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Economy: Rough times ahead

10th Sep 2018
Partner An unnamed firm
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Debenhams
istock_JasonBatterham

Stock Exchanges around the world may be hitting new heights on an almost daily basis but empirical evidence from the high street suggests to me that all is not quite as rosy as those records would imply.

Sometimes, it seems as if a major household name is going out of business or making arrangements with creditors each and every day.

Yesterday, it was Debenhams who hit the headlines, following House of Fraser, Maplin's and a stream of other high profile casualties over the last few months.

Older readers may wish to remind us that this kind of thing has been going on for generations, citing the likes of Woolworths and C&A. While that is correct, this current spate of doom and gloom seem set to become a long-term phenomenon.

Indeed, I begin to worry far more when a company like Wonga can't manage to continue, despite charging interest rates that were truly obscene. At some point, it would be good to get an inside track as to the factors that went wrong at what sounded like a business with a licence to print money. Mind you, Lloyd's of London has had its own problems over the years starting from a similarly solid, if rather more reputable, base.

I am no economist and therefore struggle to square the health of the markets with the sickness of the high street. Perhaps this is because retail no longer matters to any significant degree. That could well be the case, since these days, it does seem that service industries including accountancy are where the big money can be made most easily.

Even so, with the property market especially in London beginning to tail off and that old chestnut uncertainty rearing its ugly head, it does seem time for us all to worry. Business confidence is clearly at low ebb if no other reason than concern that our government seems far more interested in internecine strife than running the country and its finances, pinning all of its strategic thinking on a post-Europe dividend that currently appears to be based on little more than hope or prayer.

With so many major businesses going down the pan or struggling to make ends meet, there must soon be a knock-on effect which is likely to impact upon us all. While most readers will probably not have worked to any significant degree for even one of the names identified above or, indeed, other major businesses that are in the process of failing, there will inevitably be suppliers, servicers and the like who could struggle with whom we do have vital relationships.

I would love to be able to express total optimism about what is going to happen to the economy and therefore to the profession over the next decade or even just one year but at the moment the economic indicators that I see and try to understand are a source of serious worry, while yet another U-turn by the Chancellor, in this case with regard to NIC for the self-employed suggests that he has little more faith in his own business than I do.

As so often, I would love to be proved wrong and discover that the accountancy market thrives on the back of a stable and flourishing UK and global economy throughout the 2020s but somehow, I doubt it.

Replies (13)

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By Vaughan Blake1
10th Sep 2018 12:06

To me department stores looked dated when they were parodied in 'Are you being served' the 1970's comedy.

Firstly they offered limited choice as they tried to be all things to all people. This was not such an issue for the shoppers in post war Britain who caught the bus into the city centre to shop, but for baby boomers it became more of an issue.

The first problem High Street stores faced were the out of town retail parks. Specialist shops, supermarkets, greater choice, easy parking and you no longer had to take your new ironing board home on the bus!

The second problem is of course the interweb. Now you have an almost infinite choice delivered next day to your door. My economics training taught me that to have a 'perfect market' purchasers need a full knowledge of all the available options, now we have this at our fingertips, removing the need to traipse round endless shops.

It doesn't necessary need an economic slump, businesses can fail in boom periods if they are badly run or not selling the right products in the right way. Maplins is the perfect example of how not to structure a takeover (buy at a hugely inflated price with loan capital mostly paying interest at 16.5%).

High Street rents and rates are also an enormous challenge to businesses, especially when you can sell on the interweb from a scruffy unit on the local trading estate.

Sorry Debenhams et all, the truth is department stores belong to times past. "You all did very well", but now it is time to move on.

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Replying to Vaughan Blake1:
Hallerud at Easter
By DJKL
10th Sep 2018 11:24

I agree, the sorts of stores being hit are the old and dated and those whose offering is being overtaken by online delivery of the same product, whether delivered or streamed.

I expect in the right location conversions to occur , e.g. H of F at Edinburgh West End would make great bar/restaurant with serviced accommodation above

Imho the next big area of attack will be groceries, I expect far more sustained attacks on the traditional trolley parks, the Amazons of this world will plough billions into entering the delivery marketplace in a big way and there is accordingly likely to be an overprovision of supermarkets in 10-15 years as a result.

The supermarkets do not help, with self scanning becoming the norm one really has to ask what service experience do they offer that is in any way better than online shopping; walk in, push trolley, self scan, leave- why waste 1.5 hours of one's day when you can set up a weekly shopping list and merely augment with extras every so often that they bring to your door.

Re the general business malaise being in Scotland has an additional dimension from England-it only needs to worry about Brexit, we have Brexit plus Indy Ref 2 to concern re forward planning which makes reading the runes even trickier.

Up here commercial letting is slow, whilst tenants are not leaving or becoming insolvent there is little enquiry demand, (Phones are quiet, the golf handicaps of Edinburgh commercial property surveyors are dropping fast as they put in even more hours on the course) but we more lease smaller offices, workshops and some smaller catering premises, we have very limited retail space to offer, if we were a retail property exposed company I would be more concerned where we are going.

The only boom seems to be everyone and their dog is still building student accommodation (must be ripe for a market collapse at some time) as the maxim from the 1920s comes to mind,

"You know it's time to sell when shoeshine boys give you stock tips. This bull market is over"

I personally think we were just slowly climbing out of the 2008 slump when Indy Ref 1 hit us, and just coming out of that when Brexit hit, up here we have a low confidence market with ever escalating first time buyer house prices very much disguising the deeper slack demand issues.

Off now to listen to some more Leornard Cohen,

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Replying to DJKL:
By jon_griffey
10th Sep 2018 12:36

DJKL wrote:

The supermarkets do not help, with self scanning becoming the norm one really has to ask what service experience do they offer that is in any way better than online shopping; walk in, push trolley, self scan, leave- why waste 1.5 hours of one's day when you can set up a weekly shopping list and merely augment with extras every so often that they bring to your door.

One thing online shopping doesn't offer is that disproportionate moment of joy you get at the supermarket when you find that duck breast or packet of king prawns massively reduced with a yellow sticker.

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Replying to jon_griffey:
Hallerud at Easter
By DJKL
10th Sep 2018 13:09

I know what you mean, my daughter yesterday handed us a Asda chocolate caterpillar reduced to 20p to place in our trolley (she was on her break, she works there); of course our joy was soon diminished as we were paying but she would be eating.

However to me supermarkets have become a small taste of purgatory in the afterlife, shopping is more enjoyable in a comfy chair with a coffee or for reckless later evening shopping a large whisky and a cigar.

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Replying to DJKL:
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By Vaughan Blake1
10th Sep 2018 13:38

DJKL wrote:

reckless later evening shopping a large whisky and a cigar.

This can be very dangerous. My wife is looking at ways to affix a breathalyser to my ebay settings. Witness a misunderstanding about packet sizes that resulted in me buying 4500 IKEA paper napkins instead of 450. Then failing to resist the special offer of a full sized army parachute for £5 postage paid (it fits nicely in the Ryanair hand luggage cage if you want a laugh at the airport!).

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Replying to jon_griffey:
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By Vaughan Blake1
10th Sep 2018 13:24

Exactly Jon! Whatever happened to 'browsing'? If you grocery shop online, I suspect that you end up buying the same stuff week in week out.

I recall as a child in the sixties that our local grocer employed a full time delivery driver. He would pick up mother's red order book on a Wednesday (advising of any 'specials') and deliver the shopping on a Friday. So in a way some things have gone full circle!

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Replying to Vaughan Blake1:
Hallerud at Easter
By DJKL
10th Sep 2018 22:11

I just got sent to the grocers and the butchers to collect things and they then sent my mum an invoice at the end of the month, though by the end of the sixties the grocer had shut and the butcher followed mid 1970s.

Same month end billing applied with Binns (later House of Fraser), Aitken & Niven (school uniforms but also made my Dad's suits) and there was another Edinburgh shop that sold fabric etc when my mum wanted to make clothes (her father had been a tailor) that also did month end invoicing.

A very different world.

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Glenn Martin
By Glenn Martin
11th Sep 2018 09:58

For me the problem is greater than just "on line is killing the high street"

How the whole supply chain works is wrong.

For instance I went to Debenams at the start of August to get some shorts and muscle vests for my holidays only to find the store full of winter clothes.

This was down to good the summer that all summer clothes had gone quickly and would not be replaced.

I certainly don't and I imagine most men do not buy clothes for 3 or 4 months ahead to sit in a wardrobe, you always wait until your car is frozen on a morning before you buy a can of antifreeze you never buy one in September "just on case"

By the same merit if you were a retailer that had ordered all summer stock 6 months before and [***] down all summer you will have truck loads of stock you couldnt sell. The supply chain needs to work on shorter leads times.

This would be more so for younger generation and "fast fashion" where they probably buy a shirt on a Thursday to wear on the coming Saturday night.

It is not just restricted to high street I have Amazon traders that are placing orders now for March 2019.

This type of pre ordering for the year ahead has probably been like this since Victorian times.

With manufacturing capabilities of China of the far east I would of thought these lead times could have been reduced so that the supply chain could be more reactive so when unexpected peaks occur they can be jumped on.

It would probably massively improve the operation of retailers if they didn't have to pre pay for months ahead, and hold loads of stock.

The reason the likes of "BooHoo" are flying in the fast fashion game is because they are exactly that, they are fast at meeting the demands of the consumer, which need not be restricted to on line only retailers.

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Replying to Glennzy:
Hallerud at Easter
By DJKL
11th Sep 2018 15:19

It is obviously down to the manufacturer and how it operates.

When I worked in fashion retailing in the early 1990s (Benetton seconds shops) the "proper" shops all went to the local area agent months before the season and ordered from the sample rails. for summer season; that would be order circa October and delivery circa March-May.

We then got sold all the stuff made but no longer wanted (shop closed in interim etc) delivered en masse to us, always involving a vast vat reclaim and resulting HMRC visit in the days when you paid your agent when the stuff landed in the UK (unloading 500 boxes into the warehouse was not great fun)

Of course from a Benetton point of view they did not end up storing excess stock or paying to make stock they did not sell (except the unwanted/seconds which we mopped up) so these risks were passed to the franchisees; over order you have the range but loads to offload in end of season sales, too little you run out of stock.

How we of course played it was to try to discount out the particular season stock (garments that were just available for the one season) and retain the Benetton staples until the next year (though this did have a cashflow impact, we used to carry about 3-4 months stock at year end.)

Even these days it is not that simple, I have clients who have shoes made in China imported into UK, the lead time from order to delivery is about 4-5 months, this is because the factories in China set up for their production run, run it, then make other shoes designs for different customers, the cheap pricing to purchase being partially a function of not having to operate stop/start production.

If the retailer buys enough the factory can probably run 365 days on their particular design product so JIT can work, but if the factory is making for myriad retailers life is not that simple.

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Replying to Glennzy:
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By Peter Cane
13th Sep 2018 09:29

Agreed. I remember a few years ago popping into Woolworths a few days before Christmas and all their Christmas stuff had already disappeared from the shelves. It felt quite mercenary then and I was not at all surprised when Woolworths went bust the next year.

Other stores are guilty of the same mercenary attitude today. As soon as the kids broke up for the summer holidays, what were the stores pushing? "Get ready to go back to school"! As soon as the summer holidays ended, what do we see? Christmas stuff already coming in.

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By triciae1
13th Sep 2018 11:21

Having also made errors when shopping online - I do like to see and touch before buying. We are slowly becoming hibernators - work, home, surf the net, sleep (maybe after all that blue light). There must be some way of encouraging people that going out to shop provides a better overall experience. I agree some of the older department stores have not moved with the times. What happens when all the closed stores get turned into eating establishments?

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By Peter Cane
13th Sep 2018 14:05

And what about today's news about John Lewis' profits down? This was once a famous brand where their name counted for a lot and customer service and satisfaction was considered important to them. No more it seems. My wife and I recently had a new kitchen fitted through John Lewis but we had no end of problems. Our feedback and impression was that this was not an isolated experience.

The economy, business rates and all the other problems affecting the retail industry will most certainly have an impact but any business like John Lewis that neglects customer service is going to hit problems, big time.

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Adrian Lawrence
By AdrianLawrence
21st Sep 2018 17:28

Plus to add to the list.

Living wage - many stores pay close to or the living wage
Auto-enrolment - added 2% to the paybill
Apprentice levy - many retailers are classes as large and therefore subject to 0.5%

All together the cost of the traditional store has risen while it's share of revenue has fallen.

Hence its a trend that will continue and the importance of the high street to the economy is now far lower.

Next for example gets more than 50% of its Revenue online now.

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