(Title Image: Wales Online)
Time to focus on the largest sector in the Welsh economy – the service sector.
Introduction to the Tertiary Sector
The Tertiary sector consists of economic activity relating to the sale, wholesale and distribution of finished goods produced by other sectors (Part IV, Part V), as well as the provision of stand-alone personal and professional services to the general public. Those services can either be provided by the government through taxation (Part VIII) or through private companies; this section will focus on the latter.
The (private) tertiary sector usually makes up the largest proportion of GVA in developed countries because of the large amounts of capital involved – it’s where the money is and where the money is moved around. This includes banking & financial services, insurance, the legal industry, the property market and retail. The one service sector that retains elements of a being both a service and a heavy industry is transport/logistics.
The tertiary sector in Wales is relatively under-developed compared to the rest of the UK; many of the main players in Wales are headquartered in England and Scotland and this is especially true for banking and financial services.
The tertiary sector’s place as top dog is under threat somewhat due to the rise of the knowledge economy (Part VII) and the emerging Fourth Industrial Revolution (Part XIV) which is making some traditional service sector business models increasingly unviable – particularly high street retail.
Retail – In 2016, it was estimated that 198,600 people worked in the wholesale and retail industry in Wales, which works out at about 14% of the whole workforce. Wales has more shops-per-head than any other part of the UK (pdf). Wales’ largest company is also a retailer – the frozen food supermarket, Iceland (headquartered in Flintshire) which employs 26,000 people at more than 800 locations. Its turnover in 2017 was just under £2.8billion and it was one of just four £1billion+ turnover companies in Wales.
There are also smaller Welsh supermarket chains such as Llantwit Major-based Filco Foods (9 stores) and Llanelli’s CK’s (25 stores) – both of which are part of the Nisa co-operative. Also, car retailers such as Sinclair Group, Mon Motors, WR Davies, CEM Day etc. often rank amongst the nation’s biggest companies.
The other major Welsh high street retailer is the value fashion outlet Peacocks, which was taken over by the Edinburgh Woollen Mill in 2012 after entering administration. The company’s finances have stabilised and it remains profitable, with a turnover of £382million in 2017 and employing around 6,000 people. Elsewhere, the maternity and babywear specialist, JoJo Maman Bébé, has around 70 stores and a turnover of £47.8million in 2017.
The vast majority of people in retail work for international and UK chains, including the likes of Tesco, Asda, Lidl etc. It’s unclear what sort of turnover these chain sorts generate in Wales, but it’s likely to be in the tens of £billions – none of which will count as Welsh economic output. However, some Welsh towns have very high proportions of independent high street retailers, such as Conwy (92.5% of stores) and sales in the convenience sector were estimated to be £2.4billion in 2017 (pdf).
Banking & Financial Services – The big beast here is the insurance specialist, Admiral Group, based in Cardiff with operations in Newport and Swansea. Their primary focus is car insurance, but they also have price comparison (confused.com) and home insurance arms. Admiral employs around 10,000 people and in 2017 were Wales’ second biggest company with a turnover of £2.68billion. They’re also the only Welsh-headquartered company listed on the FTSE 100 exchange.
Wales only has one commercial bank, the Hodge Bank (based in Cardiff), which doesn’t offer many personal services (i.e. current accounts), but does offer savings, commercial lending and commercial mortgages. It manages total assets of £1.82billion and employs 160 people. The online challenge bank, Monzo, recently opened a customer service centre in Cardiff which could be the prelude to a larger presence in the future.
The largest high-street financial services provider in Wales is the Principality Building Society, which manages £9.26billion in savings and assets. As the sixth biggest building society in the UK by assets, it employs around 1,100 people at 71 branches and offices – all but four of which are based in Wales. There are also two smaller Welsh building societies – the Swansea Building Society (Assets: £270million) and the Monmouthshire Building Society (Assets: £1.05billion).
Atradius, Legal & General and Zurich all have large branch offices in Cardiff.
There are a number of emerging fast-growth companies in the financial sector, including the car finance specialists, Motonovo (Turnover 2017: £320million) alongside more established companies like GMAC (Turnover 2017: £197.4million). Wales’ pre-existing strengths in the price comparison market includes Gocompare.com (Turnover 2017: £142.1million), Moneysupermarket.com (Turnover 2017: £316.4million) and Admiral’s Confused.com.
Property, Professional & Legal Services – Wales has a relatively strong legal industry but again it’s mainly based in and around Cardiff. Hugh James is by far the largest independent legal firm in Wales with a turnover of £41million in 2017. They’re joined by the likes of Eversheds, Capital Law, New Law, Geldard’s, Berry Smith, Blake Morgan and others.
Another area of strength is the customer contact industry (aka. call centres) from multiple operators. As services have moved online though, these labour intensive operations have come under increasing pressure and a number of call centres have closed, are closing or have downsized including Lloyds TSB, The Number (118 118), Tesco and, more recently, Virgin Media in Swansea.
Caerphilly-based PHS Group is one of the largest office and facilities management companies in the UK, with operations in Spain and the Republic of Ireland. They employ almost 3,000 people and turned over £269million in 2017 despite debt problems.
The recruitment industry in Wales has seen some significant growth and expansion in recent years, and Wales punches above its weight. Acorn Group, based in Newport (and part of the French conglomerate, Synergie) train or place up to 6,500 people every year. Gap Personnel, based in Wrexham, had a turnover of £119.9 million in 2017, while other major Welsh recruitment firms include 24/7 Recruitment and Smart Solutions. Recruitment and training agencies also regularly appear in the Western Mail’s “Fast Growth 50” list.
Transport & Logistics – Wales has, perhaps unfairly, been considered a place you pass through on the way between Ireland and England, but there are several significant Welsh logistics companies – the largest being Llanelli’s Owen’s Road Services (Turnover: ~£60million) which employs 800 people.
An estimated 41,300 people are employed in the transportation, distribution and storage sector in Wales.
The largest Welsh transport company by turnover was the former Wales & Borders rail franchisee, Arriva Trains Wales (Turnover 2017: £279million – though with a ~£100million-a-year subsidy from the Welsh Government). KeolisAmey Cymru has just taken over the franchise as part of a 15-year £5billion agreement with the Welsh Government and Transport for Wales. They employ more than 2,100 people.
There are several major distribution centres for international logistics companies. Internet retailer, Amazon, has a major distribution centre in Swansea, which opened in 2008 and employs 1,200 people, though many of these jobs are likely to be seasonal. German grocery retailers, Lidl and Aldi, have major regional distribution centres in Bridgend and Cardiff respectively, while Tesco has a distribution centre at Chepstow.
There are no Welsh airlines, though since nationalisation in 2015 and despite financial losses, Cardiff Airport has gradually increased passenger numbers to the ~1.5million mark with ambitions of reaching 3million passengers a year by 2025 and breaking even financially for 2018.
In terms of marine transport and ports, as mentioned in Part IV, Milford Haven is the UK’s third largest port by tonnage handled. The Port of Port Talbot is capable of handling ships of up to 170,000 metric tonnes, and for obvious reasons is a major port for ores. The Port of Cardiff handles around 2.5million tonnes annually, while Newport handles around 1.5million tonnes of metals, recycling and general cargo every year. Other smaller commercial ports (in terms of tonnage) include Barry and Swansea.
Tourism, Hospitality & Care – The Welsh Government estimates that 122,900 jobs are supported by the tourist industry in Wales. Rolling figures for 2017 suggest there were just under 100million tourist visits to or within Wales, with a resulting spend of £4.33billion – about 5.6% of visits and 7% of the UK tourist spend.
According to Welsh Government research (pdf), the top five most visited Welsh tourist attractions in 2015 were Swansea Leisure Centre, St. Fagans Museum, Folly Farm, the summit of Snowdon and Aberystwyth Arts Centre. A number of visitor attractions have achieved a cult status, such as Portmeirion village, Afan Valley mountain bike centre and Gwynedd’s Zip World-Bounce Below.
Oakwood, based in Pembrokeshire, is Wales’ largest theme park and attracts around 400,000 visitors a year. The £60million Bluestone holiday village, located nearby, is made up of around 300 holiday chalets, hosting 130,000 guests in 2016.
The most famous hotel in Wales is Newport’s Celtic Manor Resort, which hosted the 2010 Ryder Cup and the 2014 NATO Summit. The resort has a turnover of around £54million with the International Conference Centre Wales currently under construction and due to open in summer 2019.
SA Brain is Wales’ largest hospitality business, with a turnover of £135million in 2017, employing 2,400 people across its chain of pubs, restaurants and Coffee #1 high street coffee chain – the latter of which intends to expand to 100 outlets by 2018.
The Ryder Cup was estimated to have had a £82.4million “economic impact” for Wales. However, in terms of other sports, The Welsh Rugby Union, by itself, had a turnover of £75million in 2017, while the Principality/Millennium Stadium was estimated by the WRU of being worth £100million a year to the Cardiff and the Welsh economy.
Swansea City’s promotion to the English Premier League in 2011 was estimated to be worth between £30-40million to the city, with the club having a £97million turnover in 2017 (presumably there’ll be a similar figure for Cardiff City in 2018-19). In terms of more traditional leisure, Bingo hall chain Castle Leisure had a turnover of over £31million in 2017, employing more than 670 people.
A study by the Social Care Wales body (pdf) found that in 2016, the care sector in Wales employed the equivalent of 61,600 full-time workers (though 84,000 posts overall, including part-time workers) directly generating around £1.2billion in GVA for the Welsh economy. There are indirect and direct effects of the care sector – which straddles a line between public and private sectors, like universities; the indirect effects being the purchase of goods and services, which was estimated to support a further 31,000 jobs and pumps up to £590million into the Welsh economy. The total economic impact of the care sector was estimated to be anything up to £2.2-2.4billion, with care services being provided at around 3,700 sites across the country.
I’m going to look at the creative/information sectors (Part VII) and public sector (Part VIII) separately, so these figures are only for private and personal services including tourism, financial services, property, transportation/logistics, retail/wholesale and what are statistically categorised as “other services” – which made up about 34.7% of the Welsh economy in 2016. This was a smaller proportion than England (44.2%), Scotland (40%) and Northern Ireland (38.9%).
The vast majority of services fall within the retail and real estate sector – about 9.6% of the Welsh economy is dedicated to retail and wholesale and around 12.2% to real estate. Accommodation and food services (presumably tourist-related) only generated £2billion in GVA for 2016 despite tourist spending being higher than that figure.
The Welsh financial service sector is also considerably smaller than the rest of the UK, making up just 4.3% of the Welsh economy in 2016, compared to 6.9% in England (14.2% in London) and 6% in Scotland.
There appear to be two main drivers for service sector activity in a region – tourism and real estate. This explains why rural areas like the former county of Dyfed, Gwynedd, Conwy and Denbighshire have a higher proportion of their GVA come from services than places like Cardiff.
Areas with a strong focus on manufacturing (Part V) tend to generate less of their GVA from services, including Wrexham & Flintshire, Bridgend & Neath Port Talbot and the Valleys.
When it comes to financial services and insurance though, there’s one clear winner, with it making up 10.2% of the Cardiff & Vale of Glamorgan economy compared to an average of around 4-5% for the rest of the country.
In terms of jobs, about 35% of the workforce (~484,000 people) were estimated to work in these services and 17.6% of them (85,000) worked in Cardiff – the single biggest concentration of service sector jobs in Wales (and remember that’s before counting the public sector, creative industries and information sector).
Other than Cardiff, the further north and west you go, generally the more jobs there are in the service sector which is, again, likely to be driven by tourism despite tourism’s relatively small contribution to Welsh economic output. The only exception to the rule is Anglesey, which is heavily reliant on services for its GVA but has a relatively small number of jobs (though they’re likely to be a high proportion of all jobs available on the island).
SWOT Analysis: Welsh Service Sector
A reputation for friendly customer service – A report published at the end of 2017 found that the Welsh have a tendency to be “friendly, agreeable and cohesive”. This was framed as a negative as there’s supposedly a link between individualism/competitiveness and faster economic growth, but the flipside is that this is a sign Wales probably provides a higher standard of customer service, which may, in turn, encourage repeat custom. The south Walian accent being considered “friendly” is also one of the reasons why so many call centres set themselves up here.
Insurance – Wales, particularly Cardiff, is developing as a significant centre for the insurance industry. While it’s still small in global terms, the success of Admiral and the long-standing presence of the likes of Legal & General is starting to attract other global players like Aon. Insurance is an “elite” sector, which generates high growth in the same way as banks. There’s no reason why Cardiff couldn’t become to the insurance industry what London and Edinburgh are to banking, and this is aided by….
Growth in digital services (Part VII) – The stand-out area in Wales is price comparison and consumer advice; all of the major players in the UK (with the exception of Compare the Market) are headquartered in Wales. It’s a highly specialised niche industry that’s attractive to customers and provides highly-skilled work across IT, finance and marketing. It’s only one area of the digital services market but is future-proofing parts of the Welsh service sector in light of the decline in retail.
Banking & high-end finances – This could be deemed a strength to a certain extent because it lessens Wales’ exposure to risk (and there’s no way Wales would be able to bail out a bank in the same way Ireland and the UK did), however the absence of Welsh high street and investment banks means a lot of Welsh capital is handled outside Wales, whether it’s personal banking, commercial banking, private pensions or long-term investment products.
“McJobs”: the majority of service sector jobs are low paid, part-time and seasonal – The best example of this is the tourist industry. There can be long, quiet periods interspersed with heightened levels of activity but statistics show that most customer-facing roles in tourism and hospitality in the UK pay pretty poorly at an average of £7.71-8.40-per-hour for part-time and maybe £10-12-per-hour for full-time workers. Maybe this is down to Wales lacking services at the higher-end of the hospitality and service industry, such as Michelin-starred restaurants, boutique fashion outlets and 5-star hotels and resorts.
Agglomeration & Cardiff-centricity – There’s very clearly a link between high-end services and urbanisation. There can be advantages to this, such as lower transport costs and a great supply of highly-skilled labour (as cities tend to attract younger people and graduates for their first jobs, particularly if they attended a local university offering relevant courses). The problem in Wales is only Cardiff can really offer that “big city” experience in the same way as London for the UK as a whole. This causes a whole host of problems if you don’t live in Cardiff, such as traffic and commuter problems, demographic ageing in rural areas, a feeling of neglect in places like the Valleys, Swansea and northern Wales. There are very few “pull factors” to get the sort of employers and companies attracted to Cardiff and the M4 corridor to move further north and west.
Making the most of The Foundational Economy (Part XIV) – This has been a subject of discussion at the Senedd and, as hinted, I’ll be coming back to this in more detail later. The Foundational Economy – a term coined by Prof. Karel Williams – consists of “mundane but essential” roles that keep the society ticking over, and whose “unglamorous” services are used by everyone regardless of social status. It’s all those working at, or near, the bottom of the service and industrial sectors, including retail, food processing, cosmetology, logistics, utilities, health, education and welfare. Jobs can’t be easily outsourced and they’re often resistant to economic shocks.
A Welsh Stock Exchange – This idea has been raised on-off for a decade or so, mostly as a way of stimulating debate into how to properly capitalise Welsh businesses and reduce their reliance on structural funds and Welsh Government grants. A 2004 study by Prof. Robert Huggins – from what was then called UWIC – explored the idea in more detail, claiming that if Wales had 60 extra listed companies it would boost our GVA by around 9%. This could be one part of a strategy to turn medium-sized companies into globally competitive ones.
Preparing for Automation (Part XIV) – This could be seen as both an opportunity and a threat. The opportunities are increased productivity and higher-skilled work in the service sector. The risks are a rapid decline in the number of jobs (customer facing roles replaced by machines) and a workforce left with outdated skills and qualifications. The ways to turn this from a threat to an opportunity are education, innovation and carefully considering when automation is appropriate in the service sector and where it isn’t.
Continued capital movements to England – As mentioned earlier, the fact most Welsh money isn’t even “in Wales” is perhaps the biggest factor in why we haven’t developed our own financial service sector and why our GVA is so sluggish. That money has to come back somehow, but building an entirely new banking system and dealing with issues such as currency and national bonds may cause enough uncertainty to prompt faster capital flight. Appealing to patriotism doesn’t mean much when it comes to someone’s money.
The slow metamorphosis of the High Street – If you said 15 years ago, during the peak of the New Labour shopping/property boom, that we will have lost our appetite for spending money in shops you probably would’ve been laughed at. There’s a real possibility that within another 10-15 years our town and city centres are going to look very different, blamed in equal parts on internet retail, business rates, social dumping, rents and poor management. This doesn’t mean the High Street will “die”, but it will change and that could have big implications on everyone who currently works in retail, particularly when things like automation start to take off and in ways beyond self-service checkouts.
Property & credit debt bubble – A large chunk of the service sector, particularly retail and property, is built on debt. A little bit of consumer debt is fine and mortgages are necessary to buy your own home, but in 2017 it was reported that the average UK personal debt (before mortgages) was £8,000 per person – which would work out at around £20.5billion for all the adults in Wales. Consumerism and conspicuous consumption are so vital to large chunks of the service sector that if it collapses, with people ceasing to borrow money to buy things they sometimes don’t really need, then it threatens to take the whole lot down with it.