Economic reality killed the videostore

By Dr Steven McCabe on Jan 20, 13 08:27 PM in Economics

The title of this blog is a play on that wonderful 1979, though vaguely elegiac, pop tune 'Video Killed the Radiostar' by the Buggles and was evocatively sentimental in how television ended the career of a radio star as the Dexy's Midnight Runners song described "Poor old Johnnie Ray" who was supplanted by the more provocative and tele-visual Elvis Presley.

So in one week we have seen the demise of HMV and 'videostore' Blockbuster both apparent victims of the fact that customers can obtain exactly the same products cheaper online.

For those of my age HMV was a place to go and browse vinyl which mainly came in black - there was an innovation in the last 1970s of coloured varieties - and was either in the form of a single (45rpm) or album (33.33rpm).

It was a time when if you wanted something you needed to buy it in shops though, for a limited number of things that were not available there was mail-order. For those who are younger that twenty it is probably hard to imagine a world without mobile phones and the internet.

It begs the question as to why, beyond the sentimentality that many attach to HMV, should we care?

Let's face it, HMV is only the latest casualty and we can expect more to follow.

From an economic perspective this is not good news.

The UK retail sales figures published by the office for National Statistics (ONS) on Friday show that the seasonally-adjusted for December fell by 0.1% when compared with November and rose by the year-on-year percentage since 1998 of 0.3% (December 2010 was worse but is discounted because of the heavy snow which affected sales).

So, given the amount of financial strain that typical households are under, things could be worse.

However, what must be worrying for the Chancellor of the Exchequer George Osborne is the increase in sales being enjoyed by online retailers such as Amazon.

Because Amazon is based in Luxembourg it pays no corporation tax in this country even though its turnover in the last three years is over £7 billion.

Even though any increase in online sales may assist GDP - the latest quarter's to be published on Friday and which are widely predicted to show that there was negative growth - they don't result in additional income for the exchequer which, we are informed, is essential to getting us out of austerity.

There is also the question of where workers who are laid off will find alternative employment?

The malaise on high streets up and down the land is endemic of the fact that things are bad and not likely to get better anytime soon.

Indeed, according to research by the Local Data Company 1400 shops on UK high streets are at risk of closure within the next month. If these shops are not replaced by even the increasingly ubiquitous 'pound shops' this would mean just under a fifth of shops will be vacant.

Maybe I didn't worry too much about retail failure in the 1980s but I don't believe that it was this bad.

Some economic commentators are suggesting that unless we can arrest the decline and inject life into the economy we are in danger of experiencing 'a lost decade'.

It is to be noted according to US ratings agency Moody's Analytics the UK has suffered a lost half-decade of negligible or negative growth and is pretty much as it was four years ago.

The 'lost decade' (ushinawareta jūnen) is used to denote the 1990s in Japan when, after the catastrophic collapse in both property and asset prices, there was no growth.

And significantly there hasn't been much since leading some to now suggest that Japan has now experienced 'lost two decades' (ushinawareta nijūnen).

As Moody's believe, our industrial base operating way below capacity as is the construction industry. Their view is that there is little to be optimistic about.

The historically low interest rates we've had for the last four years have probably meant that things have been better than they might have been. But what more can be done?

The view is that 'quantitative easing' has not made that much difference so why pump more money into the economy?

Moody's believe that the shift by consumers to, if they can, save instead of spending will continue. The fact that inflation has remained steady at 2.7% for three months is, when compared to the 1970s, blissfully low.

However, average wages are not keeping up.

The ONS published data in November showing that inflation has been higher than average pay for the last twelve years and that since April 2007 whilst annual earnings have gone up by 10%, the inflation rate of good as measured by the RPI (Retail Prices Index) was almost double at 18%.

If people looking to save money can obtain exactly the same products as they buy in high street shops cheaper on line then who can blame them especially if it avoids having to pay car parking fees simply to get one's hands on the merchandise a day or so earlier?

No government will outlaw online retailing.

I recall the argument made that supermarket retailer Tesco was being unfair by selling goods too cheaply for existing smaller shops to effectively compete against.

It's perhaps ironical that they are now beginning to wonder if the decision to increase the number and size of their supermarkets was that wise given the threat they experience from online retailers (their Metro stores being an exception).

It's not all gloom in traditional retailing.

The 'high end' retailers such as John Lewis/Waitrose and Sainsbury continue to do well. In the case of the former, in particular, there is a very high emphasis on the quality levels of service.

As economist Hamish McRae wrote in Sunday's Independent, such 'top-end' retailers offer a 'concierge business, with the profit from the merchandise financing what is supposed to be a luxurious purchasing experience.'

I guess that the current drama series on ITV on Sunday evenings Mr. Selfridge helps cement the idea of 'aspirational shopping'; I remember my first visit as a child being in awe of what I experienced.

If things are fine among the prestige retailers, they are also not too bad among what might be seen at the 'bottom-end' retailer such as the pound shops and budget supermarkets; Poundland has 400 outlets and aims to have 1000.

These offer low-cost no-frills shopping to those who want value for incomes that are being stretched by inflation especially pensioners and those on low income.

As the retail figures over Christmas demonstrate, supermarket retailers such as Morrisons who are caught 'in the middle', appear to find trading most difficult.

Richard Dodds of the British Retail Consortium believes that we may be in danger of being too pessimistic:

"There is a danger of being overly apocalyptic about what's going on with high streets. It certainly is the case that lots of our high streets are under pressure: one in nine of our high street shops are standing empty. The retail failings of recent weeks confirm that. But it is the case, still, that 43 per cent of all retail spending happens on the high street. High streets are still a very important part of our retail mix. They're going to go on to be significant, but there needs to be a lot of action and we need to intervene."

Hamish McRae makes some interesting observations about the current state of online retailing in the UK. As he notes, with the exception of Denmark this country has the greatest propensity to shop online.

Statistics produced by the ONS show that online sales in December were 10.6% of total sales though he points out that others such as the Centre for Retail Research believe the figure could be as high as 12%.

What McRae notes from his analysis is that we are the most enthusiastic online shoppers among major economies the comparable figures being US (9%), Germany (6%), France (5%) and China (3%).

Why we should be so much more enthusiastic than other major economies is, he believes, hard to explain as they are experiencing similar economic circumstances. As he acknowledges, though our use of the internet is not particularly high when compared to the 'developed world':

"...the age structure of the population might explain things a bit, because we have a higher proportion of under-30s than most of Western Europe, but it is lower than in the US. I suppose we do have a long history of being inventive consumers and having adaptive retailers."

His prediction for the future of retailing is interesting in that he believes that we are witnessing a return to past use for property:

"I think the general trend will be for them [high streets and town and city centres] to become places for entertainment and leisure, rather than places to go to shop [...] city centres will become less places where people shop and more places where they live. If the population projections for the UK are anything like correct and we have to fit in another ten million people over the next couple of decades, we will need a lot more housing. Many high streets were originally homes, not shops - you can often see how a shop-front has been tacked on to a home behind - so in a sense we would simply be returning to previous land use."

If what McRae posits is correct then there maybe some hope for the ailing construction industry which will need skills to convert existing retail premises or build new ones.

However, unlike Japan and other European countries such as Spain, we have not seen the spectacular collapse in property prices that will make them affordable to those on low incomes.

It is also to be noted that the 'miracle' employment figures have been scrutinised and found not to be quite as good in that many are on either extremely low pay or, in some cases, no pay at all.

Given that these are jobs that are meant to replace the jobs being lost in the public sector as austerity takes its toll there is every reason for UK retailers to be worried.

What is urgently needed is economic recovery.

There are many who contend that given the parlous state we are in urgent action is needed. This would include increasing benefits paid to the jobless to boost spending by those who, unsurprisingly, spend what they receive.

Chief economist at the British Chambers of Commerce Danny Kern, believes that some alteration by George Osborne is needed which would allow expenditure in certain key areas:

"Our view has always been that what we need is a two-pronged strategy: not abandoning the overall fiscal plan, but adjusting it; continuing to do things that may be unpopular, like welfare reform, but taking action in all those various areas where, rather than just increasing demand, you improve the supply side of the economy."

Another radical measure that has been touted is the abandonment of the 2% inflation figure in favour of measuring nominal GDP which is total output from the economy, measured in pounds, but not adjusted for inflation.

Those who support this view, which was mooted by Mark Carney the incoming Governor of the Bank of England, believe that in times when growth is poor - as is the currently the case in the UK - higher inflation is less of a problem than the effects of a long period of stagnation.

Japan's experience should give us cause for concern.

However, there are voices who urge caution.

Adam Posen who used to be on the Monetary Policy Committee and is now president of The Peterson Institute for International Economics warns that if wages did not rise in line with inflation which is occurring already, consumer spending will only become even more depressed.

Resonant with what Business Secretary Vince Cable believes, Posen argues that there should be a mechanism to get money directly to the sort of cash-starved businesses that are currently going out of business on the high street.

Significantly Posen believes that George Osborne should abandon his obsession with austerity:

"When you've implemented everything, and it's had the opposite effect, and it's been a bad effect, you have an ethical and public responsibility to change policy."

In the same way that, according to the Buggles, video killed the radio star, unless the government implements radically different policies to create financial improvement, economic reality will continue to kill high street retailers.

It's worth quoting the title of a single from one of my favourite bands of the 1970s and 80s, The Stranglers, "Something better change"!

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