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The Retail Cash Crunch: The Impact of COVID-19 on Major Non-Food UK Retailers


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The world is facing an extraordinary crisis. The COVID 19 pandemic has sent shockwaves throughout global communities, dislocated international supply chains and triggered steep selloffs in financial markets. It has already become clear that the high street will take  on a very different form once the pandemic is over.

Weaker players will unfortunately cease to exist, leaving behind a smaller but more resilient  sector that have acted fast. In the Office for Budget Responsibility’s (OBR) coronavirus analysis, they assume a three month lockdown due to public health followed by another three month period when they are partially lifted. Against this backdrop, real GDP falls 35 per cent in the second quarter but bounces back quickly. Unemployment rises by more than 2 million to 10 per cent in the second quarter, but then declines more slowly than GDP recovers.

However, at present, an accurate assessment of the duration and trajectory of the virus is difficult to  determine. Coordinated action from global policymakers and central banks has been swift. The UK Government has taken unprecedented action to support businesses and protect jobs, while the Bank of England has cut interest rates to new record lows. The result is a flood of cheap credit, quantitative easing, liquidity injections, loan guarantees, cash hand outs, tax breaks and generous employment subsidies which will cushion the blow to a certain extent.

The trauma will be acute for retailers, despite an unprecedented government support package. Retail Economics estimate that non food retailers could see a decline in sales of c.17% over 2020 equating to over £37 billion of lost revenue. 

Government aid has provided significant support for retailers to manage cash flow. A 12 month business rates holiday and the Job Retention Scheme are particularly significant for the retail sector, given these two components comprise a large proportion of operating costs. Further concessions including the option to defer Value Added Tax (VAT), the Coronavirus Business Interruption Loan Scheme, the COVID-19 Corporate Financing Facility and protection from eviction for commercial tenants will undoubtedly help those under intense pressure. 

These support measures, in combination with lending facilities offered by banks, will be a lifeline for retailers of all sizes and across all channels which are pivoting towards a focus on cash and rightsizing their operations. With these measures in place, our scenario analysis suggests that near term liquidity over an initial three month lockdown period looks manageable for most large retailers. But working capital demands would intensify from June and beyond.

However, should a lockdown persist beyond June, and without further government intervention, large parts of the sector would come under  intense pressure, with many retailers falling into administration by September as cash reserves and credit facilities become exhausted... [download full report to read more]

The impact on retail sales and consumer behaviour

The COVID-19 pandemic has already fundamentally altered consumer behaviour. Lockdowns, social distancing and other restrictions are forcing many households to jostle parental and home schooling responsibilities while working from home. The closure of gyms, cancellation of sporting events and social distancing is challenging how people spend their time, re ordering priorities and altering routines.

The sudden shock to everyday life has forcibly introduced new shopping behaviours, but the impact will be felt unevenly across retail sub sectors. The closure of non essential retail stores has necessitated a shift towards online, forcing many consumers to engage new  customer journeys.

The initial shift towards online shopping will fail to offset the overall decline in demand. Non food retailing is expected to fall by 16.7% in 2020 as most stores remain affected until June 2020 and demand is undermined by weak consumer confidence and elevated levels of unemployment. Elsewhere, food retailers will benefit from increased volumes as almost all meals are now consumed in the home. The transfer of spending from the closure of restaurants, bars, cafes and pubs will flood the grocery sector with increased demand across both foods and alcoholic beverages... [download full report to read more]

The impact assessment for UK non food retail

The impact of COVID-19 has caused a mandated lockdown of around 70% of non food retailing in the U.K. The initial period of store closures will last for three weeks before it is subject to review. However, it is widely expected to be extended. Retail shops allowed to remain open include:

  • Supermarkets and other food shops
  • Health shops, pharmacies including non dispensing pharmacies
  • Petrol stations, bicycle shops, home and hardware shops
  • Laundrettes and dry cleaners 
  • Bicycle shops, garages, car rentals, pet shops
  • Corner shops, newsagents, post offices, and banks

Even retailers allowed to remain open have faced significant challenges. Enforcing social distancing measures in the workplace has created a 
significant issue. Food retailers are limiting the number of shoppers into their stores at any one time while also providing staff with Personal 
Protective Equipment (PPE). Clear protective screens have also been installed at checkouts to further safeguard staff at retailers such as Aldi, 
Morrisons, Iceland and Sainsbury’s. 

Elsewhere, other retailers have been caught in a difficult middle ground; technically allowed to open under Government guidelines but finding significant operational challenges when servicing customers effectively. For example, hardware stores are unaffected by the lockdown, but B&Q stores are closed, only allowing online ordering for home delivery, but also servicing click and collect in carparks with a contact free service... [download full report to read more]

How long can retailers survive in the current status quo assuming a 70% reduction in sales?

This scenario addresses the question of how long non food retailers can survive the current status quo assuming an on going lockdown of  stores for the foreseeable future without access to further capital. 

Assumptions are based on the likely hit to revenue from store closures as of 3 March, the wider impact on consumer spending and Retail Economics’ retail sales and consumer panel data. As a result, it is expected that non food sales are likely to fall in the region of 70% during the period of lockdown. 

Empirical judgements are also included in the methodology regarding how much operating expenses, investment, and cash returns to shareholders would decline as a result of falling sales and inclusion of Government measures to support businesses. Revolving credit facilities are also factored for, together with a lagged decline in the cost of goods sold and other carefully considered assumptions (e.g. retailers will try to reduce labour costs by 50% through furloughed employees; and essential retailers will continue to see sales hold up better than retailers whose stores have been forced to close)... [download full report to read more]

Whats next for the industry?

Government measures to support businesses will be a lifeline for retailers of all sizes and across all channels. Our scenario analysis suggests  that near term liquidity over an initial three month lockdown period looks manageable for most large retailers with government support in place.
Working capital demands intensify from June and beyond. 

By August, an ongoing lockdown would decimate large segments of the sector and see swathes of retailers fall into administration as cash reserves and credit facilities are exhausted without further government intervention. Distressed discounting would erode margins significantly as retailers desperately trade over the summer months. While the duration of the pandemic remains uncertain, being nimble, innovative and quick to react in a fast paced environment will be critical, as will offering something that is meaningful to the customer in this challenging time. This unprecedented environment has dictated fundamental changes to most retailers’ operating models.

Inditex, owners of Zara, have switched some of their supply chains to the production to clinical face masks and hospital gowns. Likewise,  Burberry has started the production of PPE equipment from its West Yorkshire factory and shared plans with the Government to dedicate its global supply chain to delivering more than 100,000 surgical masks to the NHS for use by medical staff. 

Boots is also supporting the Government to establish new ‘drive through’ testing stations that provide COVID 19 tests for frontline NHS staff. Along with Amazon, they are also planning to help in the distribution of antibody tests that people will be able to conduct themselves at home. 

Elsewhere, Brew Dog, Coty and Louis Vuitton have started to produce hand sanitiser. Dunelm and B&Q have introduced a carry to car option for online orders and has also scrapped signing on delivery to reduce the spread of the virus. Sweaty Betty has also introduced free online workouts. 

Strategic partnerships are also likely to emerge as mutually beneficial and collaborative arrangements are used to cut costs and leverage sales opportunities... [download full report to read more]

Download the full report to gain deeper insights into the cash crunch from the impact of COVID-19...

Download: The Retail Cash Crunch: The Impact of COVID-19 on Major Non-Food UK Retailers report

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