As Wilko bankruptcy highlights economic woes, what's next for UK retail?

The month of July was the hottest month on record for temperatures globally. However, in the nation of the United Kingdom, hoodies were donned daily and temperatures were curiously mild. It rained frequently, Brits huddling indoors in pubs and restaurants, lamenting a summer slipping away from them day by day. 

There is undoubtedly a meteorological explanation for how so much of Europe was sizzling in extreme heat while the UK was left out in the cold. But in a way, it served as a neat analogy for how the once-great economy of Britain has fallen on hard times. 

Low-cost retail chain Wilko, which was founded in 1930 and employs over 12,000 people, announced this week it was filing for bankruptcy. The blow fuels further concern over the state of retail in the UK, as well as the economy as a whole. 

Wilko’s demise follows recent news from fellow chain heavyweights Marks & Spencers (LON: MKS) and Boots (NASDAQ:WBA) that they will be scaling back operations. The struggles amid the current climate also come soon after another challenging period for many retail stores, the COVID pandemic, headlined by department giant Debenhams shutting its doors in 2021 after 242 years in business. 

The FTSE 350 General Retailers Index, which represents the performance of general retailers listed on the London Stock Exchange, is down 27% since the start of 2022 (although things have brightened since October, which we will discuss later). 

Britain’s cost of living crisis 

The underlying cause of the weakness is a familiar one: an economy creaking under an aggressive cost of living crisis. Inflation in the UK jumped into the double digits last year, and remains high, the most recent reading coming in at 8%. 

With mortgage rates suffocating homeowners and real wages failing to keep pace with spiralling prices, spending is harder to sustain for UK households. 

The above chart paints a gruesome picture, but it also shows a sharp downtick from the peak last October. However, the devil may be in the details; while the above chart shows a softening headline rate, policymakers often point towards the core number as more indicative. This metric excludes volatile items such as energy and food. 

With these exclusions, the core number is sometimes seen as more relevant with regard to monetary policy decisions, which has seen interest rates in the UK rise perceptibly and liquidity sucked out of the system as a result. Unfortunately for UK consumers, last month saw the highest core inflation rate since 1992. 

There is therefore much concern that inflation is not coming down as quickly as was hoped. Indeed, comparing the UK to peer nations does not yield optimistic findings; the current (headline) inflation rate is among the highest in western Europe.

In terms of the overall trend, the US is arguably now the shining light, the market anticipating interest rate hikes as coming to a close as the rate of inflation dips to 3% (although the battle is far from over there either). The contrast to the UK’s trajectory is clear:

Retail just another sector

Against this backdrop, it is easy to see the travails of the UK retail sector. However, it is not alone in its struggles – this crisis has affected every inch of the economy. Plotting the performance of the General Retailers Index against the FTSE 250 shows this, as per the next chart, with the latter down a similar amount compared to the level it traded at entering the year 2022. 

(While the FTSE 100 is also presented on the below chart, its stout performance is misleading with regard to acting as a barometer for the UK. Companies within the index derive approximately 75% of their revenue from outside the UK, meaning they benefitted from a weakened pound last year. Additionally, the index is dominated by industries such as oil, banks, tobacco and mining, and was boosted by energy and commodity price rises last year). 

And yet despite all this doom and gloom, the above chart also shows a resurgence for retail since the start of the year. Moreover, looking at the General Retailers index specifically, it has outperformed the FTSE 250 since Q3 last year. Thus far in 2023, the index has increased 26%, in contrast to the FTSE 250 which has traded flat. 

Sentiment remains low and disposable incomes shrunken, but the picture is undeniably brighter than at the start of the year. It is only nine months since Lizz Truss’ disastrous reign kicked off, nearly tanking the entire economy within her chaotic 44-day term. While it is a low bar, things at least seem to be heading in the right direction, albeit slowly. 

However, the challenges remain steep for retail. Last week, the British Retail Consortium (BRC) said that retail sales increased 1.5% year-over-year, far below the average 12-month growth rate of 3.9%. Perhaps of greater concern is the fact the rate is down from the 2023 peak of 5.2% in February. 

The Bank of England’s chief economist, Huw Pill, caused a stir in April when he said that British households and businesses need to “accept that they’re worse off”. Yet the numbers are clear. As sombre as it is, in this post-pandemic, post-Brexit, cost-of-living crisis economy, the UK is simply not as rich as it used to be. That is clear around the country, but particularly acutely in retail.