Shops caught in ‘margin vice’ as earnings fall

Retailers are facing a tough few years as levels of discretionary spending begin to fall.

Research by accountants and consultants EY found that shops could expect a “last hurrah” this year before belts tighten again next year.

The firm said the introduction of the national living wage would provide a boost to the spending power of low earners in the coming months.

However, lower projected growth in income for medium and higher earning households – EY now expects an average of a 1.6% rise in earnings per year from 2017 to 2020 compared with a 3% increase this year – will ultimately put a further squeeze on the retail sector.

“At first sight, the picture on consumer spending – especially discretionary spend – looks rosy for retailers for 2016,” Julie Carlyle, head of retail at EY UK and Ireland said.

“However, this will only be a rosy tint on what is a challenging time for retail businesses as the competitive landscape for every pound of consumer spending continues to intensify, indicated by the increased spending on health-related products and a continued strong spend on recreation and leisure.

“The ‘margin vice’ caused by deflation, discounting and the NLW, coupled with the costs of delivering the seamless omni-channel service consumers now expect, make these difficult times for retailers.

“To compete effectively, all retailers will need to engage with consumers not only on product but also on an experiential and emotional level.

“Retailers will also be focusing on the investment required in infrastructure, the most effective operating models and the use of data in smart and agile ways to allow them to be as savvy as consumers in their approach.”