Tough times
There is no doubt that these are tough times for charity retail. Some of our members are expressing the opinion that this is the worst time for trading they have ever encountered; and others are being clear that it is unlikely that shop estates will come out of this 100% unscathed. We've already seen a significant reduction in the shop estate of one of our most experienced and sizable members – Scope - and anecdotally we are aware that there are others of our larger members in particular who are considering similar action. There appears to be a bit of a perfect storm at the moment, with income being relatively flat, and cost pressures being almost unprecedented. These two factors are combining to hit profitability in a way that most charity retailers have rarely seen before.
In this first of a regular series of “state of the sector” blogs we want to unpick some of this and suggest ways forward that the sector can consider in order to mitigate some of the worst effects of this perfect storm.
Income
The first thing to note is that income growth for charity retail is now very modest; although there are some signs that it is starting to pick up now compared to 2024 (see below). When we say very modest however we do have to recognise that this is comparing like for like with the best years that charity retail has ever had -2022 and 2023 - so it's hardly surprising that the sort of double digit growth that was experienced during those years has not been able to be maintained. Maybe we should be pleased that those high levels of income have been maintained through the cost of living crisis and turbulent times in the economy. Just as long as we didn’t budget for similar growth in 2024/5…
Our latest Quarterly Market Analysis (QMA) has shown, when comparing Q4/24 with Q4/23, an increase of around 3.5 percent, interestingly with smaller chains showing somewhat better figures than the very large ones. And certain subsectors, such as hospices, are actually doing rather better than that. The problem is that growth of this nature is insufficient at times when costs are growing so rapidly. But it is certainly better than negative outcomes!
Costs
There is no question that the issue of costs is the one that is hurting our sector the most. Not only do we have normal inflationary pressures such as increases in rents and utility costs, but there is also a significant increase in labour costs as a result of the increase in the National Living Wage, and large increases in National Insurance contributions (particularly the thresholds applying to National Insurance contributions). On top of this the decline in the service provided by textile collectors has in some cases resulted in increased costs of waste disposal. Of course there is never any harm in a business trying to reduce its costs, but the real issue comes when those cost reductions are so focused on the workforce that it significantly reduces the efficiency of the operation. Even in a world where the majority of the workforce is volunteers these costs cannot be ignored and must be carefully assessed by each charity as they go about their budgeting and daily business planning. Our recent survey on the potential effect of these cost increases produced the following thoughts from our members about what they might need to do in response:
Reduce paid staff (36% of respondents mentioned this)
Reduce paid hours (35%)
Reduce trading hours (21%)
Close shops (27%)
Scale back plans to open new shops (38%)
Put up prices (67%)
No action (8%)
Not a pretty picture for sure. And of course retail forms only one part of a charity’s costs.
Profitability
Given all of this it is hardly surprising that trustees and senior management are starting to ask meaningful and urgent questions about the profitability of charity retail; but the difficulty in assessing this is the varying ways in which charities assess the costs of their retail operations and how they allocate centralised costs to the retail totals. This inconsistency in methodology makes it extremely hard to meaningfully compare one charity’s performance against another and properly benchmark margins.
Further there is an almost universal acknowledgment that charity shops create a halo effect for their charities which is next to impossible to quantify, but nevertheless needs to be considered very carefully when looking at the overall contribution of charity retail to the parent charity. The visible presence of charity shops in the high street, the social value that they provide and the opportunities that having this real estate can afford to the charity as a whole must not be underestimated, however difficult they are to quantify. There is a wide spread of attitudes to this amongst chief executives and trustees but the profitability of a charity retail network must always be considered through this lens as well.
Green shoots?
It would be easy to conclude from some of the above that the heyday of charity shops is well and truly over and indeed that charity retail may be in line for a dramatic reduction in the sector’s size and profitability. But an alternative view, one to which we would subscribe, is that the creativity and resilience of the sector will kick in again - there are certainly some positive signs as we travel around the country talking to our members.
It’s also clear that the second hand markets in the UK, especially for clothing, continue to experience significant growth. As an established player in this market, the sector has to feel confident about our relevance going forward – provided of course that we remain competitive and continue to keep close to what our competitors (such as Vinted) are up to.
Our QMA notes that 68% of our members are considering opening new shops or actually doing so, compared to 36% who are actively closing or considering closing some of their shops. this is presumably an encouraging statistic and certainly not much different from how these results have come out in the past. However it is our belief that the new openings are largely driven by our smaller members and that our larger members are maybe at the other end of the scale. Nevertheless from a UK-wide point of view it has to be positive, as does the fact that our most recent charity retail sales trackers, undertaken in partnership with BDO, are showing a small but significant uptick in LFL performance. Our members really are a resilient bunch.
Top tips
So what can our members do to weather these storms? Here’s a few tips – clearly they won’t all apply to all of our members but surely are worth considering.
Be honest with yourselves about profitability. Do you have a real understanding of how profitable each shop is, and why some are outperforming others?
When did you last review pricing and/or pricing strategy? Putting up prices was a major consideration for two thirds of the respondents in our survey. Does your pricing strategy fit your demographic? And don’t forget that reviewing prices doesn’t always have to be upward – volume might end up be more important than high prices.
If you are struggling with profitability in any of your shops, do you know why? Does it require investment in new fitouts, new people, new volunteers, or it is simply the wrong type of shop for its location?
Are you carefully considering costs? Not only staffing costs, but all the other costs of your operations as well? EPOS provision? Utility costs? Even rent? Can some of your suppliers help mitigate your cost pain?
Remember that the value of a shop does not consist entirely in its financial return. The social value of a shop, its halo effect, is equally important to consider, even if much harder to quantify. Using the social aspects of charity shops to create a real buzz in the community is not only good for the community, it can have a really positive effect on sales too.
Are you considering alternative methods of sales to bricks and mortar? Physical shops are more prone to cost increases than online. Have you looked at value propositions to clear excess stock? Or kilo or fill-the-bag sales? Or other ways in which low value donations can achieve maximum value?
If you are struggling to recruit volunteers, have you considered the counter-intuitive method of plugging gaps with paid staff? Many of our members are experiencing increased turnover and profitability as staff tend to more efficient and effective than volunteers.
Are you keeping close to your communities? The relative success of the hospice section of our membership is undoubtedly driven by their being so firmly rooted in their localities – can you achieve the same sense of community as them?
Finally …
Are you taking maximum advantage of the opportunities provided by your CRA membership? Special interest groups, Conference, webinars, our brand new website – all these sources of information can help you decide which courses of action are right for you. We are always there to help.
