstock.com Credits: The BRC would like to thank the following people for their work in the production of this document: Brendon Hunt, Jane Bevis, Richard Lim, Siobhan Bentley, Tom Ironside. Printed: May 2012

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For further information please contact: British Retail Consortium, 21 Dartmouth Street, Westminster, London, SW1H 9BP 020 7854 8900 info@brc.org.uk

www.brc.org.uk