Powered by people and technology in 2018

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1 Powered by people and technology in 2018 The retail and wholesale view Owner managed businesses PRECISE. PROVEN. PERFORMANCE.

2 Contents Foreword Foreword 1 Confidence in Aspirations for Strategies in Concerns in Brexit: the retail and wholesale view 8 Bridging the skills gap 10 W. J. French & Son: blending technology with traditional skills and service 12 Our solutions 14 This year we have found a slight bounceback in confidence among owner managed businesses (OMBs) in the retail and wholesale sector in achieving revenue and profit targets. There has also been a marginal increase in confidence in the general outlook for the year ahead, although retail and wholesale OMBs are slightly more cautious about the future than OMBs generally. Sometimes this caution results in performance that exceeds expectations, as was the case for many retail and wholesale OMBs in Nevertheless, the weak pound and rising cost of imports continues to apply pressure on the sector. Retail and wholesale OMBs are also worried about the strength of the UK economy, far more so than most OMBs across other sectors. Despite the challenging environment or even because of it many retailers and wholesalers continue to refresh their offer by launching and developing new products and services. They believe their staff can make a difference, and importantly are investing in their staff by developing their internal teams to fill skills gaps. Investment in technology is also taking place, as OMBs seek to translate advancements in technology into business opportunities. Simplifying data through the use of new software will help retail businesses from suffocating from data overload. This is so encouraging: regardless of the economic climate, combining the power of people and technology is a sound strategy for improving business performance across the retail and wholesale landscape. Survey details To gather the data for this report, we conducted an online survey of OMBs between 1 November 2017 and 12 January We analysed 653 responses drawn from across all sectors throughout the UK. Respondents were senior leaders within their businesses primarily founders and owners, chief executives and managing directors, or other high-level directors. We also conducted in-depth interviews with the leaders of a number of OMBs to learn more about their experiences of 2017, their expectations for and concerns about 2018, and the strategies they aim to apply in their businesses. Gareth Jones Partner Head of Retail & Wholesale gareth.jones@moorestephens.com The owner managed business view in 2018: Retail and wholesale sector 1

3 Confidence in % are confident about the general outlook 68% expect to hit revenue targets for 2018 Aspirations for 2018 Need to keep overheads low to off-set increase in living wage, NI contributions, pension payments. Need to pull in more customers. 56% are confident about hitting profit targets Just over half (53%) of retail and wholesale OMBs are confident about the general outlook for 2018 (a similar result to the 51% last year) but this is well below the overall result of 60% for all OMBs this year. Retail and wholesale OMBs are also less confident about hitting revenue and profit targets than OMBs generally: 68% of retail and wholesale OMBs expect to hit their revenue targets for 2018 (compared to 71% overall) and 56% are confident about hitting profit targets compared to 64% overall. However, these results show a slight increase on last year s low confidence levels among retail and wholesale OMBs (63% for revenue targets and 49% for profit targets). Partner Gareth Jones says this bounce back in optimism is encouraging and hopefully it will continue into Looking back at 2017, 43% of retail and wholesale OMBs say their business performed better than expected against revenue and profit targets, while 19% say their business performed worse than expected in These results are broadly in line with the overall findings for OMBs across all sectors. Retail and wholesale respondents are looking to sustain revenue and profits in 2018 by investing in product diversification, and importantly customer service and staff skills, while also keeping overheads under control. To diversify into new product areas to win new customers and increase revenue and profitability, whilst at the same time maintaining high service levels to our existing customer base, both at home and overseas. To adapt and change using technology to better effect. To maintain turnover margin and profit. To increase staff ability to deal with changing consumer demands. Increase net profit by improving our marketing to increase sales and reducing costs. Start thinking [about] out-of-the-box solutions for client s need and provide value for money and innovative solutions. 2 The owner managed business view in 2018: Retail and wholesale sector The owner managed business view in 2018: Retail and wholesale sector 3

4 Strategies in 2018 Strategies in 2018 Launch new products or services Invest in staff training 42% Reduce costs or overheads 35% Develop new products or services 45% 44% Expand UK customer base 40% Invest in new technology and IT systems 26% Retail and wholesale OMBs are more likely than OMBs generally to be launching new products or services this year 45% are certain or very likely to do so, compared to 37% of OMBs overall. However, this represents a fall from last year (52%). Similarly, 44% of retail and wholesale respondents plan to develop new products or services a similar result to the 42% last year, and a slight increase on the 38% of OMBs generally. Retail and wholesale OMBs are also looking at investing on other aspects of business development. For example, 42% intend to invest in staff training in This, although an increase from the sector s result of 34% last year, is however far below the 51% of all OMBs we surveyed. Gareth Jones, Partner, sees this realistically: Improving customer service and staff soft skills will make a difference although it may take time to turn it into profit. We will take a more in-depth look at training priorities later in this report. to 50% of OMBs generally and 51% of retail and wholesale respondents last year). Retail and wholesale OMBs are, however, substantially keener than OMBs generally on reducing costs and overheads (35%, compared to 24% of OMBs overall). 68% of retail and wholesale OMBs view advancements in technology such as automation, artificial intelligence (AI) and machine learning as an opportunity (6% see an immediate opportunity, 62% view it in the medium to long-term). By using technology to simplify their data will help retail businesses from suffocating from data overload which is vital given new legislation and the continual growth of Big Data affecting the sector. While 21% of retail and wholesale OMBs are interested in succession planning (compared to 24% overall), 16% aim to grow through acquisition (well above the 7% of OMBs generally). This sector also seems relatively cautious about UK expansion: only 40% plan to expand their UK customer base in 2018 (compared Gareth warns that the right acquisition can transform any business. Those, however, made out of desperation rarely succeed. 4 The owner managed business view in 2018: Retail and wholesale sector The owner managed business view in 2018: Retail and wholesale sector 5

5 Concerns in 2018 Concerns in % are concerned about the strength of the UK economy 47% are concerned about fluctuating exchange rates 40% are concerned about an increase in business rates 52% are worried about the impact of Brexit negotiations 47% are worried about domestic competition The sector faces a fight for survival. The strength of the UK economy continues to be a huge concern for retail and wholesale OMBs in 2018: rising from 66% last year to 86% this year, compared to 78% of OMBs overall this year. Gareth Jones, Partner, notes that the retail sector is an important barometer for the UK economy as a whole. Retail and wholesale OMBs also show relatively high levels of concern about domestic competition and fluctuations in exchange rates: 47% are worried about each of these issues (compared to 39% and 34% of OMBs overall). Just under a third (30%) are worried about rising interest rates (the same as the overall survey result), but retail and wholesale OMBs are slightly less concerned than OMBs generally about the strength of the global economy (23% compared to 28% overall). When asked about business concerns, just over half (52%) of retail and wholesale OMBs are concerned about the impact of Brexit negotiations on business (in line with the overall result of 51%). They are also highly concerned about an increase in business rates (40% compared to 26% overall), payroll costs such as pension auto enrolment and the national minimum and living wages (39% compared to 25% overall) and an increase in the business tax rate (32% compared to 27% overall). However, retail and wholesale OMBs are much less concerned about a shortage of skilled staff than OMBs generally (29% express this concern, compared to 41% of all OMBs surveyed). Last year 40% of retail and wholesale OMBs expressed concern about staff shortages, but perhaps economic worries have pushed this issue slightly down the current agenda. Other concerns expressed by retail and wholesale respondents include issues around extracting profits from the business (27% the same result as for all OMBs) and complying with the EU General Data Protection Regulation (GDPR) (22% almost matching the overall result of 24%). Retail and wholesale OMBs are slightly less concerned than OMBs generally about the threat of cyber attack or data breach (22% identifying this concern, compared to 29% of all OMBs) and about and keeping pace with and/or adopting new technologies (22%, compared to 27% overall). 6 The owner managed business view in 2018: Retail and wholesale sector The owner managed business view in 2018: Retail and wholesale sector 7

6 Brexit: the retail and wholesale view Brexit: the retail and wholesale view Only 5% of OMBs in the retail and wholesale sector think that the government is listening to their concerns, and, as already identified, 52% are worried about the impact of Brexit negotiations on business. Alongside this, 44% don t think the government is taking the concerns of SMEs into account in their negotiations with the EU and the other 51% think the government considers SME concerns occasionally (respectively compared to 49% and 44% of all OMBs surveyed). Gareth Jones, Partner, says: It s clear to see that the Government s strategy in negotiating Brexit is fuelling the fire of uncertainty in the sector. Just under half (48%) are worried about the introduction of tariffs after the UK leaves the EU which is well above the 38% of OMBs across all sectors. Given that only 27% are exporters, respondents are mainly concerned about the impact of import tariffs, which could impede supply chains and increase costs. Interestingly, their other Brexit-related concerns are lower than the overall OMB average: 21% are concerned about a loss of European customers (compared to 23% overall) and 17% are concerned about a shortage of EU labour after Brexit which is much lower than the 30% of OMBs across all sectors. Only 8% of retail and wholesale OMBs (compared to 18% of all survey respondents) are concerned about a loss of EU grants and subsidies. In free text, several respondents referred to the uncertainty associated with Brexit. For example, one stated that uncertainty is the killer, another explained that uncertainty leads to less capital projects which leads to supply chain instability and another noted that the general uncertainty will continue to affect sterling negatively. One survey respondent expressed their concerns over the short and long term, as follows: The immediate economic impact on our business is the weaker pound through increasing our import prices, as well as the cost of home-sourced product. The uncertain outlook for the Brexit negotiations makes forward planning very tricky. If finally this results in an economic downturn in the UK economy, our business growth could be impeded, and we may need to be prepared for contraction in the worst case. Another commented that the negotiations were taking too long and were being conducted by the wrong people, calling for experienced business negotiators to take over from civil servants and politicians. Although some respondents explained that they didn t feel affected by Brexit, only one implied they thought there could be benefits from leaving the EU, but gave no explanation of what these were. Do you think the Government is taking into account the concerns of small and medium size businesses in their negotiations with the EU? 44% No, they do not listen to our concerns 5% What aspect of leaving the EU concerns you most? 48% Introduction of tariffs 21% Loss of European customers 17% Shortage of EU labour Shortage of EU labour Yes, they are listening to us 51% Occasionally 8% Loss of EU grants and subsidies 6% No aspect 8 The owner managed business view in 2018: Retail and wholesale sector The owner managed business view in 2018: Retail and wholesale sector 9

7 Bridging the skills gap Bridging the skills gap The skills gap is a theme that arises frequently in discussions and research with OMBs. Retail and wholesale OMBs are taking action to tackle this issue, primarily through internal development plans: 60% plan to address any skills gap by developing internal teams through training in 2018 (closely aligned to the 61% of OMBs across all sectors). However, in line with their need to lower overheads, only 35% of retail and wholesale OMBs will be actively recruiting to fill skills gaps (compared to 45% of OMBs overall). Interestingly, where costs could be saved, only 6% (compared to 13% of all OMBs) plan to use funds from the Apprenticeship Levy, and 9% intend to create apprenticeships (compared to 15% of OMBs nationally). Retail and wholesale OMBs provide training and support to talent at all levels of their business: 65% train junior or entry level staff (compared to 68% nationally), while 49% train middle management (56% nationally) and 40% Plans for addressing any skills gap within the business: Plan to address skills gaps by training internal teams 60% Actively recruiting 35% vs 45% invest in training their senior leadership team which is interestingly a substantially smaller percentage than the 54% of OMBs overall. OMBs in the retail and wholesale see most need to develop sales and marketing skills in their business: 60% feel the need for investment in this area (well ahead of the 45% result for all OMBs). This is the natural choice for businesses operating in wholesale and retail. Many retail and wholesale OMBs (44%) also see the need to develop digital skills in their business. A similar proportion (40%) also identify the need for leadership and management skills. Just under a third (30%) see the need for investment in developing soft skills (such as negotiation, communication and time management) and similarly 29% hone in on the need to develop commercial awareness. All of which are aligned to the wider OMB view, however only 19% of retail and wholesale OMBs highlight technical skills (e.g. financial, HR, accounting or legal) compared to 30% of all OMBs. nationally Invest in training the senior leadership team 40% vs 54% nationally Areas of training or development requiring investment: Sales and marketing skills Digital skills Leadership and management skills Soft skills (e.g. negotiation, communication, time management) Commercial awareness Technical skills (e.g. financial, HR, accounting or legal Securing quality accreditations (e.g. ISO9001, ISO14001) 60% 45% 44% 48% 40% 43% 30% 34% 29% 27% 19% 30% 10% 13% R&W OMBs OMBs nationally 10 The owner managed business view in 2018: Retail and wholesale sector The owner managed business view in 2018: Retail and wholesale sector 11

8 W. J. French & Son: blending technology with traditional skills and service The oldest and largest independent shoe The business has recently invested in an French is keeping a close eye on the shop in Hampshire, W. J. French & Son is a EPOS system to help with stock control and bottomline by reducing overhead costs where family-run business. Trading in Southampton sales reports, facilitating more cost-effective possible. However, given its focus on since 1803, it is now in the hands of the buying decisions. This new system also customer service, the biggest overhead is eighth generation of the French family. means that we can operate live stock levels staffing. Absorbing the increase in the on our e-commerce website, which has national living wage and pension contributions Competition is tough and businesses need recently been updated, French says. Many is a challenge. In addition, the weak pound is to stand out from the crowd, says managing customers use our website as a shop making the European goods we buy more director Caroline French. Clothes shops and window to browse through products and then expensive and our profit margins tighter, supermarkets sell cheap footwear and there come into the shop to try them on. French says. I have looked at making is a massive online offering, which wasn t the Meanwhile, online sales are picking up. The efficiencies through more flexible working case 10 years ago. Nevertheless, she is opportunity to sell in Europe with the weaker hours, but this is a difficult balancing act. positive about 2018 because of the good pound makes the business more competitive. Caroline French shopping experience and excellent customer service her business provides to customers. French thinks the economy will hold up well Managing Director Our staff have an average of 20 years fitting in 2018, but does have some concerns. The W. J. French & Son experience, have excellent product emerging developments from the ongoing knowledge and are passionate about getting Brexit negotiations are a huge factor that will the right fit for the customer, French says. have an impact on consumer attitudes and spending, she says. Both interest rate rises The business also promotes its onsite and inflation are obviously economic factors workshop, where cobblers repair shoes and that affect the cost of living for people s real leather goods. This is a specialist skill and it disposable income. is hard to find a skilled cobber these days, French notes. 12 The owner managed business view in 2018: Real estate and construction sector

9 Our solutions Our solutions 68% of retail and wholesale OMBs view advancements in technology as an opportunity and 26% plan to invest in new technology and IT systems Why not make that investment in a solution that provides you with the vital business intelligence (BI) you need to succeed? We can support you by ensuring the right amount and type of data is collected via the right systems to allow you to review and interpret your data in a visual dashboard. Our BI services are tailored to your specific needs, and we work with you to guarantee actionable insights, including market expansion strategies, prediction of changing customer needs and optimisation of product sales and inventory. 35% of retail and wholesale OMBs are certain or very likely to reduce costs or overheads No business can reduce costs without accurate and up-to-date information on business performance. Stream, our cloud-based outsourcing solution, allows owner managers to access key data and reports wherever they are. It enables you to spend more time making effective business decisions and less time on back office accounting. 52% of retail and wholesale OMBs are concerned about the impact of Brexit negotiations on their business As the details around the terms of the UK s exit from the EU become known, it s vital that OMBs discuss the scenarios that might impact their business and take stock of the risks and opportunities that the future might bring. Our team can advise on efficient structures to manage commercial and tax risks, and provide assurance that your business has a robust strategy in place. We work with our clients to devise a plan to mitigate uncertainty. 44% of retail and wholesale OMBs are certain or very likely to develop new products or services Innovation remains a key driver for OMBs when it comes to going for growth. Our specialist team can support you to identify projects that may qualify for research and development tax relief or grants, and have extensive experience in reviewing previously submitted claims as part of a second review. Our success is measured in the 250m we have successfully supported businesses to claim in R&D tax relief since the scheme launched in % of retail and wholesale OMBs are certain or very likely to grow through acquisition Mergers and acquisitions (M&A) are major events in the lifecycle of any business, involving many complex elements. Finding the right acquisition can transform any business and we have a proven track record in the sector. Our M&A specialists can help you manage the process successfully from start to finish, including identifying suitable targets, establishing realistic valuations, designing appropriate funding structures, achieving effective tax planning, conducting due diligence and supporting negotiations. 29% of retail and wholesale OMBs view a shortage of skilled staff as a key business concern The ability to attract and retain key team members is a key contributing factor to the success of your business so understanding the range of tax approved share schemes that can help provide an incentive for the right people contributing to your business commercial objectives. Our team can support you to review and understand the options available to you, and assist in the design process advising on all aspects of valuations, tax implications, employment and capital gains tax treatment. 14 The owner managed business view in 2018: Retail and wholesale sector The owner managed business view in 2018: Retail and wholesale sector 15

10 We believe the information in this report to be correct at the time of going to press, but we cannot accept any responsibility for any loss occasioned to any person as a result of action or refraining from action as a result of any item herein. Printed and published by Moore Stephens LLP, a member firm of Moore Stephens International Limited, a worldwide network of independent firms. Moore Stephens LLP is registered to carry on audit work in the UK and Ireland by the Institute of Chartered Accountants in England and Wales. Authorised and regulated by the Financial Conduct Authority for investment business. DPS40159 April 2018