Retail forecasts report 2021 – Rethinking retail for the ne…

The pandemic has impacted the UK’s way of life, economy, and consequently, the retail sector more profoundly than any other event in recent history. This edition of BDO’s Retail Forecast Report highlights the key areas for retail businesses to consider as the sector rethinks the ‘new normal’ in 2021.

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RETAIL FORECASTS REPORT 2021

RETHINKING RETAIL FORTHE ‘NEWNORMAL’

RESILIENCE AND OPPORTUNITIES IN A NEW RETAIL WORLD

CONTENTS AN INTRODUCTION FROM SOPHIE MICHAEL.......................1

2020 GROWTH BY CATEGORY AND FUTURE OUTLOOK...... 2

RETAIL CATEGORY GROWTH FORECASTS. ........................... 4

HIGH STREET SALES TRACKER..............................................13

RETAIL TRADING CONDITIONS............................................15

WINNERS & LOSERS. ............................................................18

RETAIL IN THE AGE OF COVID-19. ....................................... 20

CONCLUSION...................................................................... 35

Reviewing the last 12 months of 2020, our Retail Forecasts report analyses the previous trading year’s activity and highlights key areas of focus for retailers entering 2021. Even though we are still in the depths of the pandemic, with hopes that it could subside over the years ahead, it leaves behind a retail sector that will look radically different at every level. However, many have shown great resilience in 2020 and proved that even in the most turbulent of times there are opportunities and success stories to be found. #BDORetailForecasts RETAIL FORECASTS REPORT 2021

AN INTRODUCTION FROM SOPHIE MICHAEL HEAD OF RETAIL ANDWHOLESALE

In the year since we issued the last Retail Forecast Report: Adapt, Embrace and Innovate, those headline words have taken on new significance. The COVID-19 pandemic has impacted the UK’s way of life, economy, and consequently, the retail sector more profoundly than any other event in recent history. Beyond the headline statistic of 2020’s 3.6% fall in retail spend, the biggest year-on-year decline in more than fifty years, are a wide variety of different experiences. This single statistic itself is merely a mid-point in a vast range. At one end are the larger declines suffered by retailers exposed to the limitations on physical shopping. Bricks-and-mortar sales have plummeted alongside footfall as consumers have had to navigate economic uncertainty and fluctuating social distancing regulations. However, there are those who have actually had a stellar 2020, capitalising on factors including consumers’ improved disposable income, changes in lockdown interests such as DIY and cooking and the transfer of consumption on services such as from restaurants to supermarkets. However, even these better performing retailers have had to absorb cost increases. Coping through subsequent waves of the pandemic will mean the entire sector could still be vulnerable to poor consumer confidence, and further pressure on supply chain continuity. In this report we analyse 2020’s overall performance by category and assess some of the pandemic’s fallout, both negative and positive. We also explore why some businesses and sectors have fared better than others. Some of the main and interwoven trends we will cover are: X consumers re-assessing how they shop, what they need to buy and prioritising health X shift to home working and the significant impact on specific locations X acceleration of channel-switch and increase in store closures X the need to provide shoppers with a ‘COVID-19 secure’ experience X supply chain and delivery logistics challenges to meet delivery demands X the competitive consolidation and emergence of new digital and multichannel retailers and models X how retailers are becoming conscientious operators X how retail restructuring has become the ‘norm’ and changed the fabric of bricks and mortar retailing. At the same time we will examine how the best and most resilient retailers across a variety of sub-sectors such as fashion, health and beauty, home, DIY and gardening, grocery, and electricals have navigated this tumultuous year. At the time of writing we entered a second COVID-19-related lockdown, and are still in the depths of the pandemic. With the closure of non-essential stores during the ’Golden Quarter’, and an EU trade deal still undecided, the risks for UK retailers over the next year are considerable. However, many have shown resilience in 2020 and proved that even in the most turbulent of times there are opportunities and success to be found.

BDO LLP | RETAIL FORECASTS REPORT 2021

2020 GROWTH BY CATEGORY AND FUTURE OUTLOOK

While the recent announcement of a potentially highly effective vaccine means that 2021 generally looks much brighter, it still promises to be another turbulent year. Only by looking at the impact of COVID-19 on 2020, on everything from channel performance, to consumer behaviour, to the restrictions placed on businesses, to supply chains, to the economy and housing market, can we then begin to understand what 2021 (which will also see us begin a radically different relationship with the EU) and beyond may look like for retailers and consumer focussed businesses.

The Path to Recovery and ‘Normalisation’ 2020 Retail Growth Rates and 5 Year Forecast With High And Low Growth Scenarios

5.0 4.0 3.0 2.0 1.0 0.0

4.5

3.9

2.2 1.0 3.0

2.4 3.0

1.0 2.6 3.0

0.9 2.0

1.0

0.2

-1.0 -2.0 -3.0 -4.0 -5.0

-1.5

-3.6

2020

2021

2022

2023

2024

2025

High Growth Scenario

Base forecast

Low Growth Scenario

Source: GlobalData

High Growth Scenario: Assumes comprehensive EU Trade Deal, ongoing government stimulus measures and, between vaccines and other interventions, COVID-19 related restrictions are removed in the middle of the year, leading to a strong bounce back in consumer confidence. Base Scenario: Assumes a limited scope UK-EU trade deal is agreed and augmented with sector-related deals in the months and years to come. Government stimulus is gradually withdrawn and COVID-19 related interventions allowing for a gradual easing of restrictions from the middle of the year. Low Growth Scenario: Assumes no UK-EU Trade deal and a failure to produce a significant vaccine or other effective interventions to combat COVID-19, meaning major restrictions continue to come and go and consumer confidence remains in the doldrums.

RETAIL FORECASTS REPORT 2021 | BDO LLP

While the overall picture for retail in 2020 looks bleak, with a 3.6% fall in revenues, beneath the headline number lies a huge spread of performances. Physical stores and discretionary sectors that were significantly impacted by the direct and indirect effect of the restrictions, such as clothing, beauty, and big-ticket home items, saw much bigger declines than 3.6%. In contrast, online retailers and retailers of food and several other niche categories, were faced with unprecedented opportunities. While the overall picture for retail in 2020 looks bleak, with a 3.6% fall in revenues, beneath the headline number lies a huge spread of performances. Despite the fallout of the pandemic, including rising unemployment and the need to pay down the public debt through tax rises and/or spending cuts, 2021 offers the possibility of a spending bounce-back, especially if COVID-19 can be definitively brought under control and the public are released from the restrictions of the lockdowns intermittently imposed throughout this year. Globaldata forecasts that, including food, retail expenditure in 2021 will slightly exceed 2019, by £1bn, at £339.6bn. With the EU trade deal also still in the balance, the risks are certainly heavily stacked on the downside. But if 2020, has shown anything it is that some sectors and retailers can continue to find growth even in torrid conditions.

2019 % GROWTH

2020 % GROWTH

2021 % GROWTH

CATEGORY Total retail

1.4 1.2 1.5 1.6 0.2 2.6 0.4 1.6

-3.6 -11.0 26.5 10.1 -25.8

3.9

Health & Beauty Entertainment* Food & Grocery

11.3 -6.7 -5.3 28.7

Clothing & Footwear

Homewares

-4.5

4.8

Furniture & Floor coverings

-10.7

12.5

DIY & Gardening

1.7

1.7 1.2

Electricals

3.1

-1.6

Books, News & Stationery

0.4 1.5

1.6

-0.5

Other**

-13.8

8.8

* Entertainment includes music, video and video game software, with the latter category driving 2020 growth ** Other includes a range of products, such as Toys & Games, Jewellery, Sports Equipment and Musical Instruments Source: GlobalData, Retail

BDO LLP | RETAIL FORECASTS REPORT 2021

RETAIL CATEGORY GROWTH FORECASTS

HEALTH & BEAUTY

CLOTHING & FOOTWEAR

Clothing & footwear has been hit particularly hard by the COVID-19 pandemic. Consumers have deprioritised non-essential items due to the economic uncertainty and a lack of social events, leading to a significant drop in volumes, while some deflation has also occurred as retailers have been forced to apply greater discounts in order to clear excess stock. Examples include earlier reports such as H&M sitting on £3.4bn of unsold merchandise as of late April and Burberry announcing it would have to clear excess stock through discounting, staff sales, donating to charities and recycling. All stores closed again for Lockdown two. Even when open, restrictions such as closed fitting rooms, queues, and the wearing of masks, as well as fear of contracting the virus, it continues to detract consumers from visiting, so online shopping will retain its appeal, especially as many work from home and can easily receive deliveries. Online pureplays such as ASOS and Boohoo have particularly capitalised from this channel shift. Moreover, consumers are likely to remain cautious about visiting non-essential stores for the foreseeable future, leading to a slow recovery for the market; while growth of 28.7% in 2021 may seem bullish, this will still see £2.5bn less spent on the sector than in 2019 and the lowest amount since 2014. Accessories will be the worst hit subsector, as these items are the least essential and spend is often driven by impulse add-on purchases instore. Childrenswear is forecast to be the most resilient clothing subsector, as the need for replacement purchases is higher, due to children quickly outgrowing and wearing out their clothes. Footwear is expected to perform slightly worse than clothing during 2020, as consumers left their houses significantly less than normal during lockdown. Spend has been driven by trainers and indoor footwear, with sports retailers such as JD Sports and Sports Direct gained significant market share.

Health & beauty retailers have been somewhat protected by the need for everyday essentials during the COVID-19 pandemic. Consumer stockpiling started in late February, with paper products, bathroom toiletries and over the counter (OTC) medicines all benefitting throughout March and into April. Though buying behaviour has since normalised, heightened demand for hand soaps and gels has remained, as handwashing is central to infection control. Consumers are also remaining keen to manage their own ailments with OTC medicines and further protect themselves via vitamins and supplements. 2020 has not been without its sales opportunities in beauty as, owing to the temporary closure of salons and spas, consumers found themselves acting as their own beauticians, hairdressers, barbers, and manicurists, with at-home beauty and grooming treatments in demand. The transfer of spend online has already caused businesses to revise their strategy, with Next and Harrods opening new bricks and mortar beauty formats to secure support from big brands, which will then enable them to stock brands online and sell them at scale digitally. Online pureplays, including ASOS and specialists such as The Hut Group, also continue to expand their presence in the category. However, the impact of the pandemic on beauty sales has been mostly negative, with consumers’ shopping habits and beauty routines radically changed. With reduced social calendars and the significant shift to working from home that many have experienced, many consumers see little reason to purchase beauty products. Concern over finances has also proved off-putting for many, with plenty making do using what they have, unswayed by the plentiful discounts available across the beauty category. With a revised sense of priorities, consumers are also set to continue limiting their spend on non-essentials next year, especially as widespread homeworking is set to remain popular well into 2021, which will negatively impact demand for fragrance and cosmetics in particular.

RETAIL FORECASTS REPORT 2021 | BDO LLP

HOME (HOMEWARES, FURNITURE, FLOORING)

DIY & GARDENING

Furniture and floorcoverings has seen a resurgence since stores re-opened from late May, with DFS, ScS, B&Q and United Carpets all reporting uplifts between July and September. Despite the turbulence of the pandemic, the lack of foreign holidays, and mortgage and stamp duty reductions also gave some consumers in certain demographics more spending power. A proportion of spend also transferred online, with SCS reporting that over April and May online orders were up 78%, capitalising on the opportunity and investing in its online offering by launching a new website. However, large purchases for the home have fallen across 2020 as a whole, as consumers have become uncertain about the future of the economy, their job security and personal finances. The complete standstill of the housing market during the first lockdown also stunted growth. Moreover, compared to some other sectors, online’s relatively small proportion of revenue and the importance of stores in the shopping journey, has meant growth in the channel has far from offset store closures. Whilst significantly impacted by the shut-down of non-essential retail in lockdown and the lingering reduction in store footfall, smaller Homewares purchases have been supported by major consumer trends that emerged from the crisis – such as cooking & baking, redecoration, and working from home. Still, this is forecast to decline across 2020 as a whole, following the hiatus in the housing market, uncertain economy and limited back-to-uni spend. The prospects for Home categories for the first part of 2021 are strong, as the stamp duty holiday continues to encourage a buoyant housing market. However, if charges are re-introduced from April, then the second half of the year and beyond could prove much more difficult.

April saw DIY & gardening sales plummet, as the big DIY retailers and garden centres closed their stores. A lack of appetite for major projects is illustrated by the number of planning permission applications falling by 22% between April and June 2020 on 2019. Also the closure of garden centres in April and May, along with the perishable nature of these items, meant many of these products had to be discarded by the time centres re-opened. However, the category has gone on to perform strongly in the second part of the year, as shoppers turned to redecorating their homes and spending more time in their gardens during lockdown. Money which had previously been earmarked for commuting to work, holidays abroad and other leisure activities was instead spent on improving homes and gardens, while concerns about having tradesmen in homes led to more customers completing tasks themselves. The Garden Centre Association reported that its members’ total sales in July increased by 15.8%, while Kingfisher saw its combined B&Q UK & Ireland and Screwfix sales grow by 15.5% in May and by 25.9% in June, and now plans to open 30 new Screwfix stores in the coming months and trial four mini stores in Asda supermarkets. DIY stores and Garden centres are also exempt during Lockdown two, giving them an opportunity to capitalise on Christmas spending while other shops are shut. Beyond this, as with home categories, much will ride on how dramatically the housing market slows in the latter part of 2021.

BDO LLP | RETAIL FORECASTS REPORT 2021

RETAIL CATEGORY GROWTH FORECASTS CONTINUED

FOOD & GROCERY

ELECTRICALS

The impact of COVID-19 on electricals has been mixed. Food stockpiling and the increase in working from home has boosted sales of certain categories including fridge freezers and home/ home office technology. Electricals also benefited from an increase in spending on video games, as consumers looked to entertain themselves during time spent at home. However, this has come at the expense of items such as mobile phones, which has suffered from postponed launches, supply problems and general lack of demand, while economic uncertainty has bitten into spend on gadgets and other discretionary items, with this type of spend likely to weaken yet further as unemployment starts to rise. Sales through stores have been particularly anaemic, as spend has shifted even more decisively to the online channel. Dixons reported online sales were up 114% year-on-year In April, while pureplay AO World reported double digit growth in product sales for its financial year and is now looking to recruit 650 new employees across the business, from tech and social media experts to gas engineers, as it targets ambitious growth. Categories dominated by online retailers, and particularly Amazon, such as home audio equipment (set for growth of 7.1% in 2021) and smart home products, will see the fastest recovery as demand for these new technologies returns. The launch of new X-Box and PlayStation Consoles will drive significant growth of these products in 2021, as well as encouraging sales of games software.

As a direct result of COVID-19 the UK food and grocery market is forecast to grow 10.1% in 2020, the highest annual growth in more than 40 years. The market saw an initial period of explosive growth in March and April, as shoppers began stockpiling non-perishable goods, followed by significant gains as shoppers turned to retailers in the absence of hospitality and foodservice locations. Alcoholic drinks saw particularly significant volume growth (with pubs and bars either closed or restricted for much of the year), as did household products, as shoppers rushed to buy cleaning and sanitisation products. The channel shift to online has been dramatic, with penetration set to jump from 7.4% to 12.5% in 2020 - transference of £9.7bn. The surge in demand for home delivery options in March and April was high enough to cause website crashes, but supermarkets have been quick to swell capacity, epitomised by Tesco doubling its online fulfilment capacity in a space of six weeks. The dynamics of the food and grocery market in 2021 will rely heavily on the progression of the pandemic, both in the UK and abroad. Based on the outlook at the time of writing, we expect that increased food and drink spend at retail locations will continue in H1, before gradually reducing from July 2021 onwards. However, potential upwards pressure on supply costs - especially stemming from the risk of COVID-19-stricken South American countries being unable to export goods such as fruits and vegetables at the same price - means that inflationary estimates remain volatile, with Brexit related delays and upwards pressure on prices also a substantial risk.

RETAIL FORECASTS REPORT 2021 | BDO LLP

TRAVEL &TOURISM UK travel & tourism saw a turbulent finish to 2019, with the collapse of Thomas Cook, the rise of online only travel agents, such as Booking.com and Expedia, which left the travel agent unable to compete. This left many British holidaymakers stranded abroad and in need of repatriation, while 2020 also carried a potential risk in that the lack of a British-EU trade deal could have added extra barriers to travellers from and to the UK had the ‘transition period’ not been extended. Of course, the spread of COVID-19 quickly dwarfed these previous concerns and International trips are predicted to see a 40% year- on-year decline. Widespread travel restrictions from March onwards forced operators to refund flights and holidays, as new bookings dwindled. Even as restrictions lifted from July, demand, particularly for foreign holidays, was dampened by consumer anxiety over the potential re-introduction of restrictions, the possibility of having to quarantine and fears over the virus itself. These same issues also applied to travellers into the UK, with London in particular seeing a massive drop in footfall, with many of its tourist attractions, bars, restaurants, and other features either closed or operating under heavy restrictions. VisitBritain is forecasting inbound tourism to the UK to fall by 74% to 10.4 million, with related spending dropping 79%, to £6.1bn, and Springboard reported footfall in central London was 69% lower in July 2020 than July 2019. Many Brits have been encouraged to take staycations instead, particularly to South West England, where consumers could enjoy beaches in a less daring setting, with less risk of being subjected to quarantine. However, businesses are still restricted as to how many guests they can accommodate, making it difficult to ‘catch up’ on the months lost to lockdown. They are also having to meet increased customer expectations around hygiene and booking flexibility around ‘local lockdowns’.

Travel industry news service TTG launched a “Holiday To Help Out” scheme between 2-8 November, with participating suppliers on the dedicated website holidaytohelpout.com aiming to excite and tempt consumers with significant discounts on holidays that were available only through travel agents. Easyjet Holidays, Virgin Voyages and Intrepid were among the businesses to participate, but with no Government assistance, and the dates of the scheme meaning it was thoroughly upstaged by the announcement of Lockdown two and its new tranche of travel restrictions, the initiative was effectively hamstrung before it could get going. Recovery is set to be led by domestic tourists, before international travel and tourism begins a more gradual revival, as the global health battle against COVID-19 hopefully starts to contain and diminish the virus. Unfortunately, it seems likely that the uncertainty and challenges facing the travel, tourism and hospitality sector will continue well into 2021. Recovery is set to be led by domestic tourists, before international travel and tourism begins a more gradual revival, as the global health battle against COVID-19 hopefully starts to contain and diminish the virus. This could provide more favourable and stable conditions for businesses which have repeatedly had the rug pulled from under their feet in 2020. While lack of holidays has generally assisted retail spend, affording consumers more disposable income, retailers relying on incoming tourism, particularly those based in London and/or operating in luxury sectors, have had a much less favourable time and for these too, recovery will be a slow process.

BDO LLP | RETAIL FORECASTS REPORT 2021

RETAIL CATEGORY GROWTH FORECASTS CONTINUED

ECONOMICOUTLOOK Ongoing regional lockdowns means that GlobalData forecasts that the UK economy will not recover to pre-pandemic levels until mid-2023. Following falling consumer sentiment and business restrictions, GDP is expected to decline by 10.3% in 2020, with a slow recovery in 2021 and 2022 as investors remain cautious. Meanwhile, unemployment is likely to rise rapidly towards the end of 2020, even with the re-introduction of the furlough scheme, as businesses fail and are forced to cut costs to survive. After cutting the rate twice in March (from 0.75% to 0.1%), rumours continue to circulate that the Bank of England may take the unprecedented step of pushing the interest rate below the 0% mark, with consumer spending still significantly lower than prior to the pandemic. However, there is growing evidence that lowering interest rates further will fail to increase consumer spending, diverging away from traditional economic theory; despite the interest rates cut in March, the savings ratio soared to 31.8% in the following quarter (Q2).

GDP growth by year

6.0

2.9

1.7 1.7 1.3 1.3

1.9 1.8 1.7

-10.3

2016 2017 2018 2019 2020 2021 2022

2023

2024

2025

Source: ONS, GlobalData

Unemployment ratio by year

Interest rates by year

6.5

1.25

1.00

4.9

4.8

4.6

4.4

4.4 4.2

4.3

4.1

3.8

0.75

0.60

0.50

0.40

0.29

0.25

0.23

0.10

2016 2017 2018 2019 2020 2021 2022

2023

2024

2025

2016 2017 2018 2019 2020 2021 2022

2023

2024

2025

Source: ONS, GlobalData

RETAIL FORECASTS REPORT 2021 | BDO LLP

The crucial Black Friday-to-Christmas period of 2020 will more than ever depend on retailers’ abilities to attract consumers online and fulfil large numbers of orders for home delivery.

CHRISTMAS 2020 The crucial Black Friday-to-Christmas period of 2020 will more than ever depend on retailers’ abilities to attract consumers online and fulfil large numbers of orders for home delivery. Black Friday has seen Christmas shopping start earlier and earlier in recent years. This has once more been the case in 2020, as shoppers look to work within budgets, be organised and give plenty of time for orders to arrive, and retailers offer deals in an attempt to tempt consumers into spending. Although with Lockdown two keeping stores closed for much of November and early December, even more of this activity than usual will now occur exclusively online. In a worst-case scenario, even when open, consumers are likely to operate with extreme caution for fear of getting ill or having to isolate over the festive period. Combined with uncertainty about the economy and personal finances, store-based retail is therefore set to be in for a difficult period and is unlikely to see anything like the same degree of uplift typically experienced in the fourth quarter.

In contrast, depending on just how restricted stores are, online sales could be looking at anywhere from 30-50% year-on-year growth. This will place huge pressure on online delivery infrastructure. Retailers and their logistical partners will have to plan and allocate resources carefully and encourage consumers to shop early and take steps such as sending gifts directly (rather than to self and then sending on). In November Tesco had to place online shoppers into queues for delivery slots as, despite its massive capacity expansion in 2020, demand became overwhelming. As we approach the festive period other retailers are likely to withdraw rapid and next-day delivery promises to allow them to meet the increased demand, even as delivery firms such as Yodel and Citysprint recruit thousands of new couriers. One positive for retailers, however, is that with the majority of consumers spending more time at home they are at least more flexible about exactly when they are able to receive deliveries. Indeed, Christmas 2020 is set to be all about the home – shopping from home, delivery to homes, eating at home, and spending on homes, as consumers look to improve the environments in which they are now spending so much of their lives.

10 BDO LLP | RETAIL FORECASTS REPORT 2021

RETAIL CATEGORY GROWTH FORECASTS CONTINUED

BREXIT Since the UK voted to leave the EU in 2016 the expectations of what a deal between the UK and EU could be expected to cover has gradually diminished and at the time of writing a trade deal remains in the balance with signs that, even should one be struck, it may well exclude the most contentious areas.

Looking at the preparations the government has so far made, including a giant lorry park in Kent, it seems highly likely that 2021 onwards will see more administration and cost added to trading with EU countries, with only the degree of change from the previous status in question. DHL reports that checks at the port of Dover could increase from 500 to 10,000 per day based on number of trucks passing through on a busy day, and although a deal could yet lessen this increase, the new status quo will still represent extra time and cost for importers and exporters. Indeed, in November the National Audit Office reported that “although government departments have made progress in recent months … it is still likely that widespread disruption will occur from 1 January 2021”. Furthermore, while considerable arrangements may have been made in Kent to mitigate increased checks, there are many other ports across the UK that process substantial traffic and not all will have benefitted from the same levels of investment. Even for those retailers that largely import from outside the EU, delays at the border, as officials become tied up with new paperwork on EU imports and exports, will still present major challenges. Food & Grocery retailers are particularly exposed to hold-ups causing imported food to go out of date, while retailers within sectors particularly reliant on seasonality and trends, such as clothing & footwear, health & beauty and homewares, also face delays causing products to miss their windows of relevance to consumers. These retailers have had to look at sourcing and manufacturing more product locally, despite the costs, and have had to invest in speeding up and eradicating any slack in their supply chains. Meanwhile, retailers that are not as reliant on fast- moving trends or fast expiring products, such as those retailing large electricals and furniture, will need to adjust to building up larger stockpiles of goods and investing more in storage facilities.

RETAIL FORECASTS REPORT 2021 | BDO LLP 11

RETAILER BREXIT RISK COMPETITIVE POSITION IN FACE OF BREXIT B&M Lower

The transition is likely to have a lower impact on B&M because it sources products directly from Far East suppliers, which will not be subject to any hikes in costs affecting EU imports. Morrisons’ vertical supply chain sets it apart from much larger competitors and having a large supplier and manufacturing base in the UK, and good relationships with those suppliers built up over many years, will be a key advantage SCS pays suppliers in sterling so will be less impacted by currency fluctuations. It is also the main business for many of its suppliers, so enjoys greater leverage and the nature of products means it can more easily build up a stock-pile of items. Only 27% of Next’s production comes from outside the EU. Chairman Lord Wolfson has previously outlined his belief that port delays and organisational inability to cope with changes to the current agreement pose one of the biggest risk factors to the retailer and that even a move to a new deal would see an initial negative effect during an adjustment period before levelling out over time. Carpetright has a sizable European business and a key assumption underpinning its plans is to be able to continue trading and sourcing freely with the EU, making any obstructions potentially disastrous. Although John Lewis has an international business that may benefit from a weakened pound making exports cheaper, additional import costs facing its central UK business will offset any advantages.

Morrisons

Lower

ScS

Lower

Higher

Carpetright

Higher

John Lewis

Higher

The pandemic has shown the flexibility and speed with which UK business can adapt to supply chain shocks and these characteristics will likely be required again as businesses adjust to the changing environment. Larger stock buffers will frequently be required and, where costs are increased, serious consideration will have to be given as to how to mitigate these and/or whether they can be passed on to shoppers without further damaging what is already likely to be weak demand. At least some inflationary pressure seems inevitable, even if not on all classes of goods. In the medium to long term we are likely to see the government encouraging on-shoring and pushing the credentials of suppliers in countries in which it is keen to do more trade, such as China, the US and Commonwealth companies. There may even be incentives and administrative fast tracking introduced to push this, although much will also depend on the political landscapes in these other nations.

Although consumers often cite a preference for home grown products, in reality purchase decisions usually come back to value and quality, with country of origin a secondary factor at best. Retailers will be looking at how they can pivot to suppliers which offer these characteristics, albeit they will also be highly wary about only working with partners that can meet minimum standards regarding ethical behaviour, supply chain security and environmental impact. Another long-term Brexit related consideration for retailers will be what replaces the current freedom of movement for workers. There were over 170,000 EU nationals working across the retail industry at the time of the referendum in 2016, with the BRCWorkforce survey indicating certain geographies, predominantly London and the south, are particularly reliant on EU workers, with distribution employing a higher number of EU nationals than retail stores. If new immigration restrictions reduce this workforce, retailers may have to look at recruiting more aggressively, paying higher wages and making more use of technology to prevent disruption to their businesses.

12 BDO LLP | RETAIL FORECASTS REPORT 2021

RETAIL CATEGORY GROWTH FORECASTS CONTINUED

CURRENT INDEX

CONSUMER CONFIDENCE Consumer sentiment plummeted in April as the pandemic caused fear and uncertainty about the future. It has subsequently improved as the pandemic was brought under some degree of control and the most stringent aspects of the original lockdown have been avoided. The prospect of a vaccine in 2021 should now see sentiment improving in Q4 and, barring any setbacks, we may see a return to the kind of levels recorded in late 2019/ early 2020.

-44.8

Change on last year -11.6 weakening

Change on last month -5.2 weakening

Future Sentiment Index As of October 2020

-26.8

-28.7

-31.9

-33.2

-35.5

-39.6

-37.7

-42.7

-44.1

-44.8

-45.3

-52.6

-55.6

Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20

RETAIL FORECASTS REPORT 2021 | BDO LLP 13

HIGH STREET SALES TRACKER

After a reasonable start to the year, March saw sales slump dramatically across all categories. Only inOctober has year-on- year growth on the high street returned, although homewares demonstrated an earlier recovery and non-store sales have proved buoyant throughout. November will see another fall in store sales, as lockdown two restrictions kicked in and retailers will be hoping that COVID-19 cases have fallen sufficiently by December to allow them to re-open for this crucial period.

BDO High street sales tracker In-store segments and total non-store results 2019-20

150.0

100.0

50.0

0.0

-50.0

-100.0

-150.0

Nov

Dec

Feb Jan Mar Apr May Jun Jul Aug Sep Oct Nov

Lifestyle (in-store)

Non-store

Fashion (in-store)

Homeware (in-store)

BDO High street sales tracker Total LFLs 2019-20

6.6

7.0

6.5

3.7

3.2 3.7

1.8 2.2 3.5

0.8

-0.7

3.8

-3.3

1.6

-0.5

-1.3

-1.8

-4.6

-14.4

-17.9

-18.3

-29.6

Jan

Feb Mar Apr May Jun Jul

Aug Sep Oct Nov Dec

2019

2020

14 BDO LLP | RETAIL FORECASTS REPORT 2021

RETAIL FORECASTS REPORT 2021 | BDO LLP

RETAIL TRADING CONDITIONS

RENTS, LEASES AND BUSINESS RATES After years of steady transference of spend away from stores and towards e-commerce, the pandemic crisis has initiated a more dramatic shift. This has left many more shops with unprofitable setups, particularly where they are tied to quarterly rents with upward-only review arrangements that are fundamentally uneconomic in the face of crisis. The good news is that the pandemic also may finally be the catalyst for the issues of unsustainable rents and business rates, which have plagued retail for more than a decade, to be addressed. The Government is currently conducting a business rates review which is due to report back in Spring 2021 and there is now an opportunity for the government to replace the current rates holiday, possibly after an extension, with a new system more suited to a reality where businesses with large revenues generated online can shoulder more of the tax burden. However, this will be a complex process, especially as the government will need to weigh up how to increase taxes on Amazon and other multinational companies at a time when it is trying to negotiate trade deals with the US and others. Leases and rental agreements could also look dramatically different going forward, as 2020 gives a hint of how new relationships between retailers and landlords might help them adapt to a multichannel future that requires fewer physical stores. Recent months have seen an increase in consensual renegotiation

Nevertheless, there is a growing sense that turnover based agreements present the most viable and equitable blueprint for retailers continuing to operate stores in a context where even more spend has now migrated online. This may lead to a redistribution of equity in retail restructuring that brings landlords closer to the owners of businesses. The BPF insists that landlords are “increasingly supporting turnover-based rent models underpinned by collaboration and transparency”, with The Crown Estate, which includes London’s Regent Street in its portfolio, reportedly among those to pro- actively offer some of its tenants the choice of turnover based rents. If, between Government action and a renewed spirit of co-operation between retailers and landlords, the cost burden of stores could be reduced. We may then see the pandemic as the beginning of a new era for shops, with retailers able to increase investment in physical outlets, introducing more technology and other improvements, and creating truly compelling environments that can truly complement, and compete with, online. The good news is that the pandemic also may finally be the catalyst for the issues of unsustainable rents and business rates, which have plagued retail for more than a decade, to be addressed.

CVAs and pre-pack administrations, as retailers attempt to offload unviable stores and reduce rents, with examples including Hotter shoes, which shut down 46 stores and kept 15, Pizza Hut, which closed 29 of its 244 stores, and Poundstretcher, which secured rent cuts of between 30% and 40% for 84 of its 450 stores, with another 253 placed under review. Perhaps more significantly, though, the pandemic has led to numerous calls for more rent agreements to become more equitable and therefore ‘turnover’ based, a setup found more commonly in leisure and hospitality businesses, as well as in retailer stores in continental Europe and in outlet centres across the UK. In September New Look secured a CVA to switch to turnover-based rents at 402 of its UK stores, and no rent at all at the remaining 68, along with a concession that its landlords will be able to exit leases more easily if they can secure better terms elsewhere. This followed AllSaints, where in June it secured a CVA which saw its 41 stores across the UK and 42 in the US moving to turnover-based rent. Obviously these agreements require landlords to take ‘a hit’, with British Land, NewRiver and Landsec among those to vote against New Look’s CVA, and BPF chief executive Melanie Leech insisting CVAs should not be “used as a weapon by businesses to rip up leases permanently”. Shopping centre Intu itself fell into administration in June, after a plunge in rental income from its retail tenants.

16 BDO LLP | RETAIL FORECASTS REPORT 2021

RETAIL TRADING CONDITIONS CONTINUED

TRANSACTIONAL ACTIVITY 2020 has been a year of change for all retail businesses. Almost overnight they had to adapt and change to a completely digital consumer. Whilst this was a trend we expected to happen in the short to medium term, this instant shift saw some real challenges for businesses but also a huge opportunity for some of the emerging brands in the market place. This in turn has resulted in an exceptional year of growth for some brands as the consumer has had more time to engage with brands via social media, previously unknown to them. As we move through quarter four, businesses are now considering how best to maximise the opportunity presented to them. Either by looking to partner to raise capital, in the case of GymShark, who is the

first consumer Unicorn (a privately-held company valued over $1bn, so-called on account of its mythical status) or exit to a strategic partner with global infrastructure such as Charlotte Tilbury and their exit to Puig. The market for Global M&A therefore remains buoyant even in these unusual times, with the larger retailers taking the opportunity to consider whether acquiring digital capability will allow acceleration of the changes they need to make as soon as possible. Equally, as the global consumer becomes embedded into digital platforms, retail brands need significant capital to invest into technology and the consumer experience to support the demands of the evolving consumer.

As we move forward into 2021, we expect similar hotspots for M&A globally in Beauty and Health &Wellness. However, efficacy in Beauty brands using innovation of science will be fundamental for the success of business in that space. In addition, one of the fast growing consumer areas of 2020 has to be the pet market. Significant interest and consolidation is expected in 2021 as the larger players look to secure new brands into their global operations. To date understandably consolidation has been the theme. In an environment of contraction, those with existing platforms and scale will succeed, as evidenced by the acquisition of DaveWhelan Sports by Frasers Group, in a competitive sales auction.

RETAIL FORECASTS REPORT 2021 | BDO LLP

As well as impacting what consumers do (and don’t) buy, the pandemic has created seismic changes in how and where they shop, rapidly accelerating some trends, reversing others, and even introducing whole new ones. Online spending has surged, especially in food and grocery, as the physical restrictions and health concerns surrounding the pandemic have led consumers to shop from their homes via computers, tablets and mobiles, before collecting their orders or having them delivered to their homes. In particular, the events of this year have been a catalyst for older shoppers who may have previously found the technology involved in online shopping unappealing to shift, their spending to the internet. Many are unlikely to reverse this behaviour, having grown appreciative of the convenience and value to be found shopping online, with 38% of consumers aged 65+ saying they will buy more products online rather than instore in the ‘new normal’ world. It is again high streets, so beleaguered over the past few decades that have once more borne the brunt of the pandemic turbulence. Springboard data in October revealed year-on-year footfall was -40% for high streets and -34.6% for shopping centres. Not only have they lost convenience-led shoppers looking to purchase items such as food and personal care products, they have spent less on clothing and other non-essential items as well as transferred remaining spend online.

Summary of Latest GlobalData forecasts for 2020 online growth by sector