Rerating retail

Retail performance and the Business Rates spectre

First of all, a warm welcome to the many new readers of Moving Tribes who have joined over the last few weeks, it is lovely to have you on board. What you can expect is a more-or-less weekly dose of opinion on a topic relevant to consumer businesses. Sometimes those will be on broad topics of leadership and business governance and sometimes they will be observations on individual brands or on practical aspects of running a consumer-facing business. Over the 18 months or so that MT has existed you could have read pieces on topics as niche as lighting in stores or as strategic as the insight I offered into the days before a business goes into administration which made it into the national press.

Whatever the topic, my intention is to provoke thought and to give you something that might prompt a helpful discussion amongst your own team. I often find that readers choose to share posts with their close network and I’d love you to do the same. Feedback is also always welcome - some of the most interesting insights Moving Tribes has generated have been, it pains me to say, from reader comments rather than from me!

Today I wanted to weigh in on a debate which has resurfaced in the retail sector over the last few weeks - the impact of Business Rates and how a new government might make life for businesses better.

Business rates are a big topic because what started many years ago as a perfectly sensible way of levying a tax on business - based on the property it operates - has evolved over the decades into a deadweight tax with severely distorting effects:

• It is a tax you pay regardless of how you trade (unlike, say, corporation tax which is paid out of profits) and as such it greatly increases the risk of opening a new store - regular readers will remember my analysis of the economics of a single shop a few months ago which showed that business rates can, without the small business discount, be as much has half again on top of the rent bill.

• As business has evolved and the internet has grown as a channel, levying a tax on business via the property it operates from has become less and less a proxy for its economic activity - so giant internet retailers pay very little, whilst brick and mortar stores which employ millions of people and contribute to the life of our towns pay a lot - in fact the retail sector pays something like 20% of the overall Business Rates bill whilst representing 5% of the economy.

These distortions are made more significant by the fact that retail is a sector which operates on thin bottom-line margins, meaning that the impact of this kind of upfront levy on trading is particularly severe when times are tough.

Regular readers will remember that a few months ago I explored how different retail sectors were performing by taking a different look at the monthly ONS retail sales figures. Looking behind the figures I examined the non-seasonally adjusted figures (to remove the impact of the statistical voodoo of seasonal adjustment) and used year-over-year growth figures rather than the strange month-on-month ones that the ONS tends to quote in its press releases.

I’ve updated that data using the most recent release to the end of July, which gives us the most current snapshot of how different retail sectors are experiencing 2024. Let’s take a look:

As a reminder, the blue line here shows year over year growth in the value of retail sales (in this case for food retailing) whilst the orange line shows the change in the volume of what was sold. The difference between the two lines is therefore inflation in the sector (if value goes up more than volume it is because prices have risen). In this case, then, we can see that the food sector experienced very high inflation over 2023 but with very little actual volume growth. As inflation as dropped away, the sector is back to fairly sluggish growth of just a few percentage points - which in turn translates into company results where we see the sector winners delivering growth of 5-10% year over year whilst the laggards hardly grow at all or are even shrinking.

The equivalent graph for the other ‘half’ of retailing (non-food) shows a similar picture - inflation was never as high for these retailers, but in any case has gone, and growth in either volume or sales revenue is negligible.

As we explored in the previous post on this data, the sector picture within non-food varies a bit with DIY and home furnishing having a particularly tough time, the clothing sector also continuing to be in gentle decline whilst the electricals and telecoms sectors have had a better summer, perhaps driven by all that sport.

The macro picture is easy to see, however. Consumers are still reluctant to spend, scarred by the chaos of the last few years and no doubt cautious about the impact of a new government. In that environment, short term issues like the disruption caused by riots or the impact of unseasonal weather can really put a dent in a retailer’s results.

And all of that comes against continuing cost pressures - national living wage has just gone up nearly 10% and many retailers tell me that they are seeing significant freight cost inflation again driven by the conflicts in the Middle East.

The link, then, between that analysis of how the sector is performing and the debate about Business Rates is hopefully obvious. Levying a thumping great tax that is paid before a penny of revenue is generated on a low margin sector facing sluggish consumer demand and rising costs is a risky game. All the more so when you remember that retail as a sector employs 2.7m people in the UK and contributes over £110bn of economic value to the country.

There is no point just wishing Business Rates away, however - any cursory analysis of the UK economy would suggest that the government is in no position to start giving away tax revenues. So what can they consider doing instead to generate the same revenue but on a less economically damaging basis? Here are three ideas:

• Rebalance business rates by sector to levy more heavily on online retailers and others who generate a lot of economic activity without using much property - get the 20% paid by retailers down to a more sensible figure.

• Consider the case made by retailers and unions recently that cutting business rates is actually revenue enhancing over the medium term as it boosts activity.

• Shift the tax burden in the economy away from ‘deadweight’ taxes which are paid before any profit is made, and towards those taxes which are paid on trading success.

Whatever Rachel Reeves does, however, there is no question that as a sector retailers face a challenging time until the much-lauded return of decent economic growth and consumer spending. For most retailers I talk to, it has been a belt-tightening summer and it looks like the diet will continue for some time yet.