Belfast Telegraph

Economy Watch: How policy can help with the challenges hitting retail sector

Economy Watch

By EY Ireland Chief Economist, Neil Gibson

The announcement of House of Fraser store closures and difficulties at Poundworld have refocused attention on the High Street. Happily, the Belfast House of Fraser store was not one of the closures, but retail profit warnings have been a feature of the first half of 2018. Is this trend set to continue and can policy respond in any way?

Perhaps this is a natural evolution of the retail market and policy should be passive as the new retail world emerges? This is a subject I have written about before but it seems timely to revisit the topic - after all, it is Northern Ireland's largest sector.

Any article on the high street should start by saying there are many retailers doing very well indeed, despite the difficulties. New businesses are still opening and the influx of tourists to Northern Ireland, coupled with record numbers of people in work, is providing a healthy customer base.

But pointing to these successes, without recognising the profound change under way in the retail sector, would be to ignore the risks that the transformation presents for many areas and individuals. The move to on-line retailing is well documented (the Centre for Retail Research puts the figure at close to 18% of total sales in 2017 in the UK) and the ability for consumers to price check at the tap of a button has revolutionised customer/retailer interaction.

Social attitudes are changing too. Much has been written about people's increasing willingness to pay more for experiences than products. The rush is on to make shopping an 'event' to entice customers. Just as garden centres transformed into restaurants and gift shops to augment the plant buying experience, cafés, coffee shops and even bars are popping up in retail stores to attract the experience shopper. Clearly, there will always be a need for a physical store. The ability to touch and feel products before buying, to be inspired to purchase by a captivating display or demonstration and the need for advice to help make a purchase are all reasons to be re-assured that the shop still has a future.

However, if the pattern of consumption is changing and threatening the viability of high street shops, the critical question is whether policy should play a role? Is it simply an evolution of a sector and, therefore, would it be unwise to try and swim against the tide? There are reasons to suggest policy will need to play a role.

Firstly, rates are a major source of income and retailers are a significant contributor to the rates base. If there is a reduced high street presence, then bills will have to rise elsewhere to fill the shortfall. For councils, for whom rates are such an important component of their finances, this is at the very least an issue they need to consider. Given the lengthy list of exemptions from 'full-fat' rates in Northern Ireland, the contribution to rate by retail may need consideration.

An increased focus on taxation of consumption, not 'bricks and mortar,' may be required.

Secondly, vacancy is economically damaging in many ways - not just the lost income but also the knock-on effect it has on footfall and on neighbouring properties. Therefore, a passive policy stance as high streets slowly decline would be very damaging, unless of course alternative uses appear to fill the void and prevent the vacancy blight.

Thirdly, retail is a hugely important employer. The latest data places wholesale and retail as the region's biggest employing sector with 136,000 workforce jobs, and this is despite recent losses in the sector (down 6,000 since Q3 2016). Not only is it a major employer, it offers flexible hours, opportunities across the skills spectrum and, for many, is the first step into the world of work. This increases its importance from a policy point of view. If NI were to lose 10% of its retail employment, this would equate to 13,600 jobs - more than the total population of Strabane.

Technology is replacing jobs in the retail sector and, coupled with the structural changes discussed above, our forecasts are for a further contraction in overall retail employment numbers. There are macro-economic factors at play too in this outlook. A retraction in consumer spending is predicted as pay rises are not projected to outstrip inflation substantially. There will be a need for increased provision for retirement and possible tax increases for health and infrastructure spend that will reduce retail spending capacity.

The good news is that the policy debate is rather healthy. Consideration of business rates in NI continues and the various exemption regimes continue to be looked at.

The Northern Ireland Retail Consortium and the revamped Retail NI group have an extensive set of policy recommendations focused on ensuring the ongoing vibrancy of the sector.

As a sector, it is often in the back seat of the policy debate - considered a secondary service only supported by incomes generated elsewhere.

However, as a vital part of the employment base and of the physical landscape of our towns and cities, its transformation is not something to simply observe as the implications will be significant. As always, individual firms will buck the overall trend and still retailing will be a critical employer across Northern Ireland in 10 years' time.

Yet, as the transformation of many of our town centres continues, the policy debate, especially around rates, should remain lively. Retailing is changing and policy will need to change too.

Belfast Telegraph

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