Hot topics and other developments
Below is a selection of recent key developments and relevant trends affecting Retail.Luxury goods and counterfeiting
An unwanted trend in the world of fashion has been the increased exposure and threat from counterfeiters who are utilising social media platforms to target consumers.
The growth of social media as an e-commerce platform for luxury brands has been coupled with a growth in counterfeiting issues; counterfeiters are commenting on the social media pages of luxury brands advertising the sale of fake goods. Given the internet’s very nature it is extremely difficult and expensive to police, and it requires extensive collaboration between retailers and social media platforms to combat the efforts of counterfeiters LVMH is reported to spend $17 million annually on anti-counterfeiting legal action.
Concerted efforts by counterfeiters make it increasingly difficult for e-commerce platforms such as Alibaba to regulate their sales. They circumvent the security and checks procedure by avoiding the direct sale of counterfeit goods. This is achieved by offering the counterfeit designer goods as a free gift with every purchase of a legitimate product on the site.
Counterfeiters are also stealing designs of luxury products prior to launch so that they can be copied and released ahead of the authentic versions. In order to mitigate the threat this imposes, it is advised that luxury brands keep all designs on a stand-alone computer.
Cyber breaches in the retail space
The importance of data within the retail sector cannot be understated, especially with advances in technology, including the emergence of artificial intelligence in bricks and mortar stores and online. These technological developments, and the ease with which mass data can be stored, allows retailers to collect and process vast amounts of data on their customers. However, as retailers continue to amass large quantities of personal information it is important that they invest and implement measures to protect the information they store.
The importance of investing in secure systems is growing as more retailers are becoming victims to cyber-attacks, with Macy’s, Adidas and Uniqlo all falling victim to breaches. The result of a breach can be devastating as a study by KPMG highlighted that 19% of consumers would completely stop shopping with a retailer following a breach, with 33% stating that they would take a long break from using that retailer again. Our own experience is that customers can be more understanding, but much depends on the messages that are sent. The fact remains that a data breach could cost retailers a sizeable chunk of their custom, as well as the immediate cost of rectifying it. Therefore, the way a breach is handled and communicated to those affected could make a significant difference in maintaining custom.
Drone delivery patents
Two retail giants have been filing a number of patents on drones used for delivery. Amazon and Walmart appear to be locked in something of a battle to achieve supremacy in the space, with both evidently identifying it as a high-priority area.
Jeff Bezos spoke about Amazon delivering by drone as far back as December 2013, referring to a loftily ambitious 30-minute delivery time. In October 2019, the company was granted a patent named “Unmanned Aerial Vehicle with Ports Configured to Receive Swappable Components”. The inventive concept lies in the “swappable sensor”, which looks to address the downtime drones suffer from when one sensor fails.
Walmart demonstrated similar ambition with patents filed in October 2019. These patents focus on the method of delivery, with one covering a possible “landing port” for drones, while the other is for a window sensor system that could confirm when a package has been delivered.
Amazon announced in June 2019 that is was looking to launch drone deliveries “within months”. However, on the Prime Air website, Amazon says it will deploy “when we have the regulatory support to safely realise our vision”.
While that support may not be immediately forthcoming, a future of drone deliveries from both Amazon and Walmart does seem to be edging closer.
The Second Annual International “Purple Tuesday” took place on 12 November 2019. Purple Tuesday is a call to action to celebrate the “Purple Pound”, ie the spending power of disabled people and their families. It encourages customer-facing businesses to be more aware of opportunities and challenges in this space. It is hoped that this will inspire many businesses to make practical changes to improve the disabled customer experience. According to Purple, a disability organisation based in the UK, the value of this market is reported to be worth £2.25tn worldwide but fewer than 10% of businesses have a targeted action plan to access it. To find out more and get involved in the future, visit www.purpletuesday.org.uk.
Brands and retailers navigate changes to their high street store space
When cult beauty brand Glossier opened its first pop-up store in London, over 10,000 fans visited in a week. Now it’s back again. While the brand has built up millions of loyal digital customers, mainly via Instagram, its pop-up success shows these customers also want a slice of the brand “IRL” (in real life).
Numerous reports have emphasised that despite their fixation on all things digital, Generation-Z would still rather shop bricks and mortar. This trend has led some commentators to call for retail brands to re-value their bricks and mortar portfolio.
Brands’ strategies for attracting Generation-Z shoppers into store will often involve a change of use in their store space – things like free tie-dying services, workspaces, wellness and events.
From a legal perspective, brands looking to offer the next big idea in store should be mindful of some key issues. These could include possible restrictions on the planned activity by provisions in your lease, insurance coverage, regulatory approval, IP rights and personal data issues.
These kinds of legal considerations won’t be at the front of shoppers’ minds but ensuring a positive, smooth-running store experience will be key in brands maximising the true “value” of the store.
Rents, returns and turnover in the age of online retail
In light of the challenging climate in the retail sector, we are seeing tenants of bricks and mortar retail properties demand more tenant-friendly deals from their landlords.
The retail sector has long been dominated by inflexible lease arrangements, which combined with weak consumer spending and sky-high business rates, have resulted in an extremely difficult trading environment.
Challenging trading conditions have resulted in a surplus of retail space on the market which has shifted the bargaining power from landlords to tenants. Alongside rent free periods, service charge caps and break clauses, turnover rents have become an increasingly common feature in lease arrangements.
Landlords are often wary of binding their income to the turnover of an occupying business which they have no control over. However they must be flexible and respond to changing market conditions to continue to attract tenants.
With change comes innovation. Some tenants are requesting “total occupational deals” which wrap in service charge, rent and business rates. Others are demanding that the cost of processing products returned either online or in-store, which has rocketed in recent years with the rise online shopping, be deducted from their turnover figures to reduce their rent.
If retailers and landlords are to not only survive, but thrive, they must work together more closely than ever to find solutions that work for both parties and reflect the realities of the current market.
Corporation tax cut postponed
A planned cut to the rate of corporation tax has been postponed by the government. The rate is currently at 19%, and was set to drop to 17% as of April 2020.
The reduction in the rate was first announced in the 2016 Budget. The stated policy objective was “a more competitive corporate tax system to provide the right conditions for business investment and growth”. The obvious direct impact of the reduction would have been a smaller proportion of business’ income going towards tax costs.
However, the Office for Budget Responsibility estimated that the cut would have reduced the exchequer’s revenue by over £900m. Also, there is controversy over whether cutting corporation tax does in fact positively impact revenues or GDP.
As such, Prime Minister Johnson’s announcement to the annual conference of the CBI that the move had been shelved has been welcomed by some. The PM emphasised that the cut was because “the NHS is the nation’s priority, and because we believe emphatically in fiscal prudence.”
Energy Savings Opportunity Scheme Regulations (ESOS)
Administrated by the Environment Agency, the Government established the Energy Savings Opportunity Scheme (ESOS) to implement Article 8 (4 to 6) of the EU Energy Efficiency Directive (2012/27/EU). ESOS is a mandatory energy assessment scheme that applies to large UK undertakings and their corporate groups compelling them to identify cost-effective energy saving measures. The scheme sits alongside other regimes such as the MEES regulations and EPC requirements seeking to reduce the environmental impact of businesses in the UK.
Corporate groups are subject to ESOS if at least one UK group member meets the ESOS definition of a large undertaking, which is defined as any UK company that either:
- employs 250 or more people
- has an annual turnover in excess of €50m (£44,845,000), and an annual balance sheet total in excess of €43m (£38,566,700), or
- is an overseas company with a UK registered establishment which has 250 or more UK employees (paying income tax in the UK).
Organisations meeting this criteria must carry out assessments every four years to calculate the energy used by their buildings, industrial processes and transport and use those calculations to identify cost-effective energy saving measures. We are many years on from the initial deadline which was in 2015 (Phase 1). Large organisations which confirmed compliance during that initial phase have had to revisit their approach and take into account lessons learned in this second phase audit. The most recent deadline for notifying compliance to the Environment Agency was 5 December 2019.
Although, the purpose of ESOS is to identify opportunities to reduce energy use, consumption, emissions and cost, ESOS contains no obligation to follow up on identified opportunities. However, failure to do so not only undermines what the regulations hope to achieve, but resigns ESOS to a costly compliance exercise, and negates the potential cost-saving benefits retailers might utilise to make their businesses more efficient.
Corporate criminal tax offences: two years on
It is two years since the corporate criminal offences of failure to prevent facilitation of tax evasion was introduced by the Criminal Finances Act 2017. The offences attribute criminal liability to corporates for the criminal acts of their employees, agents or those that provide services for them or on their behalf. There is a defence if the corporate has in place “reasonable preventative procedures” to prevent facilitation, or where it is unreasonable to expect such procedures.
With businesses potentially facing unlimited financial fines, confiscation orders and serious reputational damage, it is surprising that many businesses are unaware of their obligations or have not implemented appropriate “preventative procedures”.
HMRC has confirmed that it is currently investigating a number of corporates in respect of these offences. A prosecution in respect of these new offences is likely to follow. Companies need to urgently take the necessary steps to ensure they have reasonable preventative procedures in place or they could face investigation by HMRC and criminal prosecution.