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UK retailers reap big productivity gains from shift to online

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UK retailers have reaped big productivity gains from the shift to online sales that has been accelerated by the pandemic, as businesses become better able to operate with fewer workers.

Unit labour costs in wholesale and retail trade in the second quarter of 2021 were 3 per cent below the average for 2019 while output per hour was around 10 per cent higher, according to official figures published on Wednesday.

The Office for National Statistics said this was partly a reflection of the strength of retail sales — which rebounded in mid-2020, as housebound consumers switched spending from services to goods, and have remained above pre-pandemic levels even as spending on leisure starts to recover.

But the ONS also said the “rapid uptake of online shopping instead of store-based retail may have contributed to the increase in productivity” — with less labour needed to generate higher sales.

The figures place retail in stark contrast with trends in the overall economy. Unit labour costs in the second quarter of 2021 were 7.5 per cent higher than their 2019 average, with almost every other sector suffering a fall in output while still paying wages to furloughed staff working fewer or none of their usual hours.

The data coincided with an upbeat trading update from Marks and Spencer, a traditional UK retailer that is now pivoting rapidly towards online sales, helped by its recent tie-up with Ocado.

The ONS said the sector’s productivity gains could also reflect changes in its composition, with less productive retailers that had failed to embrace ecommerce forced out of business, while online giants that were able to make economies of scale had expanded.

The pandemic accelerated the demise of high street stalwarts such as Debenhams, Topshop and Oasis, with stores closed and brands snapped up by online retailers such as Asos and Boohoo.

Further evidence of the productivity advantage ecommerce enjoys over store-based retail could fuel calls for the government to consider more fundamental reforms to business rates, the tax on commercial property: the British Retail Consortium claims the current system penalises bricks and mortar operators, leading to high street closures and job losses in poorer parts of the country in particular.

However, it is not clear whether retailers will be able to hold on to the productivity gains made recently — given the intense pressures on supply chains, and staff shortages that could drive up wage bills.

Oliver Vernon-Harcourt, head of retail at advisory firm Deloitte, said productivity would be helped by a higher proportion of full-price sales, with retailers seeing less need to offer discounts while many products were in scarce supply.

But many retailers are warning that rising costs will eat into profits, with Next, Asos and Boohoo among those flagging the impact of higher shipping prices and staff shortages in UK warehouses.

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