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Can the high street return to form without the support of the consumer credit crutch?

Author: Michael Young
15 October 2010

Mike Young, St Albans partner at FRP Advisory LLP, the specialist restructuring, recovery and insolvency firm, analyses consumer lending patterns and what a more austere approach to personal finance, coupled with the 2011 VAT increase and a subdued economic recovery, will mean for performance on the high street.

A quick office or dinner table survey is likely to back-up statistics released this month (October 2010) by Nationwide; consumer confidence was at its lowest level in September since March 2009, largely caused by people's concern about the impact of the Government Comprehensive Spending Review (CSR). Ask your friends and colleagues; there are likely to be few among them who are planning major purchases in the next few months, such as a house, a car or a new kitchen. In its latest report, The British Retail Consortium found that, although like-for-like sales grew by 0.5% in September, this was a significant drop on the 1% experienced in August, with "big ticket" items (bathrooms, fitted kitchens) on the high street being the hardest hit.

Undoubtedly, this is driven by low consumer confidence, but it is also greatly influenced by our changing attitudes towards, and the availability and cost of, credit. A few years ago, credit was easy and cheap to get hold of, jobs were plentiful and too few of us concerned ourselves with how we would pay our debts back. It was a part of our new found consumer culture – we didn't need to deny ourselves anything, because consumer or store credit allowed us to live and buy well beyond our means.

Figures* taken from the Bank of England (BoE) show that, in August 2000, net lending to individuals totalled £644 billion, with secured borrowing standing at £522 billion and unsecured at £122 billion. Just five years later, in August 2005, total net borrowing had jumped to £1.122 trillion, with secured borrowing reaching £932 billion and unsecured £191 billion. These figures are staggering and it should come as no surprise that, over this period, the number of personal insolvencies increased by 38,056, reaching 67,584 in 2005 (Insolvency Service)**, despite relatively benign economic circumstances, low rates of unemployment and, indeed, low interest rates compared to historic levels. It became more socially acceptable to 'go bankrupt' or to enter into an Individual Voluntary Arrangement (IVA) - a slightly more constructive alternative, in that it should ensure at least some return to creditors. The number of IVAs being entered into led, or perhaps was driven by, new businesses providing IVA solutions – they took on a standardised, volume based approach and the numbers soared.

From August 2005 to August 2010, the rate of growth in consumer lending slowed, particularly in the run up to the recession. However, total net lending in August 2010 was still at £1.457 trillion (BoE) and the annualised rate of personal insolvencies to June 2010 had more than doubled to 140,850 (Insolvency Service). The increase in insolvencies was driven by a combination of straightforward excessive borrowing, as a result of the ready availability of credit, a shift in cultural attitudes and the marketing of personal insolvency solutions. The dramatic fall in property values, rise in unemployment and the current slow recovery, have compounded these problems.

What is noteworthy and of concern, is that although the rate of increase in borrowing slowed during the recessionary period, consumer borrowing kept going up and existing levels of debt are still greater than GDP. With such a mountain of debt, set against the backdrop of poor short to medium-term economic prospects, it is unlikely that the availability of credit, or the confidence to access it, will improve in the near future. In reality, there needs to be a reduction in the total level of indebtedness, particularly unsecured, to create headroom for further spending.

Similar to business lending, more prudent consumers are now concentrating on paying downdebt. Many are now saving, either to fund purchases they would traditionally have used credit to buy, or because they are concerned about job security. There has been a perceptible shift in our attitude towards credit, as well, arguably, as consumerism, and this is only partly driven by the cost and availability of debt.

So how will the high street perform in this new reality?

It is highly likely that consumer spending will remain subdued this quarter. The recovery is tentative and few are predicting strong growth over the next few months. The retail sector has undoubtedly been supported by the borrowing and spending habits in the decade running up to the recession and the bubble has apparently burst. The growth in levels of borrowing could not continue at the rates experienced in the early and mid 2000s. Without the crutch of consumer credit, we are unlikely to see the same levels of growth in the retail sector as those experienced during the early years of this decade.

In addition to a subdued economy and the forthcoming VAT increase, high street stores also have a large number of fixed overheads – rent, rates, service charge – and, therefore, results can vary markedly due to footfall. High street store operators are having to negotiate with landlords in many instances, to agree terms of monthly rent or turnover rents, just to survive.

In contrast, online retailers are performing relatively well, which reflects the persistence of young spending and the absence of expensive overheads. Additionally, pockets of retail, such as young, low-cost fashion (Primark, TK Maxx), are growing – and, at the other end of the spectrum, the high value sector has remained largely unaffected, due to its wealthier customer profile. However, for much of the high street, it will be a case of continuing to run a tight ship, as our steps towards a recovery become more sure-footed. There will be a continued period of austerity and we are unlikely to see a return to the growth rates in consumer borrowing of the early 2000s. However, as the economy improves, so too will consumer confidence and, as people rid themselves of debt or take it to more manageable levels, they will begin to find more disposable income. I don't believe we, as a nation, will ever grow tired of our penchant to shop, but the high street must accept that its performance is unlikely to be so considerably propped up by consumer credit again.

*To view Bank of England consumer borrowing statistics visit http://www.bankofengland.co.uk/statistics/li/2010.htm

**To view Insolvency Service statistics relating to personal insolvencies visit http://www.insolvency.gov.uk/otherinformation/statistics/insolv.htm

For more information, please contact Michael Young using the online form below.