Video Transcript: Navigating retail in a challenging environment

Transcript

Moderator: Good morning everyone, welcome to the Act Now restructuring retail briefing. My name is Zelf Hussain and I am a Restructuring Insolvency Partner in our London team leading on the retail sector. We have today got a slightly different format from recent years as I have all the presenters here with me in the studio. So let me start by outlining the running order for this morning and introduce everyone here. Firstly I shall do a quick bit of scene setting and a look back at the year just gone. I'll then be asking Gavin Barwell some questions on his views on both the political perspective for the year ahead and the economic implications. Then we'll go to Kien Tan to provide us with some details and analysis of the Christmas trading results and explain what that means for 2024. We'll then hear from Jane Steer, a fellow Restructuring Partner to share her views on what 2024 might look like for retailers and discuss some of the tools that can be used for consumer business to help accelerate that turnaround. We have also got with us Mark Anderson to talk about supply chain resilience, which has once again become quite a hot topic for the retail sector. That should leave us some time at the end for a Q&A session for all of today's presenters. You can actually start logging your questions as we go along, but wait for the Q&A session at the end. But let me start with a bit of a recap, so 2023 was once again a tough year for retail. From the ongoing cost of crisis living to the problems of the pure plays and the collapse of the much loved high street retailer Wilko.

The cost of living crisis continued throughout 2023 with inflation reaching a historic peak of 19.2% in March. That's the highest annual rate seen for more than 45 years. This also fed into food price inflation, which peaked at 15.7% in April. This consistent high inflation fed into consumer behaviour with more people telling us in our regular consumer surveys they wanted value for money. Which is good news for value retailers, but others had to learn to be clear about their propositions to retain loyalty and persuade shoppers to choose them. Inflation also impacted on how much retail employees were paid and all retailers felt the need to increase wages to retain staff, which further increased pressures on their profitability. And during the year we saw the problems for the pure plays. Once being seen as the future of retail to a place where a lot of them started to struggle with declining sales and profits. It started with Made.com, but expanded to others such as ASOS, Farfetch and Matches. This was from a combination of people returning to physical stores, but also from stronger competition from Chinese based online retailers such as SHEIN and Temu. It is one of the notable things about last year that physical stores became popular again, with some retailers such as M&S and Ikea opening more stores. And even SHEIN and ASOS opened their first ever physical stores. And two of the winners from last year's disruptions were Frasers and Next, both acquiring more brands such as Matches, Cath Kidston, Reiss, FatFace and many others.

However despite stores becoming more popular, it didn't stop the overall decline in the volume of retail sales over December. Well as ever there'll be some winners and losers in that headline and we'll hear more about that later. So Gavin, with that context, let me turn to you for the big picture of what we can expect from 2024. And I guess probably starting with the economics viewpoint before we get to politics.

Lord Gavin Barwell: Okay, so there's probably three things to talk about. The inflation interest rate picture, growth prospects and the labour market, so if I maybe go through those three in turn. You were talking about how difficult last year was in terms of cost of living and the good news is we look like we're over this spike in inflation. And actually maybe we're in a little bit of a better position than then headline numbers would suggest. So November for example, inflation in the year to November was 3.9%, but most of that increase happened in the first six months. So if you look at just the six months to the end of November, inflation was only 0.6%. So the headline numbers that we get given are actually probably overstating the inflationary pressure in the economy right now. I think at the start of the year, people might have thought interest rate cuts might come, start off in second quarter. People are a little bit more pessimistic now for two reasons. There is a little bit of a worry about wage inflation still, that is still a bit higher, so the bank is watching that. And then I think also some of the geopolitical events, particularly in the Red Sea and the disruption to supply chains we're seeing there, that potentially is adding a little bit of upward pressure on inflation. But I think we can still say with confidence that interest rates have peaked, not just here in the UK, but in the US and Eurozone as well. And the question is just how quickly, how long do we have to wait before they start to fall and then when they do start to fall, how long will it be.

And best guess, I think maybe towards the end of Q2 and maybe two or three cuts during the course of this year I would say is the trajectory we're looking at. So that's reasonably positive news. The growth outlook is anaemic. We’re not going to go into recession I don't think, but it's not the levels of growth that we would have been used to, certainly not before the global financial crisis and not even really during the 2010's. So I suppose it depends whether you're a glass half full, or a glass half empty, person, but the economy will grow a bit more than it did last year, but still not at the kinds of levels that we would be used to. And then the labour market, the last bit of the piece, I think that's also one where it depends whether you're a glass half full or a glass half empty. If you want to take a positive spin on it, unemployment has not gone up by anything like as much as everybody was predicting during this kind of period when the economy has been flat. And the British labour market has once again outperformed expectations, but there's a flip side to that, which is from the point of view of employers, it means the labour market is still by historic standards tight. Lots of people are still finding it difficult to find the talent that they want and it feeds into my first point on inflation. Because the market hasn't loosened as much as the bank was expecting, you know potentially that wage inflation pressure is higher. I mean it's a classic example of economists right?

Anything that sounds like good news, they find a downside to it and anything that sounds gloomy, there's always a silver lining. It depends on the way that you look at it. But to summarise that overall I would say good news on inflation and interest rates cuts are coming, just a question mark how soon. Growth better than last year, but still a bit anaemic. Labour market has performed better than expected, but that means it's quite tight.

Moderator: Okay and it's a big year for elections, so what can we expect in the UK as a starting point then?

Lord Gavin Barwell: So in the UK, I mean as you say it's a record year, 2024. I think it's something like four billion people around the world in 60 countries are going to have a chance to vote this year, most of them in free and fair elections. A few of them in places where the elections are a kind of rigmarole to come to a pre-determined outcome. But the UK one is probably one of the ones that's easiest to predict, which is almost certain we're going to have a change of government. So first of all on timing, the legal position is that the election's got to take place by January of 2025. I think the Prime Minister is unlikely to leave it until the last moment because that would mean an election campaign over Christmas and New Year, which I suspect none of us would like very much. So he's not going to do that I think. He's unlikely to call it soon because he would lose and he'd just be giving up his job earlier than he needs to, so I think that's telling us we're probably going to have an election in the Autumn, either in October or November timing terms. In terms of what happens, all of the evidence would suggest that there's going to be a change of government and the question I think is whether Labour win outright, or whether it's a kind of draw with a hung parliament and if you're in that scenario there'll still be a change of government I think because the smaller partiers will prefer Keir Starmer to Rishi Sunak as Prime Minister. But from a business perspective, I think there's quite a big difference between an outright Labour majority and a sort of minority government coalition in a hung parliament.

If you're in the former scenario, then there's a good chance that the kind of chaos that has inflicted British politics ever since the Brexit referendum might go away and we might go back to the kind of boring predictability that our politics used to be known for. You know the Conservative party's been divided over Brexit and then rowing over Boris Johnson and Liz Truss and it's not been an easy period in terms of political stability. But if Labour won with a reasonably good majority, then you might actually see a more stability in our politics, which would be good I think both for businesses in this country, but also for foreign investment into the country. Whereas if you've got a sort of hung parliament and therefore you've got a minority government or a coalition, that's bound to be a bit more unstable and so it wouldn't give the same upside. And if you want some numbers, I would give maybe a 60% chance that Labour win outright and a 40% chance of a hung parliament essentially. And then maybe the final thing to say is just a few words about what a change of government might mean, what difference it would make. I think a Labour government would be a government of the moderate centre left. It's not going to be a Corbynite style Labour policy. They'll make some quite big changes in some areas and very little in others. I mean it's a mixed bag when you look at the policy things, so if what-, if you take a few examples where things will change quite a bit that could have implications in businesses.

They'll have a sort of industrial strategy that is prioritising key sectors of the economy in terms of where we're trying to get the growth. Think about like what Joe Biden's done in the US in terms of Inflation Reduction Act and CHIPS act and things like that. They'll regulate the labour market quite a bit more, so zero hours contracts are going to get outlawed, so that might have implications to some businesses in this sector. They'll make it much easier to build things, whether that's housing or commercial development, or big infrastructure. You're going to have significant loosening of the planning system to try and get the country building stuff again. And then finally I think the other big change, on Net Zero they'll go much more aggressively on that. And I'll give you a couple of examples on the other side of the coin, what wouldn't change very much. They're not going to fundamentally change the Brexit deal that Boris Johnson negotiated. They'll make a few tweaks at the margin, but no fundamental change there. And the overall kind of tax burden that the economy faces, I don't think would change very much under Labour. They've got a few particular measures on private schools and carry in the CGT system and non dom status. But they matter a lot if you're one of the people affected by it, but in terms of the overall size of the tax burden, I don't think you see very much change at all. So I think on British politics, we've got a high degree of certainty about when the election's going to be, who's likely to win and what it's likely to mean in terms of public policy.

Moderator: That's an interesting lead into my next question was more globally you said there's loads of elections going on, a big one-the US, so what's your thoughts on that?

Lord Gavin Barwell: So that's much harder to predict. Look I think at the moment, it looks highly likely that it's going to be a rerun of the last one, Joe Biden versus Donald Trump. For an outsider looking in on it, it is bizarre because if you take Biden first of all, something like 60% of Americans don't want him to run again, including nearly four in ten Democrat voters. But the Democrats have decided that they want him again. And on the Republican side, if you went back to where we’ve been having this conversation twelve months ago, it looked like Ron DeSantis was in a good place to challenge Donald Trump. And every time that Trump has been criminally indicted for something, his support has just gone up further. And he's been able to sort of say to people, 'Oh these are all trumped up charges and it's all a political witch hunt.' And it's actually worked in his favour. So you've got this incredible spectacle where this country so full of talent has arrived at these two individuals it looks like again as the candidates on the ballot paper. In terms of who's going to win, right now I'd say it's a complete toss up. There's two bits of data you can look at and they point in different directions. So if you look at the opinion polls in the key states that are going to determine the election, they'll tell you that Donald Trump is the favourite right now. But if you look at all the elections that have happened over the last twelve months, the Democrats are consistently doing better than the polls predicted that they were going to do.

And that is because the Supreme Court's decision on abortion has motivated Democrat voters to come out and vote, so their turnout is always higher than it would normally be. So the question is, is that trend going to continue is this year's presidential election or not and that will be key. I mean US politics are kind of turnout elections, as fewer people vote than in the UK. So the parties are less bothered about trying to win over swing voters, they're more just trying to get the people that are their supporters actually to come out and vote. I think there's two things that people should be watching out for. The first is if you get a Trump presidency, then I think there are some big economic and geopolitical implications of that. Economically he's talking about putting tariffs on all imports into the US, so that could well provoke global trade wars with countries who'll respond if the US does that to their exports. So that could have a big impact on supply chains potentially. And then geopolitically he's talking about cutting off support for Ukraine and people question his commitment to NATO, so it would significantly the world geopolitically in ways that are quite hard to predict. And then the final thing to say is America is a very polarised country at the moment and I don't think you can completely dismiss the possibility of civil unrest if the result is close again. So that's a huge one and then beyond that I haven't got time to go into all the detail, but you've got elections in the European parliament, people are worried about how well the far right might do there. Modi is up for re-election in India. We've just had some good news, since I've been a bit gloomy about the US one, we've just had an election in Taiwan that people were worried about what reaction you'd get from China on that and that's passed off relatively smoothly. But there's a huge amount of political turbulence this year.

Moderator: Thank you for that. Kien, I'm turning to you, in that context of economics and politics, can you say a bit more about how did Christmas go and what can that feed into 2024?

Kien Tan: Okay, so let's take it away from the big global picture and back to the UK. What happened over Christmas? So Zelf's already painted quite a dark picture about 2023 and all the-, the cost of living crisis and what that meant about retail. If you actually look at the headlines, the headlines were really quite mixed. So yes on the one hand, definitely the ONS talked about retail sales volumes falling at their quickest rate since COVID, retail sales volumes being as low as they were right in the middle of the first lockdown in May 2020. But on the other hand, several retailers have profit upgrades. There were probably fewer profit downgrades than you would expect in that kind of environment. And lots of retailers talked about record sales, so who’s right? Well it all comes down to inflation. So absolutely, volumes were declining, not just through 2023, but through 2022, so people were simply buying less stuff. But cash in the tills was growing as a result of the record inflation that Zelf talked about earlier on.

So, you've got this big gap where people are having to spend more, but getting less for their money. A lot of that was focused on food. So, if you then separate what that means in food and in non-food. And this is using British Retail Consortium numbers from their members. So, it's skewed towards the bigger retailers. Well, food definitely had, you know, pretty record levels of inflation that we've not seen in something like 40 years. That helps retailer results over the Christmas period, but as you can see, volumes were declining pretty much right through the year. And, in fact, they recovered a little bit in the run-up to Christmas because shoppers were prioritising food and eating, and celebrating with their friends and family over other things. The up-shot of that was that they had less money to spend on everything else. So, on the right-hand side you can see non-food, non-grocery retail, and even though inflation started to ease in the second half, not only were volumes declining, but that meant that actual cash in the till continued to decline and actually got worse in the second half of 2023, on top of an already bad performance in 2022. So, it was a really tough time for big ticket, for home, for luxury. And that, you can see in the results that I'll show you in a second. Over the course of the year, and here I've separated to Zelf's point from earlier, online and in-store performance. There was a drift back into stores, particularly for grocery, as you can see on the left-hand side, but this is all just from best to worse, from left to right, in terms of categories. So, if you're spending more on food, what does that mean that, in actual cash in the till terms, basically, little or no growth, except in grocery. Health and beauty did a little bit better. Partly on the health side, I don't know if you were suffering from a cold before Christmas. Everybody seemed to be. So, that helped. But also, a little bit of the lipstick effect in a down-turn. It's one of those things that can help brighten your day, and helps with celebrating and going out.

Okay. So, what were the results like? This is a list of all the reported results up until Friday. So, it doesn't include the ones from this week. The two or three retailers that reported this week. And you'll get all the numbers in the appendices, and we'll send them through to you so you can look at the numbers in detail. You take out the, kind of, the outliers on either end. What do you notice? Well, you notice that, overwhelmingly, retailer results were positive. And also positive in some of our legacy, our much-loved high street retailers. The Boots' and M&S', and Tesco's, and Sainsbury's. Historically, retailers that did were much harder to steer the ship around. So, historically, they would have seen 1% or 2% growth in a low-inflation environment, and they were seeing high single-digit growth. And then, conversely, if you look at the right-hand side of the chart, you've got those categories that I said were more compromised. So, home, big ticket, luxury, particularly some of them more accessible luxury brands, and fashion's actually all over the place. There were some big winners and there were some losers as well. And on balance, fashion probably didn't have as bad a Christmas as some other categories. Helped because, you know, fashion is probably one of those few things, it's not necessarily as expensive a buy in some cases, and it also helps with celebrating and going out. And hospitality, interestingly, had a relatively strong Christmas, albeit maybe not strong enough, given the cost pressures that the hospitality sector is facing. One thing I would say, though, is if you look at the average of the results that were announced, that comes out to a median of about 4% or 5% growth. That's quite different to what the Office for National Statistics were saying. It's quite different even to the British Retail Consortium average of about 1% or 2%. Why is that? Well, retailers announce different time periods, as you know. They announce like for like sales, total sales, some of them include internet and online sales, some of them don't.

Some of them reported globally, some of them reported only in the UK. Some of them reported time periods as short as five days in one case, or a quarter. So, it really varies about how retailers report. And there were some, the high-profile retailers that haven't reported at all, and they necessarily have to, particularly if they're private. There's no compunction to report. So, retailers tend to report good news. It's only the really big FTSE 100 that tend to have to report in some way, shape, or form because you expect them. So, bear that in mind when you're looking at published results. I just want to hone in on the grocery sector because it's an important one. I know it's one that many of you are involved in, either because you work with suppliers or with grocers. So, again, if you ignore the outliers which tend to be small retailers, now Zelf talked about value doing well this year. I would argue that one of the characteristics of grocery this Christmas was that it wasn't just for value in discounters. There were some premium retailers that did well and some mid-market retailers that did well, some of the mainstream retailers. Being either super expensive or super cheap was no guarantee that you would be in one bucket or another. With less money in your pocket, and dedicating more money to groceries and to food and drink and celebrating, because I said hospitality did well, consumers were choosing much more carefully which retailer to go to. So, ones that promised value for money but where they could also treat themselves. And also, there was a little bit of a trying to avoid temptation. So, some of the general merchandise retailers that sell a lot of grocery, some of the value retailers actually had a bit of a harder time because why go into one of those retailers where you might be tempted by home products or things that are non-essential, when you can go to maybe a nicer or more expensive grocery retailer, where you can treat yourself and have a nice centrepiece meal for Christmas, but also buy a price-match discount item for the rest of your basket?

So, there was no guarantee of whether online or offline, big stores or small stores, value or premium. It was more around the execution and also promotions. And that's something that we'll see more and more coming into the year ahead. So, what does that mean of that Christmas before I go to the year ahead? Consumers definitely prioritised eating, drinking, and celebrating. And it was tougher for, as I said, non-essential. Home, big ticket, luxury to a lesser extent. Fashion was a little bit mixed. Consumers were really judicious about which retailers they chose. Value for money, brands that gave them promise. If you are going to be careful, where you're going to spend, you're going to go to the retailer that delivers on its promise. Also, promotions were important, loyalty card promotions and omni-channel. That horrible word. Or multi-channel. The retailers that were at the places that consumers wanted them to be. The year ahead, I think, might be a little bit tougher, as inflation comes off. Inflation hides a multitude of sins. You can increase wages in a much easier way in an inflationary environment. And, actually, particularly for grocery retailers, if your consumers are prioritising grocery, actually, that means that, you know, you might have to work a little bit less hard to get high single-digit sales growth. So, let's look into our crystal ball. I show this every year. We've been tracking consumer sentiment and, in particular, how people feel their disposable income will change since 2008, since before the last global financial crisis. Above the line means that people will expect to say they think they're going to be better off in the next twelve months. And below the line means that people think they're going to be worse off. And that balance, so there's a very faint line that's the balance of opinion, that's been, historically, a really good indicator of future consumer spending. Maybe six or twelve months ahead. So, right on the left-hand side you've got the financial crisis in Lehman’s which was, sort of, the all-time low.

We had the austerity period, where sentiment was lower. But during the mid-2010s, actually, sentiment was relatively robust. The shock of COVID, but then the quick recovery, and particularly as the vaccine was rolled out. The shock, maybe, last year. In Autumn there was a shock in the mini budget, and with energy prices rising. Actually, since then, since last Autumn, sentiment has been improving. And we're actually at the point at minus four, where it's above the long-run average for the UK. So, consumers are actually relatively positive about the year ahead. And you can also see it in this chart, where we asked consumers what their financial situation in their household is. Is it healthy? Do they have money left at the end of the month? And one in three adults think that they've got money left at the end of the month. Or are they struggling? Are they struggling to pay bills or, potentially, in danger of missing bills, which is only 8%. The vast majority are just about managing, if you like. What this also shows, though, is the huge disparities. And everyone talks about polarisation. There's definitely polarisation here in how consumers are feeling this sentiment recovery. Older consumers, retired consumers, you can see a half of retired consumers have got money left at the end of the month for luxuries or for saving, and more affluent. So, that's the socioeconomic group on the right-hand side of the chart and As and Bs. So, professionals. Most of you watching. Well, half of all households say they've got money left at the end of the month. That will be a key characteristic going forward. But having said that, you know, the good news is that the outlook is looking better. And this is why wages are now rising faster than prices, and they have been pretty much since the summer. So, you know, the pressures that Gavin talks about at the beginning are on the Bank of England, because of wage settlements, that's actually turning up in people's pockets. So, together with the National Insurance giveaway, people are feeling just that little bit richer. What does that mean for retail?

Again, this is one I show every year. Above the line means they'll spend more. Below the line means they'll spend less. On balance, even though people are richer, on balance, more people are saying they're going to spend less on most categories. Grocery is up because you're feeling the pressure of inflation in the next year. The interesting one is holidays. Holidays actually always get a bit of a January boost, but if you are working with any holiday companies, you'll know that bookings are up. And that's been prioritised over, interestingly, the home, where we spent a lot of money during the pandemic. No need to spend all that extra money now. So, if there is spare cash, it's going towards saving for a big holiday instead. But more challenging in discretionary categories, which, sort of, are all on the right-hand side. Yes, and I'm going to give you a bit of good news. There's a bit of good news and bad news. The glass half full and glass half empty. The good news, if you look at the balance, so the spending intention, it's in a much better position than it was last year. And we expect to see that improvement through the year, as inflation eases. Forecasts for the year ahead will normalise because you won't have that impact of inflation that subdues. So, 1%, 2%, 3%, 4%. Not nearly as much growth as, you know, we would have seen in the late 2010s in the run-up to COVID. And not nearly a huge growth that you saw during COVID in some home categories, for example, when you didn't have to spend any money going out or on holidays. So, it will be subdued. And as I said, in a lower inflationary environment, that will put even more pressure on retailers to, maybe, across this year, to avoid profit warnings, but you know, can they do this two years in a row? I would say that most of that growth, what little growth there is, will be back-end loaded. So, for consumers, glass half full, glass half empty. Lots of indicators on the left-hand side saying that life is going to get better. Inflation easing, interest rates potentially going down when, maybe, second half of the year, for sure.

And, certainly, it won't be as bad as energy is. Is also forecasted that energy prices also forecasted to ease up. On the other side, but they're not spending yet, and anaemic was a great word there that Gavin mentioned earlier. Definitely, growth forecast for the year will be anaemic, and if anything, second half skewed towards the second half for growth. One thing I will say is that things can only get better for consumers, just to borrow a line from maybe an election from the past that we might remember. Okay. So, what am I telling my retail clients to do? It's not all bad news, and there were certainly winners over Christmas. And the winners, what did the winners do? They pivoted towards, that's a horrible word, isn't it? Pivoted. They pivoted towards consumers that were more resilient. So, maybe wealthier consumers, maybe older consumers, and they also had this multi-channel platform in many cases. So, one or two big fashion retailers, using their platform not just to sell their own products, but other brands as well. There is demand out there. Consumers do have cash. So, the question is how can you stimulate that, and using promotions, loyalty card discounts and other ways of getting people out to spend. And one high-profile food retailer decided not to spend on advertising in the run-up to Christmas and said they were going to put it all into prices. If you don't advertise, you're not telling anybody. So, you're not stimulating demand. So, they didn't have the best Christmas. The other thing I would say for smaller and mid-sized retailers, you don't have to do it all yourself. Joint ventures, working, partnering with other retailers, coming on to platforms such as the next Frasers, and M&S platforms, the multi-channel platforms is a huge opportunity. And I think there will be more the M&A that Zelf talked about earlier, where some of the bigger players will take advantage of the fact that, maybe, pro equities are so interested in retail this year, so corporates can, well, either get a bargain or pay more for retailer's choice.

And I'm not going to steal Mark's thunder, so I'm going to leave the supply chain and operations point. But a, sort of, parting point is to say that, in our CEO survey, the PwC CEO survey and the Make UK survey, the number one thing that CEOs were talking about in the retail sector and in all consumer sectors was the use of technology to help with those cost savings. So, working both at the top line, at the top of this page, and at the bottom of the line to maintain profitability. So, cautious it's going to be a difficult year ahead, but I think the second half could be better.

Moderator: Okay, Kien. That's a lot to take in. So, on that note, I'm going to turn to Jane, then, in so far. So, based on what Kien's just said, what's your thoughts and observations on how you think retailers are going to have to respond to this next year?

Jane Steer: Yes. So, the Q4 insolvency data was out yesterday, wasn't it? And I think we could see, overall, insolvencies were up. But when you dug into that, you could see that retail and consumer-facing businesses were some of the hardest hit within there. Now, I think it's fair to say that, if you delve into that, it's probably more at the SME end of the scale. So, it's retailers that are, sort of, sub- 1 million turnover. But as you said right at the start, we saw, last year, that those bigger name household names, they're not immune to distress or failure either. And I think everything that Gavin and then Kien have just outline this morning, you know, show that there are going to be some challenges still to come and face the sector. So, in terms of what Kien was talking about, and what Kien always tells us is, and what he's just said now, is that retails really need to act now. They need to anticipate changes in customer needs, changes in the market. And to use the word that you hate, they need to pivot. So, invest in those things that Kien was talking about. Invest in product development, different channels, AI. And one thing that I think retailers are going to have to do there is they've not go limitless cash to be able to do that. So, they're also going to have to look at how they take cost out sensibly as well. In terms of what Gavin was talking about, it's obvious that we're looking to 2024 and it could be a volatile geopolitical environment, and that could have impacts on the retail sector as well. It impacts interest rates, it can impact consumer sentiment, it can impact supply chains, which I know Mark will talk about. And I think what we've seen, in terms of the businesses that we've worked with, and that we are working with at the moment, is that's really where those changes and those shocks have gone straight to cash and haven't necessarily been planned for. So, I think the key there is looking at what could happen next year, and what would we do in response to that. So, really making sure that you're starting to plan around it. Now, there will be businesses that don't plan for it, and then are burned.

And there will be businesses that plan and it's not enough, the plans that they've got in place. But I think, what I would say is, that doesn't necessarily mean that needs to lead to insolvency or failure. I think there are some really useful tools available, at the moment, that allow businesses to solvently compromise their creditors. And, of course, I'm talking about restructuring plans and CVAs. With restructuring plans, far more used now. I think there's been about 30 sanction plans. We've been involved in around ten of those. And I think what's helpful in terms of the volume of those plans that have now been sanctioned, is that we've got some really useful case law. And what that case law allows us to do is have some, sort of, guide rails and be able to plan and advise clients so that we're really structuring those plans, so that they've got the best chance of success. And having those, sort of, those guard rails also means that it's helpful and more efficient to plan and makes it more accessible. Those plans, therefore, are more accessible for mid-market businesses as well. CVAs, they've not gone. They've still got a place. I think that's fair to say. And, obviously, some of the benefits in terms of versus a restructuring plan might be that they might be a bit quicker to implement. Maybe a little bit cheaper. But also, they've got the drawback because, obviously, you can't then compromise the secured creditors and your preferential creditors have got to vote in favour. But I think restructuring plans and CVAs are relevant for retailers, particularly where they're those multi-site operators.

Moderator: Yes. And what's your thoughts around those restructuring tools? You know, what's the best circumstances you could actually use them and apply them?

Jane Steer: Yes. What's the best way that they're going to be successful, I think, is probably the way to look at it, and we could talk all day about it, couldn't we? But I think it probably boils down to three key things. The first one is obviously get the right advisors. No. I say that flippantly, but what I mean there is companies, they don't want to be operating in a vacuum here. Actually, there has been some useful case-law. There is experience that you need to bring in around it. There's a lot of financial analysis, legal analysis that goes into it, that they will need help with. And I know myself and colleagues, you know, are willing to go out and talk to businesses before you formally engage. Bounce around ideas of what are the options available to them. And I think businesses really need to challenge their advisors to do that. I think the second thing is making sure you've got robust finance functions, actually. Or at least support for those finance functions. The financial planning that sits behind a restructuring plan is going to be subject to a lot of scrutiny, so needs to be robust. So, I think making sure that you've got the team there to support that and that you've done that proper modelling is going to be really important. And the third thing is give yourself enough time. So, I think this is just going to be a recurring theme. It's really anticipate the need for it and act now. I think that that's really important. There's a lot of financial analysis and legal analysis, as I've said before. You also might want to go and road test some of these plans with creditors before you actually launch them, to make sure they've got the best success of being, or the best prospects of being approved. And also, actually, in the Adler judgement recently, I think Lord Justice Snowden took the time, didn't he, to say, 'It will not be looked on favourably by courts if you come late with these restructuring plans and don't give it sufficient time.' So, they would be my three things.

Moderator: Thank you, Jane. I'm going to turn to Mark there because everyone that's here has, sort of, picked up on supply chain. So, left you to last because of the answers. What's your views on what we're seeing in that, and particularly how that's going to impact on the retail sector, on this disruption?

Mark Anderson: Well, as we've heard, I guess a, kind of, period of constant disruption really to supply chains. So, incredibly difficult to manage them, actually, across the sector at the moment. We're probably seeing, sort of, three key themes affecting the sector at the moment. So, one is around restrictions of products from some of the delays caused by, so, geopolitics and other events. You've also got extreme weather events thrown in there. So, that's one area. And some of those are, sort of, long-term events. So, a lot of long-term restrictions. So, you see restrictions in some electronic consumer goods, caused by things like the chip shortages. But actually, some of these are much more recent. So, I think, you know, Gavin mentioned the Middle East and disruption across the Red Sea. This week we've had some industrial action in France, affecting, sort of, the agri supply chain. So, I think that there's lots of small pockets, unfortunately, of geopolitical disruption, which I think is going to continue across the year. We've heard Kien talk about inflation and, actually, possibly some good news around managing cost. We do see a continuing, in some cases, a bit of a delay actually in these, sort of, inflation effects in supply chain. So, you see, you know, for example, a lot of suppliers seeking preferential terms from retailers at the moment because they've got a, you know, a cash crunch. Or you see some tightening of credit terms for the retailers themselves, in which case, you know, they actually might be seen, might be the other way around. So, the suppliers might actually be being asked to, you know, accept late payment terms from retailers. So, you know, that's a, kind of, that's quite a challenging dynamic for both to manage. And then, you've also got, you know, other challenges across supply chain around other types of, so broad disruptions. You know, we're seeing disruptions from regulation, for example, and increased activism. So, there are some regulations now that affect the retail sector which weren't there before. So, sanctions is a good example or export controls.

We're seeing lots of clients come to us, you know, even from the retail sector to say, 'How am I going to deal with things like restrictions on luxury goods?' Which came through in the Russia (ph 39.03) sanctions. But actually, also things around ESG. So, a lot of new regulation coming on ESG and a lot of requirement for organisations to conduct deeper due diligence into their supply chains. So, you've got the corporate sustainability due diligence directive in the EU, and that's requiring retailers to look deeper into supply chains for human rights abuses. And what we're also seeing, sort of, at the back end of that is actually a lot of activism from NGOs. So, reporting suppliers or retailers into enforcers and those enforcers, therefore, having to take action. So, it's a pretty challenging environment.

Moderator: Yes. It doesn't sound like a lot of that's going to go away any time soon. So, what should retailers actually be doing about, you know, how to address some of these things?

Mark Anderson: Well, I think we've heard about the phrase building resilience. So, I mean, really, it is about building resilience into your (TC 00:40:00) supply chain, which is, sort of, very easy to say but a little bit harder to actually, so do in practice. But I think there's a few things that you can do, that we're advising our clients to do. One is to properly map your supply chain. So, really understand where the critical pinch points are. And I do talk to a lot of clients who say, you know, 'We know that. You know, our buyers know that.' And, in many cases, they may do. But it's, sort of, not mapped into the corporate memory of the organisation. And, sometimes, people still get surprised by, as I said, some of the, sort of, geopolitical incidents that crop up, or weather incidents that cause difficulties in supply. So, really map them, particularly where your critical supply is. And you've actually got to go down lower tiers than you used to, to comply with things like some of the scope three regulation reporting in ESG. And then I think you're looking at a monitoring then of broader basket of risks. So, and making sure you can actually get data for KPIs. So, again, historically, there was a, sort of, a response which was, 'I can't get the data. Or it's too difficult. Or the financial data is historic.' You know, we've got lots more data sources to play with here. You know, we use things like social media to give us, you know, indicators. You know, you can use all sorts of public data, but you can also ask your suppliers for data. So, increasingly, people have talked about technology and AI. And I think we'll see, we are seeing, you know, technology and AI playing a real role in supporting that activity so that you can actually get a much more live consistent view of where your risk lies. And, obviously, that gives your teams the ability to react quicker. I think, then, you know, leading into that is having a proper framework around your resilience and your control. So, you know, putting that information in the hands of your teams, whether it's your buyers or your sellers, if you're a supplier, to make decisions.

So, that you're not, perhaps, giving the preferential terms when, actually, you know, all the indicators are saying that this year's suppliers are in indeed trouble. Or, similarly, you know, looking at whether it's right to support the retailer that you're supplying when some of the warning signs in the markets are that it's in distress. And then, I think, you know, last but not least, have a plan for when it goes wrong, as Jane said. You know, there's lots of things that we could be doing. Be talking to your advisers, obviously. But, you know, you're likely to have an incident of the supply distress or failure. And if you do, you know, have a plan to respond to that, how you're going to actually deal with it, especially if it's one of your critical suppliers. Or, actually, if one of your suppliers, you know, is involved in an integrity issue, you know, make sure you can get on top of it quickly, investigate it, deal with the issue so that you can move towards recovery.

Moderator: Okay. Thanks, Mark. So, thank you to all of you. As we get to this stage where we've got a bit of time for Q and A. This is the bit which I enjoy because I can go through the questions and throw them at this lot. Right. So, just looking at some of the questions that we've had coming in. The first one, which is an interesting one. I'll just read it out. 'The national living wage increases by 9.8% in April. How will this impact retail and hospitality and how will retailers manage such a dramatic cost increase?' Right. Who wants to take that one up first?

Kien Tan: You start or am I going to start?

Lord Gavin Barwell: You start and I'll talk about the politics behind it. But you're probably better to talk about the impact, I guess.

Kien Tan: Retail actually is less hard to hit than some other sectors. Retail is relatively, has got better pay than other industries. So, hospitality is harder hit by this, and hospitality, you'll have seen the hospitality various hospitality groups already talking to the government, and I'd love to hear Gavin's view on whether or not the government is going to react to that. Retail, since the pandemic, has been just a little bit above living wage. And, you know, some, particularly the grocers have to pay more to get staff in. They've also been at the forefront of using technology and other things to ease the load on stores, in particular. So, it definitely is a concern, and Lord Wolfson at Next said that he would otherwise be lowering prices of his clothes. But, actually, as a result of both business rates and stash living wage, he's unable to do so. But I think it is probably more manageable for retail than in other sectors. And the interesting thing is to see whether another government may change that situation.

Lord Gavin Barwell: So, I think the politics of this is this is, sort of, the completion of something that's been under way for a few years. That, essentially, the government's set a target of getting the national living wage to the level that qualifies as low pay. So, that it's basically trying to abolish low pay in our economy, which is think it's two thirds of the median wage is the, sort of, technical definition that they have. So, the idea is if you get everybody up to that level, than actually, you know, you can say, 'We've abolished low pay in this country.' So, under the current government, I think what you would see beyond this is it then going up in line with inflation, just to keep it at that level that it's reached. Now, if you had a change in government, whether it would want to go further still, is a question to be asked. The politicians, I think, it used to be, I mean, if you think back when Labour originally introduced the national minimum wage, the Conservatives opposed it, arguing that it would cost jobs. And, actually, the evidence is that, you know, as it's been introduced and increased it hasn't maybe had the impact on employment that people were worried about. So, the politicians have become a bit more complacent and are using it as a tool to protect people on lower incomes. So, you know, TBC, I suppose, how it plays out in this instance.

Moderator: Okay. And we've, I think this one's for Jane, actually, we've had in, which is a very restructuring plan-related. Implication of the Adler judgement recently. Any thoughts?

Jane Steer: Yes. So, I think it is fair to say, isn't it, that the Adler judgement has got some of us geeky restructuring advisors quite interested. And it is a really significant judgement, isn't it? For two key reasons. One being that it's the first plan that has been overturned at the court of appeal, which is interesting in the context that we've talked about restructuring plans one of the benefits being that the challenge is front-end loaded, versus a CVA, where there's that challenge period afterwards. And this, perhaps, shows there might be challenges to come. The other one is that, actually, Lord Justice Snowden did take the opportunity, with that judgement, to really outline his views on some of the other restructure sanctions, restructuring plans, and provide some guidance to the courts on those. And particularly where you've got that cross-class cram down, which is a mouthful. But specifically in respect of the Adler judgement, I think three key things. Always in three's. One was around the, sort of, fairness, particularly in terms of the distribution of the restructuring surplus, and its creditors, and really being able to justify that, and justify that in the context of the environment of the restructuring plan to that horizontal test. The second thing was around the provision of information. So, like I touched on before, that robust, the borrower really having to provide robust information to support the plan. But also, any challenger having to really interact and engage with that information to, sort of, justify their challenge. And, actually, it made it really clear that, sort of, a long shopping list of issues was going to be a bit of a more of a waste of time, perhaps. And then, the final one was that timing point again, that the court is not going to look favourably on restructuring plans that are coming with, sort of, a time bar around them. And, actually, there is going to be an onus on borrowers, particularly where there is the expectation that a plan's going to be challenged, to be dual tracking a plan A and B at the same time.

Moderator: Great. Thank you for that. And then, Mark, this is probably for you, I'd say. Geopolitical tensions affecting supply and chain resilience. I think you've picked up some of it. Do you want to expand on that?

Mark Anderson: Yes. Well, I mean, we've heard how much it is affecting. And actually, what's quite interesting is that we're seeing macro risk strategies and scenario planning actually become much more of a part of corporate strategy across the sector. So, even if you are predominantly a UK retailer, you're going to be affected in your supply chain by events, you know, globally. So, yes. So, and that's a fantastic piece of advice, actually, for the clients who are not doing that is to really build in macro strategy into your, kind of, your overall corporate planning, whether it's around your sourcing strategy, geopolitically, or just, you know, how you're built into your resilience on how you'll respond to different risks around the world.

Moderator: Sure. Thank you.

Lord Gavin Barwell: Just two quick thoughts on that. I mean, I think one thing is to say this is not a, sort of, short-term thing. I think it's a long-term thing that's with us for the future, right? The world is becoming more multi-polar and it's just becoming more complicated for companies to operate in. So, it's not bad luck that we've had a number of these things over the last few years. I think it's illustrative of the future that we face. I think the other point that's really important on geopolitics is not everything is predictable. So, you can have a good, kind of, risk management function and planning and scenario testing, and that will spot some things. But other things, you're not going to spot and you need to, therefore, have a, kind of, resilient culture to respond to that. And the two wars we've got on at the moment (TC 00:50:00) are very good examples that Ukraine, you could absolutely see coming down the track. Putin wrote this essay over the summer before, basically saying what he was going to do, and the Americans published intelligence and said, 'This is going to happen.' The Israel Hamas war took everybody by surprise. There's a guy called Jake Sullivan, who is President Biden's national security advisor. So, he's probably the individual on the planet that is most informed about what's going on in every government in the world. He was giving a speech eight days beforehand and someone asked him, 'This is all very gloomy. Tell us something good in the world.' And he said, 'The Middle East looks quite good at the moment.' Eight days before it happened. So, I think that's a key thing that you've got to bear in mind with geopolitics. Some things you can spot, you can plan against, try and mitigate, but you are sometimes going to get taken by surprise as well.

Moderator: Thank you for that. On that warning. And then, next question. 'How are retailers coping with their net zero and ESG commitments, especially when costs and pressures are rising?' Go on, Kien. (Inaudible 50.56).

Kien Tan: I do think Mark should pick up on this because there's definitely an angle in there. Look, it's a fact of life. It will become much more important. Net zero is just going to be on the agenda more and more going forward. And I think what has become apparent over the last decade is the pressure isn't actually coming from consumers. There is a group. There is a one in ten group of predominantly young consumers, but who are not huge spenders, for whom that is their choice of retailer, their choice of product is driven by sustainability in its wider sense. Actually, where it comes from is it will come from legislation. It will come from some of the unknowns that Gavin's talked about, maybe a little bit less so in the current government, but probably more so going forward. And keeping one step ahead of that is probably more important than, you know, just being reactive. So, it's being in tune and in conversations with the law makers and the legislators, and also, with other stakeholders. It will come increasingly from shareholders for publicly listed companies, the things that you do. And, unfortunately, the expensive stuff is happening next. It's all very well changing your light bulbs to low energy light bulbs because everybody wins, you know? There's a lower carbon footprint and, you know, you save money. But it will get tougher going forward because some of the things that they're going to be asked to do are going to be a little bit thankless.

Moderator: (Talking over each other 52.27).

Mark Anderson: Yes. Add a couple of things. I mean, I think the answer is that some parts of the retail sector are actually incredibly good at managing resilience in their supply chain. I mean, you know, supermarkets, they've got long and complex supply chains, and they are among the best. But there are a lot more obligations coming down the line, and the bigger challenge is actually managing your suppliers and what they're doing. And, you know, you will have an obligation on you to do that, you do already. So, you know, the relationship with your suppliers, the dialogue you have around them is really important. I think a lot of retailers are doing this, but you can also lean on existing controls that you've got in place to help manage this. So, a good example, as I've said, you know, things like supply due diligence frameworks. I mean, they've been around for a long time. You know, whether you're complying with grocery code of conduct or anti-bribery, a sanctions legislation. You know, most big retailers will have these programmes in place. So, you're really extending it to cover some new areas of regulation around ESG. You know, things like the CS due diligence directive. So, lean on those, definitely. And I think, yes, the other thing is do look at your wider stakeholder group and who you've got to manage. So, you've got suppliers, you've got your customers, but you've increasingly got regulators and you've also got activists, as I said, who are keeping a very key eye on statements that you're putting out and what you're actually doing. So, it's, kind of, no stone unturned, really, for retail supply chains.

Moderator: Okay. I think we've got time for one more question. And it's (speaker is interrupted 54.07).

Jane Steer: A long one.

Moderator: And it looks like it's a long one. Right. Let's give it a go. 'Does pivot and/or cost out mean job losses?' And, 'We've seen a number of large employers, for example, John Lewis recently announced job cuts. Are we at a point where that is the preferred option, or are other creditors, lenders, refinancing landlords, CVAs, HMRC supplies going to be required to be more flexible?

Jane Steer: Yes. So, maybe if we leave that on the screen just so I can make sure that I answer every bit of that question, but I don't mind taking that. So, I think the answer to the first part around, 'Does that just mean job losses?' The answer to that is not necessarily, I think. I think, in terms of jobs themselves, I think there's also things about looking more efficiently or differently, utilising your work force. And we're certainly working with businesses where we're looking at that. So, I don't think it necessarily just means, 'Go straight to job losses.' I also think there's other things that people can do. They can look at their procurement function. They can look right across that supplier base, check the consistency of terms, that different departments are getting the same amount of their supplier base, for example. There's production efficiencies. We're seeing a lot of that, particularly with the manufacturing base, looking at shift times, efficiency in the production line. So, there's all those sorts of things that you can look at when you're talking about cost out. And then, in terms of all those other, sort of, stakeholders that you can go to for support, I think there's a short-term and a long-term length around that. We are seeing, you know, things like time to pays, a bit of creditor stretch where businesses are facing that short-term liquidity pressure and are needing to pull those short-term cash levers. Some of them, in terms of refinancing or landlord when you need to get rent reductions, some of those can take a little bit more time, can't they, to do in, sort of, a solvent way without using the tools like CVAs and restructuring plans. And I think where the CVAs and restructuring plans come in to play is that the can accelerate some of those. But, clearly, to use either of those tools, you have to prove the insolvency is the alternative to them. So, they could just be used in those situations.

Moderator: And, sort of, (inaudible 56.14) a vision of a viable business on the other side for people.

Jane Steer: Exactly.

Moderator: All the stakeholders to actually buy into it and support as well. All these things are helpful, but that needs to be developed as well by companies.

Kien Tan: I'm just going to add on this because it's my fault that you have the word pivot there.

Jane Steer: Did they say it again? No. The question.

Kien Tan: It's in the question.

Jane Steer: Yes.

Kien Tan: So, it is my fault. But really, the pivot, and I want to end a positive note, the pivot is to areas of growth and opportunity, rather than just cost out. So, when I was assessing the scene, consumer sentiment is positive by long-run standards. And, actually, consumers will have less on their plates in the coming year. So, can you pivot to those consumers who have money to spend but are not necessarily spending? So, actually, I would start at the top line before going to some of the more extreme things that you mentioned.

Jane Steer: Well done, Kien. Throw it back to me, yes.

Moderator: This is why you need a combination of an answer, don't you?

Jane Steer: Yes.

Moderator: Thank you for that, Kien. On a positive note. Right. We'll have to wrap up now, right? So, it just leaves me to say thank you Gavin, Kien, Jane, and Mark. Really great to have you here and thank you for sharing your insights today. And for everyone who registered for this briefing, we should be sending out copies of the slides and the recordings. So, thank you to everyone for your time. And it just leaves me to say, goodbye for now and thank you again.