Dear Prime Minister Johnston – Retailing Needs Your Help

by Centre For Retail Research Retail Briefings Who’s Gone Bust Briefings

13 December 2019

Dear Prime Minister

Well-deserved congratulations on achieving a substantial majority and bringing to an end a parliament that could neither agree to ditch Brexit nor agree how to progress Brexit. Irrespective of whether people agree with you, you must derive a certain degree of satisfaction that you have achieved this success in the teeth of the contempt of the impossiblists of the metropolitan elite.  

Retail as an Industry. Now you are securely in government, you need to turn your attention on the retail industry. This is suffering. It is a critical sector of the economy with almost 3m direct workers and a further 0.8m in allied trades. No one would expect you to intervene simply because companies have failed to modernise, are closing shops and warehouses and making hundreds of thousands of workers redundant in the face of intense competition. But if this were the steel industry or cars it would be very different.

The Social Fabric of Our Towns. It would be wrong to intervene simply because many retailers are facing chronic problems. However the cumulative adverse effect of store closures and under-investment on town, village and city centres in lower-income areas are likely to be permanent. Once the social fabric of an area has been depleted, and shops that people want to use eventually close, town centres will die and residents will lose that sense of community. Instead there will be chicken shops, betting shops, vaping, hairdressers and perhaps a well-defended convenience store.

The Problem with Business Rates. The retail industry pays 25% of all the business rates paid by industry, commerce and professional firms. But it represents only 7% of the value added in the economy. Compared to the average business, retailers pay 157% more of their sales in business rates. This weighs particularly hard on bricks-and-mortar stores for which business rates represent 2.3% of their turnover. In contrast, the cost to online businesses of business rates is only 0.6%, meaning that the rating system actively discriminates against the success of physical stores and in favour of online retailers. When online was only 2% or 3% of shopping, this difference did not make much difference. Business rates are now the largest tax that retailers pay to the government (42% in 2018 according to PWC) and this is quite simply unfair. If you cannot do that, at least give immediately to those retail premises whose rateable values are now lower than pre-2017, the full reduced business rate, rather than expecting them to continue compensating retailers in more fortunate areas.  

Tax Avoidance. The ability of many multinational corporations to earn profits in low or zero-tax countries like Ireland and Luxembourg is a threat to the integrity of your government’s revenue streams as well as discriminating against UK retail businesses like Sainsbury’s, John Lewis & Partners, and Next which do not take this approach. A pan-European attack on this issue has long been promised and is years away from materialising. We urge you now to use the VAT system to rectify some of the anomalies of current fiscal policy by introducing a higher VAT rate for online retail businesses, such as 22%, and reducing VAT for bricks-and-mortar retailers such as 18%.  

The Dangers of Using Retailers as ‘Free Money’.  It started I think with glorious George Osbourne, who combined an attack on local authority spending and welfare payments to the poor with largesse in the form of higher wages (the Living Wage) to employees of private and public firms. If wages are forced up excessively by government pressure: profits fall; shops, restaurants and cafes may close; workers become redundant and departing employees are not replaced. The government minimum wage has been an unmitigated success precisely because of the care taken not to produce unaffordable increases. When governments start setting wage rates as part of pre-election munificence they affect the performance and the future of many struggling businesses. I suppose the best than can be done is for the new government to mitigate the effects of their Living Wage proposals by reducing the employers’ National Insurance charges.

You Need to Start Somewhere. These are some ideas to start with. No one expects you to solve every outstanding problem but you can at least get started.

One more thing. Can we please drop this over-zealous use of our by politicians all the time before every public service or good thing. As in our NHS, our schools, our Norwich, our Liverpool, our welfare state, our countryside. We never used to do that. Most of them are large managed bureaucracies, run well or badly. The used to be good enough.

Yours sincerely

Professor Joshua Bamfield

Centre for Retail Research