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Hamish McRae

Hamish McRae: It's pointless to focus on retailers' woe

Economic View

The retreat from the high street has become something of a rout. Three stragglers, HMV, Jessops and Blockbuster, are just the latest casualties of the shift to online, but the retail sector as a whole remains under great pressure. There is room at the top, witness the success of Apple stores just about everywhere in the world, and the level of rents in prime locations such as Bond Street in London or Fifth Avenue in New York. And there is room at the bottom, with Poundland already having 400 stores in the UK and apparently aiming for the 1,000. Ikea can't get enough sites in Britain to meet its expansionary ambitions. But unless you have something special to offer and a strong online presence too, then you could be in trouble. John Lewis had a fine Christmas, topping an outstanding year; Morrisons has been finding it tough.

All this has been widely noted. What has received much less attention is the way in which the UK has become something of a test-bed for retailing of the future, for with the possible exception of Denmark, we are moving faster to online shopping than anywhere else in the world. According to the Office for National Statistics, in December online sales accounted for 10.6 per cent of all retail sales, a whisker down from 10.7 per cent in November. Other estimates, for example from the Centre for Retail Research, put it higher, at 12 per cent. And while comparable international figures are hard to come by, the one thing that all the researchers seem to agree on is that among the large economies at least, the UK is top of the league. I have assembled some rough estimates from various sources, including the US research firm Forrester, in the right-hand graph.

I have not found any analysis of why UK customers are switching faster to online buying than anyone else. Internet use is not especially high by the standards of 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. Maybe there is a bit of "push", in that onerous parking restrictions and monochrome high streets have encouraged people to shop online instead. But whatever the reason, we seem to be leading the march.

That march is proceeding at different paces, depending on the type of goods being bought. Some estimates for the proportion of online sales for different types of goods are shown in the left-hand graph. I found them in a piece in the Harvard Business Review in November 2011 on the future of shopping, and give a good feel for the way different industries are moving. Music and video has moved fastest, followed by books and electrical goods. But it is American data, and US retailing is not at the cutting edge of best global practice, as anyone who has been to a US supermarket will appreciate. Looking at that chart I suspect that food and groceries will not remain stuck at less than 10 per cent of total sales and that booking travel will tend to go more online than those estimates suggest, certainly in the UK.

But what happens to the high street? I think the general trend will be for them to become places for entertainment and leisure, rather than places to go to shop. Top end will be fine, because the chief characteristic of top-end shopping is that a very high level of service is attached to the selling process. It is a concierge business, with the profit from the merchandise financing what is supposed to be a luxurious purchasing experience. There is nothing wrong with that, but this is inevitably a small segment of retailing and not enough to keep high streets going.

Another trend will be towards specialist retailing, where the store has a particular segment of a market – individually crafted jewellery, whatever – in which it is renowned. Collections of specialist shops can give an atmosphere to a retail street that mimics the top-end luxury market. Any street famed for antique or art galleries can survive and prosper.

There will also always be a market for last-minute essential shopping, the space occupied by Tesco Metro and its competitors. But the main trend will be of high streets selling services, not goods: restaurants, hairdressers, dry cleaners, and so on. Not only are there some things that by their very nature cannot go on line: you cannot log on a screen for a haircut. But in addition there will be new services that we cannot yet envisage that will develop.

All in all, though, 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.

The big point here surely is that while online retailing is a threat to established patterns of distribution, it is also an opportunity to release retail space for other purposes. Many of our present high streets do not work very well, either for shoppers or retailers. The villain for that in popular parlance has been the out-of-town superstore. The new villain is online shopping. But we vote with our feet – or in the case of online, with our fingers – and to focus on the negatives of any great socioeconomic trend is pointless. If we are pioneering the shift to online retailing, and I think we are, then we have an opportunity to pioneer what we do with our high streets – and make a better fist of it than we have so far to date.

Soon we will know how much of a mess we are in

It is a busy week coming up for data about the UK economy, so expect the usual anguish about numbers that may well turn out eventually to be wrong.

But the GDP estimates for final quarter will inevitably reflect some slackening, and the retail sales numbers out last Friday were disappointing.

The more hopeful set of data will come in the employment and unemployment numbers, and if, as most economists expect, job growth has continued, that will take away some of the sting from the GDP data.

The great puzzle remains: why has this apparently been a deeper recession and slower recovery than the 1980s and 1990s cycles, and yet had a much smaller fall in employment and subsequently stronger job growth than either? Any light would be most welcome.

The other big issue is how far the Chancellor has fallen behind on the Coalition's deficit reduction pathway. We get the public accounts until end-December so we will have figures for nine months of the financial year. Is the underlying deficit rising (as most of us think) or falling (as George Osborne claimed in his Autumn Statement)?

December is not a particularly big revenue month, for self-assessment income tax does not come in until January. But with only three months to go, we should know pretty much how much of a fiscal mess we are in, and insofar as it matters, whether it is odds-on that the UK loses its AAA credit rating.

Two little twitches in the markets in the past few weeks: 10-year gilts are yielding over 2 per cent, and sterling has started to slither, particularly against the euro.