Home-related retailers most at risk from Brexit fallout.
The unexpected vote for Brexit will have far reaching consequences for retail, but the most vulnerable players will be those that operate in the home sectors, as the potential negative effects on the housing market weigh heavily on their future investment plans.
With a heavily weakened pound likely to force up prices when hedges unwind next year, on top of a likely fall in consumer confidence impacting all of retail, and the possible constraint to the supply of cheap labour in the longer term, all of retail faces significant challenges.
For home-related retailers though, the potential impact on the housing transactions, with a wait-and-see approach likely to dominate, will exacerbate the issue. Furniture, floorcoverings and large electricals have the most to fear, though homewares has proved to be more resilient in downturns in the past as consumers look to cheaper ways to refresh the look of their homes.
The previous Verdict forecast for the combined home sectors (DIY & gardening, furniture & floorcoverings and homewares) of 2.4% growth in 2016 is now looking less achievable – or at least unlikely to be driven by volume growth and more so by inflation, therefore reducing already thin margins.
Even ignoring the currency and housing market anxieties, the demand to at least replace big ticket items in the current climate of unprecedented uncertainty will in all likelihood see a fall in the second half of the year as consumer confidence decreases – though the longer term may be more optimistic. This leaves all home retailers in a difficult situation, with some struggling to rationalise their bloated store estates, but none more so than Bunnings, which has plans to spend a significant amount on rebranding and turning Homebase around. However, the one positive for the Australian retailer is its reputation for a value-led, highly price-competitive approach, which will be perceived in an even more appealing light now.
While the total impact on home consumer expenditure over the next five years is hard to predict, the most likely, and prudent, action taken by retailers in the near future is going to be to delay making big decisions that carry significant financial risk. .
However, improvements being made by the traditional DIY retailers to their multichannel operations should not be ditched, with the job half completed by some. This could be more important than ever as shoppers turn online to more easily find the best value products for their more price conscious budgets.
As the volatile financial markets are clearly showing, the only certainty is that everyone is in the dark when it comes to understanding the full impact of Brexit. With the impending margin squeeze on retailers due to inflation and some still in the midst of restructuring, this is going to be a difficult period for home retailers, but one that can be managed through careful and considered decision making.