26 May 2024, 02:47
By Fiona Cincotta Apr 11, 2018

An uncertain outlook for bricks-and-mortar retail?

Concerns over the health of the retailers in the furniture and interiors industry have been growing for some time now. However, this winter has been particularly brutal for these bricks-and-mortar retailers, writes Fiona Cincotta. 

Back in January FTSE 250 Carpetright dropped -40% to its lowest level on record, after a profit warning, and this proved to be just the start of what was to come. Carpetright has continued to sink lower and lower as investors move out of the stock amid yet another profit warning last week. And it doesn’t end there – this week DFS have been the latest to fall victim to the harsh winds blowing through furniture retailers.

The Confederation of British Industry (CBI) reported this week that British retail sales fell sharply in March as difficult weather conditions and financial strains stopped consumers from spending. Meanwhile, the British Retail Consortium (BRC) reported that non-food sales fell by -1.1% in the three months to February, well below the 12-month average, highlighting the struggle consumers are facing.

Inflation, stemming from the Brexit referendum devaluation of the pound, has remained elevated at +3% for the past five months, eating into household budgets. This is pushing consumers to put more of their paycheque towards essential items, leaving less left over to spend on discretionary items, whilst also pushing large one-off items, such as furniture, even further down the list.

Add into the equation weak wage growth of just +2.5% and we can see that wages in real terms have been falling, creating a challenging climate for the consumer. Furthermore, Brexit uncertainties are weighing on consumer confidence and consumers are even less likely to invest in large one-off items under these conditions.

Data also shows that UK consumers are increasingly shunning the high street, and shopping online instead. Figures from Barclaycard also support this notion, with online spending on Barclaycard up +14.1% in December 2017, compared to the same month a year earlier. Meanwhile, in-store spending increased just +0.3% (the figures are not adjusted for inflation). This, in addition to falling footfall on the high streets, serves to highlight the extent of the online shopping revolution.

The shake-out of retailers in the furniture and interiors industry is expected to gain momentum in the near term as more retailers come under pressure from reduced consumer spending, increased costs and ongoing changes in consumer habits. Retailers with large physical stores such as furniture retailers are expected to come under particular pressure.

Looking further ahead, the outlook for the UK jobs market remains strong, and wages are expected to increase. Furthermore, inflation has started to show signs of easing, meaning things could slowly be on the up for the UK consumer. This can only be good news for furniture retailers, especially those retailers focusing on their online offering. However, Brexit remains a key uncertainty, and whilst consumer confidence remains low, large items such as furniture are expected to stay near the bottom of the list.

Longer term, whilst the squeeze on the consumer is set to be temporary and Brexit uncertainties will start to clear as trade deal talks progress, the changing habits of shoppers are a more permanent feature, and will inevitably keep a downward pressure on bricks-and-mortar furniture retailers going forwards.

Fiona Cincotta is a senior market analyst at www.cityindex.co.uk.

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