2016: An annus horribilis for consumer?

The end of the calendar year is always a good time to reflect – and I don’t think that any of us could have predicted just what an unpredictable year 2016 would be.

When looking back over the past year and talking to many CEOs and chairmen from across our sectors, the mood is not great – and indeed, I think that 2016 has certainly been an annus horribilis for many leaders across consumer-facing industries.

On the surface, this is understandable – others, far more knowledgeable than I, have written extensively on growing popular disquiet and unrest around the world – not least the impact of Brexit and the American presidential election. However, at this time, consumer confidence remains strong (or at least as strong as can be expected): spending grew 3.2% year-on-year during November (with online spending growing by 12.5% over the same period), the FTSE has regained much of its losses, and the economy is on the rise.

So why the air of pessimism? We are hearing four main factors:

Firstly, any multi-site operator in retail and leisure is being hit with a double whammy of increased taxation and potential Brexit related fall-outs.

Without a doubt, payroll costs are set to grow. The National Living Wage will increase to £7.50 per hour (with no regional distinction) and the Apprenticeship Levy will be set at 0.5% of a company’s payroll above £3m beginning in April. Additionally, with so many of the existing retail and leisure workforce coming from within the EU, it is highly likely that employers will need to start to pay additional premiums to ensure they are fully staffed.

Furthermore, in March, the chancellor announced that the business rate would increase in April 2017, bringing last year’s national total of £27.8bn up by £2.3bn over the next five years, with the retail industry paying an average of £465.8m more annually. The business rate disproportionately affects physical retail and leisure businesses and is likely to play a key role in determining the future of brick-and-mortar retail, which has been wrestling for years already as consumers increase their spend online and decrease their spend on the high street. Talking with one CEO earlier this week, he described how a single London store, currently making a £1m annual profit contribution, will see profit fall to £300k by end of 2018 as a result of payroll impacts and increased rates. Ironically, this increased pressure on bottom line within retail and leisure is good for executive search – we have seen an increase in transformation director and productivity director roles as companies seek to reduce costs, and pricing and revenue management directors as they seek to optimise pricing, passing costs onto the consumer.

Amsterdam and Rotterdam may see FMCG companies relocating their EMEA headquarters

Secondly, and perhaps most importantly, many analysts and CEOs point to a possible fall in consumer confidence in the new year. As Rooney Anand, CEO of Greene King, observed in his recent results presentation: “The full impact of the UK decision to leave the EU remains unclear. Looking ahead, increasing levels of consumer uncertainty, further cost pressures and the changing dynamics of eating out, mean the consumer environment is likely to become more challenging… We’re a ‘tell it like it is’ company and we’re very close to our customers. What they’re saying is that there’s a degree of uncertainty after the events of the last year which could impact their spending behaviour.”

Thirdly, within the consumer goods and digital sectors, many companies are starting to question whether the UK is a logical home for their EMEA headquarters. Whilst large FMCG companies haven’t as yet made any decisions to relocate, indecision on investment (and indeed hiring decisions) is certainly there. Other European cities – notably Amsterdam and Rotterdam – are in line to benefit.

Finally, within the consumer and retail sectors, exchange rate fluctuations have led to a significant increase in cost of goods. As illustrated by the ‘Marmitegate affair’ between Tesco and Unilever, players across the spectrum – particularly those with a significant supply base outside of the UK – are seeking to pass costs along to the value chain to retailers, and then end consumers. Between September and October, input costs rose by 4.6%, representing the biggest monthly rise since 1996, and manufacturers – both local and international – selling in the UK will need to review pricing structures.

So now, on the cusp of 2017, what will happen next? Is it all doom and gloom? Without a doubt, the next year will be challenging in many ways. However, we’ve also seen a number of promising developments as companies have expanded their UK operations. Among these, McDonald’s has announced that it will move its non-US tax base to the UK, and car companies such as Jaguar Land Rover are investing in their existing sites in the country.

Additionally, the UK’s digital sector continues to go from strength to strength (and is obviously, disproportionately less affected by the business rate increase). At the end of November, Facebook announced that it would increase its UK workforce by 50% with the addition of 500 employees, and just a few weeks before that, Google unveiled plans to build new headquarters at King’s Cross, creating 3,000 jobs.

Pureplay companies such as Facebook and Google are investing significantly in London

UK manufacturers and retailers are also in part benefitting from the reduction in the value of the pound. With the sterling down, visitors from other countries are arriving in waves – and spending significantly in UK retail, tourism and hospitality. At the same time, the currency fluctuations have been good for exports, the value of which rose by £2.1bn in October alone, the highest level since records began in 1997. Likewise, within leisure we expect a number of consumers to choose to vacation at home – which undoubtedly will benefit UK focused hospitality companies such as Bourne Leisure, Centre Parks and Whitbread.

On the whole, challenging times can create positive changes as CEOs respond to the new landscape. We at MBS are privileged to speak with many CEOs each week, and time and time again over the past year we have heard the same messages:

  • Customers are being put right back at the heart of decision-making;
  • Heritage, ethics and corporate social responsibility are becoming more firmly embedded in decision-making as companies seek to restore trust amongst consumers;
  • Decision-making is becoming more efficient and more data-driven;
  • Technology is being deployed throughout businesses – reducing cost and improving customer experiences.

These changes won’t be easy – however, we are privileged that our sector continues to be led by some of the greats who have a vision for the future – and the drive and determination to take us there.

Wishing you all a very Merry Christmas – and a very happy and prosperous 2017!

Elliott@thembsgroup.co.uk | @TheMBSGroup