The Chancellor’s Budget: what’s in it for Retail?
COVID-19 Market Update – 05/03/2021
8 minutes to read
Introduction
This is the 34th of a series of weekly notes analysing the state of the UK retail market in the light of the COVID-19 pandemic. This note explores the implications of this week’s Budget, focusing on the two key areas of relevance to the retail sector:
- Some perspective on the £5bn Restart grants
- Extension of the business rate holiday
Please do not hesitate to contact myself or any of my retail colleagues if you require any further information.
Key Messages
• Chancellor pledges £5bn in Restart grants
• Capped at £6k per premises for “non-essential” retail
• Capped at £18k for gyms, leisure and hospitality
• Geared very much towards small operators/independents
• Will not plug the gap in ca. £22bn of lost non-food sales in 2020
• Less than a day’s takings for many operators
• <one day’s takings vs >7 month’s lost trade through lockdown
• Minimum wage to rise +2.2% to £8.91 from April
• A major cost increase for many retailers
• Business rates holiday extended to June
• Reduced rate for six months thereafter
• Relief capped at £2m per business
• Potentially too early for much of the high street
• No mention of possible online tax in this Budget
• More detail likely on 23 March in wider tax consultations.
1. Some perspective on the £5bn Restart grants
So telegraphed in advance were many aspects of this week’s Budget that the event itself actually felt like an anti-climax, almost the dissemination of “old news”. Two features – business rates and the £5bn Restart grants – stood out as being of the most direct relevance to the high street.
As reported in the press the previous week-end, the Chancellor has set aside £5bn in Restart grants for shops and other businesses in England forced to close under lockdown. Some sort of acknowledgment at least of the plight of many retail, leisure and hospitality operators, although unlikely to be a significant gamechanger for the high street as a whole. The grants are unequivocally aimed at small rather than large businesses.
A sum of £5bn appears a big number on paper, but the sad reality is it is a drop in the ocean in the context of what the retail sector has had to endure over the past year. By way of context, the British Retail Consortium (BRC) has estimated that non-food retailers lost around £22bn in sales last year. A single operator, Primark, put its own loss of trade at £1.1bn due to lockdowns. The even sadder reality is that cash injections from the Treasury will never fully plug the gap in lost revenue, but can at best only dress very deep wounds.
The limitations of the Restart grants are even more apparent in the two levels of caps that will be applied - £6,000 per premises for non-essential outlets due to re-open in April and £18,000 for gyms, personal care providers and other hospitality and leisure businesses. For many operators, this would equate to less than a single day’s takings. So effectively, having been forced to close for nearly eight months over the last year through the three lockdown periods, they are recouping less than one day’s trade in recompense.
Sticking with Primark, more for context than example (Primark probably being too large to qualify for any grant). Primark’s 185+ UK stores turn over an average of ca. £18m a year, so an average of ca. £50k a day. £6k therefore represents less than one hour’s takings on an average day. Primark is obviously a very strong, well-financed, multi-national retailer and there is absolutely no doubt that it will bounce back quicker than most when Lockdown V3 is lifted (all being well) on 12 April. Its future will not depend on government subsidy, but the point is that others’ may, big operators as well as small.
Admittedly, the Restart grants are likely to provide more of a lifeline for those that are actually designed to aid, smaller operators and independents. £6k / £18k may be helpful in alleviating some of the costs that will be incurred in re-opening. But little more than that. They will certainly not redress the volumes of trade that have been lost during lockdown.
Whilst few would in any way begrudge smaller operators a helping hand, the Restart grants will make minimal inroads in repairing damage done to the wider high street during the pandemic. The ongoing worry is the implicit assumption in Central Government that national multiples are ‘big businesses’ and therefore not in need of help or fiscal support.
There are also some ‘hidden nasties’ in the Budget that are actually at odds with the Restart grants. From 1 April, the minimum wage will increase from £8.72 to £8.91 and the age threshold for the top banding will be lowered from 25 to 23. Always projected as a positive for the retail sector in that they increase the level of consumer disposable income, movements in minimum wage are actually a major cost issue for most retailers.
Since 2012, the minimum wage has increased by £2.72 in absolute terms, or +44% in percentage terms. How many retailers have grown their top line by anything like that over the same period? Very few, if any. Costs rising at a faster rate than sales has been one of the destabilizing factors in retail markets even prior to COVID. Any further increases in minimum wages will intensify rather than ease the problem for retailers.
The Restart grants of £5bn may soften the blow slightly for some smaller retail operators, but will have limited impact on revitalizing the high street. They certainly put the paltry £1.2m previously set aside for the Portas Pilot towns into perspective. Above all else, the challenges facing the high street cannot be resolved through money alone.
2. Extension of the business rates holiday
As boldly predicted in the Retail Note of 19/02/21, the Chancellor confirmed that the business rate holiday would be extended beyond the end of March. But sadly not for the full year that we boldly hoped for. And, although widely mooted prior to the budget, any mention of reforming the current system through an online tax was conspicuous by its absence.
The business rates holiday will now be extended until the end of June. This will be followed by a further six-month period where rates will be discounted to one third of the normal charge, up to a maximum of £2m for closed businesses. But no reference to any degree of reform, radical or otherwise. On balance, possibly not altogether surprising and in all likelihood, much more detail will be presented on 23 March when the Treasury publishes its range of tax consultations and calls for evidence.
Our views on the whys and wherefores of an online tax, as articulated in the Retail Note of 19/02/21 remain unchanged. In a nutshell, root and branch reform of the current business rates system is necessary to level out the economic realities of modern day retailing. Online operators must be brought more into the equation, but not to the detriment of multi-channel operators. A straight online tax would be fraught with complexity, in sharp contrast to a system that is currently relatively simple and easy to collect. Resettlement across other property uses (especially industrial) may be a more viable option or a delivery / “green tax” a more equitable long-term response. Roll on 23 March…
A couple of observations on the business tax announcements made in the Budget itself. From a purely retail perspective, June feels premature. It seems to be predicated on an assumption that both “non-essential” retail and all hospitality (indoor and out) will re-open as planned by 12 April and 17 May, trade will come flooding back and those businesses will be firmly back in recovery mode.
The reality is likely to be somewhat different. Yes, hopefully both the retail and leisure will be fully up and running again come the end of June. And, yes, we anticipate a very swift rebound in consumer demand as pent-up cash and general lockdown frustration is released (as detailed in the Retail Note of 26/02/21). But an actual recovery will take considerably longer, many months not weeks.
At best, retail and hospitality operators will only be in a fragile state of recovery by the end of June. There are a couple of significant roadblocks before then in the shape of two quarterly rent days, the one in March a particular pinchpoint in that it will come at the end of a full quarter of total lockdown for many operators. Expecting retailers and leisure operators to restart paying business rates as early as June is tantamount to making them run before they’ve even started to crawl again.
The second observation relates to the cap of £2m on the discount available for the six months after June. As with the Restart grants, this is clearly geared towards smaller operators and independents and will only partially apply to larger multiples. Bigger businesses yes, but still in need of ongoing financial support.
Ordinarily, much of the focus of any Budget centres on measures to stimulate consumer demand, a key driver of the wider economy. Such measures were there in this Budget (e.g. extension of the furlough scheme, freezing of fuel and alcohol duty, reduction in VAT for the hospitality sector), but from a retail perspective, these feel curiously irrelevant in the current environment.
Consumer demand will probably be far less a concern when Lockdown V3 is lifted. Consumers will spend and they will spend freely, whatever economic metrics may suggest to the contrary. The challenges facing retailers and F&B occupiers are far more structural than economic. Which is why any retail narrative of spend or growth being “back to pre-pandemic levels” needs to be taken with a heavy pinch of salt. Do not confuse a rebound in spend with a retail recovery, the time lag between the two will be considerable.