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Most noticed business news stories in March

As an all-powerful, monopolised online giant suffered a catastrophic data scandal, two staples of the UK high-street quietly began to close their doors for the last time.

Throughout March, the public noticed Toys ‘R’ Us and Maplin on an almost weekly basis. Toys R Us has commenced a wind down of the UK business following its collapse into administration at the end of February. Shortly after, Maplin – which has more than 200 stores and 2,300 staff – collapsed into administration after talks with buyers failed to secure a sale.

The stories raise questions about both changing consumer behaviours, and retail spaces.

The changing face of retail

Perhaps the most potent symbol of the current state of the retail sector is the news that Debenhams plans to rent space in its flagship Oxford Street store to WeWork, a company providing shared workspaces and frequently associated with iMac using, flat white drinking, technology start-ups.

Where Oxford Street shops were once worth their cubic space in gold, now many retailers are struggling to fill these hallowed halls with profitable stock. Instead they are turning to services like restaurants, gyms and, now, flexible working spaces to plug the gap.

However, with recent research from accountancy group UHY Hacker Young suggesting that one in three of the UK’s top 100 restaurant groups are not profitable, there appears to be a problem across the retail sector.

What went wrong?

To understand the challenges facing the sector, we need to start with Quantitative Easing (QE).

When first used in response to the 2008 financial crisis, it was a radical idea. QE is the use of money created by the central bank (in the case of the UK, the Bank of England) to buy bonds. This gives the government and financial institutions access to cheap money, which – as well as boosting share prices – keeps interest rates low and allows banks to lend money cheaply. This encourages high consumer debt and spending, which in turn props up the economy.

Effectively, we have (electronically) printed money and trickled it through the economy. All of this is redolent of a GCSE level understanding of the actions that led to hyperinflation in the Weimar Republic.

Whilst the UK has experienced some inflation, it is nowhere near the levels seen in inter-war Germany. The key difference is that the Weimar Republic lived in a condition of scarcity – no matter how much money they had, there were not enough goods to go round – we live in a condition of relative abundance and high consumer spending.

If I earnt an additional £6,000 pounds a year (the amount spent on behalf of every man, woman and child in the UK on QE), I would not be hard pressed to spend it (Xbox One and the new FIFA to start with… if you’re asking).

So far so good…

The problems arise when money becomes more expensive. With interest rates rising, the Federal Reserve unwinding QE and Bank of England officials considering selling down QE assets, the heady days of cheap credit are coming to an end. The correction we saw in the US markets in February where the Dow Jones industrial average plummeted 12% in two weeks, is an early jitter we must monitor closely.

However, we don’t have to look to the US to see the initial impact of the end of cheap credit.  Maplin and Toys ‘R’ Us have entered administration, as have a raft of lesser known retailers like Warren Evans, East, and Multiyork. New Look, House of Fraser, Debenhams and M&S are all in ‘turnaround’ states. And John Lewis – reliable, trusted and ‘never knowingly undersold’ – posted a profit fall of 77%.

The UK is waking up from a generation of cheap credit with a retail hangover

QE insulated retailers from changing market dynamics, acting as a macro-economic life-support system. It artificially supported traditional retailers struggling to cope with the challenges of the digital age. However, as cheap credit becomes less widely available, these weak retailers are dying because their QE ‘life-support’ is being withdrawn.

That John Lewis is struggling shows that even those businesses with robust reputations are not safe from belt tightening. We should expect many redundancies as the UK wakes up from its retail hangover. An expanding manufacturing sector – and a rebalancing of the UK economy – will help, but with manufacturing currently making up only 10% of the economy, we should not expect miracles any time soon.

Now more than ever, retailers need to slim down, understand their customer, and make sure they have the right tools to target them. Marketing and communications is – like most other things – undergoing a digital transformation that allows businesses to get closer to the customer.

Differentiated approaches – where different customers are targeted with different messages on different platforms – are necessary to address an increasingly fractured audience.

Those that have access to information about their customers, and know how to use it to their advantage, are best placed to deal with the challenges posed by the 4th industrial revolution. Without this understanding, retailers are wandering around in the dark.

Max McEwan

As Senior Research Executive at Populus, Max explores attitudes to policies and organisations within the Reputation and Strategy division. He holds a BA in Politics from the University of Newcastle and an MA in Political Research from the University of York.

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