Business rates: the “gift” that keeps taking
The BRC business rates lobby gains momentum ahead of the Budget, the CMO’s bizarre ruling on JD’s proposed takeover of Footasylum, strong HY figures from Dunelm and improving performance at New Look.
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• Having spooked the market with an over-sensationalistic December release, the BRC’s figures for January were more positive. Total retail sales increased +0.4% during the five weeks to 1 Feb, above the three- and 12-month average declines of -0.4% and -0.2% respectively. Like-for-like sales were flat. Detractors pointed out that these figures were well below the growth figures the previous year (+2.2% overall, +1.8% like-for-like), ironically missing the point that this made for a challenging comp base. The BRC itself admitted (through semi-gritted teeth) that January showed a “semi-positive performance”.
• Very impressive HY figures from Dunelm. In the 26 weeks to 28 Dec, the value furnishings retailer reported a +19.4% increase in pre-tax profits to £83.6m, while total revenue rose +6% to £585m. Like-for-likes increased by +5.6% year on year and online sales (i.e. online home delivery, reserve and collect, click & collect and tablet-based sales made in-store) were up +33.2%. The update included an upgrade to FY profit expectations.
• Fashion retailer New Look reported reduced losses in its third quarter, helped by cost control and lower markdown activity. The business reported a statutory loss before tax in the year to date of £1.2m, versus a loss of £63.2m in the comparable period last year. Total revenue was £830.1m compared with £930.4m last time, largely a reflection of a CVA-induced smaller store estate. But, more worryingly, like-for-like sales (which strip out space changes) were still down by -7.1%.
Stephen Springham, Head of Retail Research:
Retailers and landlords never agree on anything. But they do on business rates. Such is the level of opposition to what is clearly an inequitable system.
The BRC has again lobbied the government this week for business rate reform, writing to the Chancellor ahead of next month’s Budget. The submission has been co-signed by CEOs from more than 50 retailers including Sainsbury’s, Marks & Spencer, Ikea and Greggs. In addition to the usual (but very valid) narrative that the business rates system is broken and has become “unsustainable for many retailers” and that “fundamental reform is needed in the medium term”, the submission focussed specifically on the issue of transitional relief.
According to the BRC, since being introduced in 2017, transitional relief has cost the retail sector £543m by forcing retail to subsidise other industries. It has also forced locations outside of London to subsidise businesses in the capital to the tune of £596m over the past three years.
We fully endorse the lobby. Transitional relief is just one of many inequities of the current system. The original rationale of transitional relief is “to protect ratepayers against significant and unprecedented increases” and the key point is that the system must be “fiscally neutral”. To put this into layman’s terms (or rather, my understanding of this), all the money raised from business rates increases is counterbalanced by rebates to other properties that have seen rateable values decline over the specified period.
Much of the business rate debate quite rightly focusses on the huge increases that many properties face and the pressure this is putting on most retailers. But there are still huge inequities at the other end of the equation. The system of transitional relief means that the rebates are dripfed over a period of time, rather than provided as a lump sum. Retailers are not receiving money they may be owed, or if they are, it is over such a protracted period that they see limited benefit.
Will the chancellor take heed? Unlikely, if past performance is anything to go by. The government has yet to commit to the root and branch overhaul that the system requires, instead only tinkering round the edges. The focus has thus far been on extending relief bandings to lower rateable value properties.
But this is addressing the wrong end of the problem and demonstrates a worrying misunderstanding of the fabric of the UK retail market. The high street is no longer just the domain of independent butchers, bakers and candlestick makers, as the government seems to think. Sure, we need to recognise the significant role that independents play and appreciate the vitality they bring to the high street, but the government needs to take a more holistic view. Supporting the “little guy” to the subordination of all else will not “save the high street”.
Still lacking from the whole business rates debate is a viable, fully quantified alternative. There have been proposals for an online or “Amazon Tax” to level the playing field, but in my opinion this is not necessarily the solution. In simple terms, most retailers are now multi-channel operators and will just be taxed another, additional way. The last thing UK retail needs is additional tax.
In my opinion, inequities in the business rate system need to be explored in a much wider context, one that extends beyond retail and real estate as a whole. Otherwise, we will always be in a “robbing Peter to pay Paul” situation.
Just a suggestion: any shortfall that a revised but equitable business rate system produces could be counterbalanced by major multi-national tech companies paying their fair and correct share of corporation tax? And couldn’t one of the big accountancy firms deploy their tax experts to propose alternative tax scenarios that would give any lobby far more substance and weight (to quantify as well as qualify)? For that matter, does the BRC not have a very strong relationship with KPMG?
On a seemingly totally incongruous issue, the Competition and Markets Authority (CMA) has provisionally blocked JD Sports’ proposed acquisition of Footasylum, an incredible ruling and one that the former’s senior management is hotly contesting. Rightly so. It is hardly going to give rise to a monopolistic situation (JD has ca. 400 UK stores, Footasylum ca. 70) and their key product category of trainers is one of the most fragmented there is – any number of players from other sports retailers, fashion operators, department stores, online pureplays, to foodstores have a slice of the market.
Moreover, the takeover is a friendly (as opposed to hostile) one of an under-performing operator. JD has no intention of ‘slashing and burning’ and putting stores and jobs on the line, its intentions are to turn the business around, to grow it and run it as a parallel brand / operation.
So, why are the CMA provisionally blocking the deal? Second-guessing the CMAs is usually a fool’s errand (cf. Poundland/99p Stores, Tesco/Booker, Sainsbury’s/Asda) but one of the points they raise screamed out: the CMA believes a deal might mean “there could be fewer discounts and less choice in stores and online”. So, the CMA thinks widespread discounting and margin erosion is a healthy thing for a market as challenged as the UK retail sector? Does it not want the high street to have a sustainable future?
The parallels between the CMA’s ruling and the government’s stance on business rates? Examples of external establishment bodies failing to understand the fundamentals of the UK retail market and the challenges it faces. And only ever intervening in a counter-productive fashion. Standing aside when proactive intervention is needed and sticking an oar in where it isn’t.