Legacy Portfolio blog

dream of a living wage
15.07.2015

The Economics Are Changing

Here at Legacy Retail, we have long predicted that it was only a matter of time before the economic reality would catch up with the fact that there is still a 25% overcapacity in the retail sector.

We have always maintained that the eventual winners in the retail sector will be those that act now to dispose of underperforming retail sites rather than wait until it is too late and the market becomes flooded with surplus property.

With this in mind, two very important events occurred last week.

The first was that, the Chancellor announced in the budget that the minimum wage of £6.50 per hour would, by 2020, be replaced by a living wage of £9 per hour. A near 40% increase. Of course, different retailers will be affected by this new policy, to differing degrees and it is hard to get an overall picture. However, pretty much all retailers will have some staff on the minimum wage in store, not forgetting those in the warehouse, (particularly where automation is relatively low) and security staff, cleaners and so on.

According to our initial analysis it seems that this development will on average depress net margins by at least 2-3%. If one translates this into the number of stores it would push from marginal to loss making, we then see that, of the 25% we cited above we calculate that would account for some 10%. For those of you who are interested, please get in touch and we would be more than happy to take you through our analysis.

The second important event was that, both Tesco and John Lewis have announced they will be charging for both ‘Click and Collect’ and possibly home delivery, where they currently do not. We are sure that others will follow. The economics of Click and Collect don’t make sense. The view that by forcing people in store to collect goods ordered online will mean they purchase other goods is not a correct one. The real reason they Click and Collect is based in convenience or because the retailer doesn’t stock the goods in store. It tends to be a very specific purchase.

So what do these developments mean for retail space?

It seems obvious that if a customer has to pay for Click and Collect then they may as well get that item delivered to their home. Furthermore, if you are having an item delivered that is when you are likely to make that multiple purchase.  It means not only do retailers need space for Click and Collect, they now don’t need it for other goods. Yet again it pushes marginally profitable stores into the realm of the ‘loss makers’.

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About the author

Barry Knight

Barry Knight

A retail veteran blogging about the latest retail trends.

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