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The UK’s Muted Productivity: The Retail Sector

    “Productivity isn’t everything, but in the long run it is almost everything”, (Paul Krugman, Nobel Laureate Economist).

    Britain is currently facing declining productivity – 20 percentage points below the average of the remaining six members of the G7 group of industrial nations. Productivity is the value each worker adds in every hour he or she works – a key determinant of how fast the economy grows. Therefore it is central to improving living standards and reducing Britain’s deficit in the long term.

    The retail sector employs 4.4 million people, making it the largest industrial group in Britain by number of employees. The performance of small firms - making up 64% of the retail sector-make a sizeable contribution to the productivity gap, but they are often not thought of as central to the productivity problem. According to RSA research small businesses and the self-employed are comparatively more productive than large firms – bigger is not always better.


    The entrance of supermarket giants into the high-street and areas with neighbourhood convenience stores has increased. Tesco stores, armed with its Express and subsidiary One Stop stores, exemplifies this development most clearly. This should have increased productivity by fostering competition, driving out small underperforming stores. However the opposite has happened. Supermarket giants are exploiting the convenience sector via “misleading prices” - something the Competition Markets Authority (CMA) is taking action against in the supermarket sector. For example, in an independent store, a bottle of Coca-Cola is priced at £1 each, whereas in Tesco’s subsidiary One-Stop, it is priced at £1.29 each or 2 for £2. Recent research suggests that such offers are “seducing” consumers into spending an extra £1,000/ year. Restricting consumer’s flexibility to make choices, may allow grocery giants to mask low productivity labour and other high operating costs of their small stores.

    Smaller independent stores provide lower regular pricing, making it easier for customers to purchase products they need, in quantities they need, without having to buy multiple items to enjoy great value. Clearly supermarket giants benefitting from large economies of scale are not passing this benefit onto consumers. Also by entering the high-street or neighbourhood market, chain stores just share the existing trade whilst trading lengthier hours generating higher labour and operating costs – reducing efficiency and productivity in the sector. Productivity could be increased by existing firms with advantageous knowledge on consumer preferences and obstacles by upgrading their businesses. 

    Technology & Training

    Interestingly as productivity slumps, retired workers are not being replaced by younger workers at the same rate as previous years. Many retail shops are also sluggish in embracing digital sales and customer service strategies as a sector challenged by a comparatively low-qualified workforce. Hence, businesses need to up-skill existing workers and attract skilled new workers, in line with adopting new technologies.

    Training and higher education ease the process of learning and skill retention - vital in the information age. The experience young workers gain now will have an impact on their labour market decisions and outcomes when older. Britain’s low productivity may partly be fuelled by its bottommost position in OECD numeracy and literacy rankings (see Figure 2). 

    Existing Policies & Recommendations

    The introduction of the National Living Wage (NLW) – set to rise to £9/hour by 2020 – is likely to burden the retail sector disproportionately, given that it is the most labour intensive sector in the UK. This reduces retailers’ ability to invest in technology and training according to the Office for Budget Responsibility (OBR). Consequent contraction of the sector, will result in up to 110,000 job losses. Unproductive labour may diminish, but the NLW is only masking the productivity problem in the short-run - it is not resolving it. Without evidence, there is no justification for increasing wages if the value added by labour to businesses is not increased by the same amount. Similarly recent reforms to business rates relief may allow retailers opportunity to invest only in the short-run. In the long-run, the lower business rates will be translated into higher rents for those retailers leasing property. 

    Poor numeracy and literacy results must be addressed, by encouraging discipline and productive behaviour within the education system - preparing people to make efficient and productive decisions during their working life. The retail sector must accompany this by improving its image developing a clear progression route and promoting opportunities to use technology-based skills in order to attract high-skilled labour.

    The Investment Association’s Productivity Action Plan (which forgets to mention the retail sector), welcomed by the government to catalyse long-term productivity, proposes initiatives typically helping large firms. For example, eradicating quarterly accounts benefits large firms focussed on maximising shareholder dividend in the short run, whereas small firms, exclusive of multiple shareholders usually invest for long-term results anyway. Small firms dominate the retail sector, meaning that government policy should focus on assisting upgrading existing small businesses, not the entry of inefficient giants.

    To enhance productivity in localised micro businesses, solutions must be targeted at the ground level. New approaches that simplify things, making firms more effective and employees work smarter should be implemented. Such approaches must be accompanied by a focus on serving demand. Demand driven supplies, that eliminate slow selling goods will increase profits and improve productivity. A successful retail example is Aldi’s business model – minimum staff, minimum range, and maximum queues! It is in businesses’ interest to increase productivity, but the government need to be ready to support this transition by delivering supportive policy reducing business costs and facilitating an educated workforce. 

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