Quarterly retail review Q2 2021

Appetite for deals in the consumer sector was strong for the second quarter in a row. 16 deals of UK head-quartered retail and consumer businesses were completed this quarter, bringing the total for the first half of the year to 31.

What is striking about the deals this quarter is that only one had explicit insolvency involvement – the sale of Peacocks Stores. All other deals have been completed through a solvent M&A transaction. You have to go back two years to the second quarter of 2019 before you find a quarter which had no insolvency deals. Is this the strongest indication yet that retail and consumer has rebalanced itself coming out of lockdown? Or will we start to see an increase in insolvency processes as the government’s financial support is gradually withdrawn?

Three key deals in Q2

Online, data and technology led consumer businesses hold their lead in M&A

Although government support has undoubtedly reduced the need for businesses to enter into an insolvency process, mainstream M&A has also continued apace because many retailers have continued to trade strongly coming out of lockdown. Attention is still very much on those businesses who have strong online trading, and which also use technology and customer data to disrupt traditional retail models.

Outlook: private equity still values the UK retail sector

There is still a wall of money to invest in the sector from private equity, and we're also starting to see more interest from trade in processes where there is a strategic rationale. This is starting to increase valuations on deals where buyers had been nervous about whether lockdown trading could continue as the high street opened up.

Although the outlook for the sector remains difficult to predict, the continuation of strong M&A activity suggests that there is rising confidence in future opportunities and performance.

If you’re looking for a confidential conversation about taking on development capital, releasing cash out of your business, or exiting completely, get in touch with Nicola Sartori.

All industries have seen seismic shifts over the last few years, but while the retail sector has suffered through recent events, it has also had no choice but to adapt to the rapidly fluctuating needs of its customers. To do this, it needs data. 

According to a study in 2019 by market research agency Walnut Omnibus, environmental impact is the reason why 75% of UK buyers now make conscious decisions around modifying their consumption of plastics, non-recyclable goods, fast-fashion, food, and travel.

Google’s Zero Moment of Truth retail study told us that 70% of UK buyers research online before making a purchase. However, IT giant Wipro anticipates that integrating COVID-19 related data into current insights on consumer behaviour will be problematic, particularly where the quality of publicly held data is concerned.  So, as businesses recover, they need to gather the right data themselves. The challenge is ensuring that they have the skills to do it. 

The UK digital skills gap

The Royal Society reported back in 2019 that the UK was vulnerable to a drastic shortage in digital and data skills. It also revealed that the data science skills shortage had more than tripled to 231% in the five years leading up to the report. In light of recent events, there is no doubt that the situation has hardly improved. 

In fact, in March 2021, the BBC reported that the UK was heading towards a digital skills shortage disaster: the number of students taking subjects related to digital skills had dropped by 40% - while the consultancy Accenture reported that demand for tech jobs had dramatically jumped in the last nine months – 115% in Liverpool, 253% in Leeds and 450% in Newcastle. 

A further study by the Learning and Work Institute revealed that 70% of people want employers to invest in teaching them digital skills on the job, but only half the employers surveyed were providing those opportunities, even though 76% of them believed the lack of digital skills was hitting their profitability.

With all this insight into the obvious need to substantially increase the provision of digital skills, you should be looking into digital and data apprenticeships to fill the gap. The apprenticeship levy offers all businesses the funds to support this investment. 

What is the apprenticeship levy?

The apprenticeship levy was introduced in 2016 to push employers to address growing skills gaps, and develop a more sustainable and diverse workforce, while supporting industries in their search for talent. Unfortunately, a lot of employers don't really understand how the apprenticeship levy works.

Employers with a pay bill in excess of three million pounds are levied 0.5% of it, which they can access to spend on apprenticeships. 

A lot of smaller businesses don't realise that they can also benefit from the levy funds. For employers with a pay bill below £3 million, the government will pay 95% of the costs of training an apprentice.

Are data apprenticeships the right solution?

While apprenticeships have traditionally been alternative entry routes to university – the introduction of apprenticeship standards now enables these training programmes to respond to skills needs at any level.

Apprenticeships are generally a robust solution to the digital skills gap. In fact, data skills development is available at level three, four, six and seven: from developing people across various functions where performance would be improved with additional data skills, to developing early career data analysts, and degree-level development of internal analysts. Apprentices practice in the workplace as well as developing with academic studies, building the behaviours and professional skills needed to operate at the necessary level. This helps them become data citizens, influencers, storytellers and senior advisors to those who are making tough decisions for your business.

It's true that getting stakeholder buy-in for a scheme that includes 20% off the job training might seem like a substantial obstacle, but the alternative to this investment in the future is bigger problems caused by our digital skills shortage getting even worse. So, if you're looking for a proactive approach to training employees to fulfil your data demands, think about apprenticeships. 

If you’re interested in offering data apprenticeships in your business, contact Ruth Walsh in our talent solutions team.

The spring Budget always grabs the headlines, but a key talking point in 2021 was the changes to capital allowances. The super deduction for plant and machinery is especially good news for the retail sector, just as footfall is set to rise.

There are also other reliefs available, such as loss carry-back provisions. That's why it's even more important for businesses to understand which reliefs they're eligible for, and how they can apply for them.

Super-deduction on qualifying plant and machinery

Businesses with qualifying plant and machinery can now benefit from 130% tax relief. This attractive scheme is further supported by other measures:

Another consideration is the increased flexibility of the loss carry back provisions: rising from one year to up to three years. Claiming the super deduction could result in a significant loss carry back claim, and secure a valuable repayment of corporation tax.

Unlimited relief

Surprisingly, the expenditure qualifying for the super-deduction is unlimited. This will be welcome news for those with a capital expenditure programme in excess of the £1 million annual investment allowance (AIA), and comes without the complexity of the AIA sharing rules.

The UK’s wide array of capital allowances now means that potentially all capital investment will receive some form of tax relief.

It will, however, be crucial to take careful note of the timing rules. The new allowances apply to expenditure incurred between 1 April 2021 and 31 March 2023, and only where a contract was entered into on or after the Budget announcement. Careful consideration is required to ensure tax relief is not unclaimed. A number of exemptions that could disqualify a super-deduction should also be noted, for example, leasing and connected party transactions.

Next steps

In my experience, the biggest barriers to maximising a claim for capital allowances is data quality and interrogation. Problems can be caused by errors in manual data handling, poor communication between property and accounting teams, records of development expenditure not being kept, and claims for tax relief being made long after development teams have moved on to a new project.

Businesses can successfully claim tax relief by ensuring that they have accurate and up to date information, and carefully considering the application of the often-complicated capital allowances legislation.