KPMG/Synovate Retail Think Tank White Paper #21
Are like-for-like sales figures still a useful and relevant measure of retail performance?
– Measurement is at risk of becoming obsolete without change –
– The impact of online sales cannot be ignored –
– An inclusive and standardised set of principles is required to maintain like-for-like’s relevance –
Part I: Executive Summary
The phrase ‘like-for-like sales’ entered the retail lexicon in the 1980s and quickly became one of the most commonly used measurements in the sector, rivalling sales per square foot as the metric of choice for underlying performance.
Stripping out the sales generated from new space gave retailers and stakeholders alike a good indication of how the underlying business was performing against previous periods. This was absolutely essential at a time of rapid expansion in the high street and the emergence of large out-of-town shopping centres.
But despite it being a relatively straightforward concept, comparing like-for-like (LFL) sales between different retailers is fraught with difficulties. The sector has never had a standard definition of the measurement, meaning companies use a diverse range of methods to calculate the figures they report. They are free to pick and choose which elements to include or exclude, meaning elements can potentially be pulled in or out at will to ensure sales figures are shown in the best possible light.
“Without an industry standard, retailers have understandably been creative in how they choose to declare like-for-like sales publicly,’ says Tim Denison, Director of Retail Intelligence at Synovate Retail Performance.
The increasing importance of online sales and emerging retail operating models have also brought into question the future relevance of like-for-like sales as a primary performance metric – making comparisons has become even more fraught with difficulty.
The KPMG/Synovate Retail Think Tank met in July to consider whether the calculation of like-for-like sales requires a set of guiding principles, to ensure they remain relevant to external stakeholders, or whether the measurement is simply past its sell-by date and needs to be consigned to the scrapheap.
The most opaque metric used in retail?
While like-for-like sales figures are popular with City analysts and the media alike, there are huge issues around how the figures are collated, interpreted and presented. Key to this is the lack of a standard definition.
No industry or regulatory body has ever set out rules or principles for retailers to use when compiling like-for-likes, making it impossible to accurately compare performance between retailers. An individual retailer’s definition of what constitutes like-for-like sales can also change over time, potentially rendering its own figures difficult to interpret.
“It’s probably fair to say that one of the most misunderstood and opaque metrics used in modern day retailing is that of like-for-like sales,” says Neil Saunders, consulting director at Verdict Research. “It really shouldn’t be this way, of course; the general concept is straightforward enough and, as a measurement, the principle of LFL is a useful one. The problems stem from both the wide variability in what actually constitutes LFL and also from a lack of care in the interpretation of LFL figures which often leads to misuse of the metric, especially in media reporting.”
As it stands, decisions on whether to include items such as VAT, inflation, refurbished or extended stores, the cannibalisation of sales from other stores, change of product mix, promotional sales, vouchers and staff discounts are all down to individual retailers and very seldom explicitly stated. This can leave external stakeholders baffled over what truly constitutes like-for-like, making invalid comparisons in performance between individual businesses.
“What’s appropriate for one business’s internal decision making will not necessarily be appropriate for another,” says Helen Dickinson, KPMG’s UK Head of Retail. “Hence we are left with a challenge around what is an appropriate external measure of relative performance. Banishing the LFL as a measure to benchmark relative performance is not necessarily the answer, but greater consistency and transparency on how retailers calculate this much loved measure is long overdue.”
Timing can also contribute to wildly differing measures of like-for-like sales. During the crucial Christmas period, for instance, there are no rules over which weeks should be counted to provide consistency across the sector.
“It is easy to pick the ‘best’ period to report upon, particularly at the key Christmas period,” says Nick Bubb, Retail Analyst at Arden Partners. “This was clear last Christmas, when some retailers missed out the poor snow-disrupted week in early December 2010 from their figures and included the less-disrupted week in early January 2010 instead, delivering rather better LFL sales growth than their peers. In future, retailers should be obliged to give figures for the same five week reporting period to early January as the ONS and BRC measures of retail sales.”
A misunderstood measure
Even with its inherent vagaries, like-for-like is still a popular measurement used extensively by analysts and journalists. The Retail Think Tank argues that it is often overused and, more importantly misused. Taking it as an overall guide to the general health of the retail market or as a measure of consumer demand is highly misleading.
“While LFLs are useful in the context of individual retailers, they are much less helpful when exploring the wider retail picture,” says Verdict’s Neil Saunders. “Indeed, LFLs should categorically not be used to assess the overall health of the retail economy. Unfortunately this often happens within media circles and often leads to some irksomely inaccurate headlines.”
“From a macro-economic point of view, the like-for-like measure of sales is not actually much use. Economists care about how much consumers are spending in total. It is largely irrelevant how those sales are split between stores that were already open and new stores,” says Vicky Redwood, Senior UK economist at Capital Economics. “The best macroeconomic measure of sales is one that includes as much as possible – including online and other multi-channel methods of sales.”
The lack of standardisation creates difficulties in making direct comparisons between different retailers and even for a single business, like-for-like sales are just one indicator of its overall performance. Assessment of the health and value creation of a retailer requires a balanced view across a much broad set of metrics covering cash generation, profitability, and productivity.
“Like-for-likes provide a general guide to short term performance, but it takes a lot more to nail down the actual health of individual players,” says Mark Teale, Head of Retail Research at CB Richard Ellis.
However, those companies considering dropping like-for-like metrics altogether because of these issues would have to tread very carefully, warns Arden’s Nick Bubb.
“Retailers who are growing their store estate particularly quickly may well claim that LFL sales are not a fair measure of all that their business is doing, but the City is rightly suspicious of retailers who refuse to give LFL sales figures,” he says. “After all, human nature would suggest that such retailers probably don’t give LFL sales figures only because the figures don’t look very good…because otherwise they would be shouting about them.”
The online effect
The retail world has undergone a major transformation since like-for-like became a widely-used metric. The growth in online shopping means that store sales, on which like-for-like figures are historically based, are no longer the be-all and end-all for retailers.
John Dawson of the University of Edinburgh says “The way that channel structure evolves also affects like-for-like sales interpretation with shifts away from store based selling, which is the basis of LFL calculation, having the potential to reduce the total of store based sales even within an overall growing market.”
As consumers increasingly choose to make their purchasing decisions from the comfort of their sofas by laptop, or on the move by smartphone, the contribution of outlets to overall sales is changing. As we look ahead, many companies are more likely to have to take into account store closures in like-for-like measurements than new openings.
“Today, there is limited new shop space coming into play in the UK and the real opportunities lie on the virtual high street,” says Richard Lowe, Head of Retail & Wholesale at Barclays Corporate. “The lack of accounting standards around like-for-likes mean there is no clarity as to how internet sales should be accounted. A retailer may well be enjoying remarkable online growth with sales driven through a combination of click-and-collect and purchases made via the internet (often preceded by a store visit) but, these are not visible if you were to look at business’ like-for-likes in isolation.”
The relationship between online and physical sales is far from clear-cut and very difficult to define. Stores can still play a vital part in situations where customers make a purchasing decision after a store visit but carry out the transaction online. However, their contribution is virtually impossible to measure.
“It is getting hard to know where the boundaries lie,” says Arden’s Nick Bubb. “In this age of ‘bricks and clicks’ it is reasonable to include online sales in LFL sales, but it would helpful if online growth is separately disclosed, so that the performance of the stores themselves can be monitored.”
The influence of online activity also raises the issue of whether negative like-for-like store sales should still be viewed in a bad light. If like-for-like is to continue to be a useful measurement of performance for external stakeholders, the contribution of online must be recognised.
Having considered the various issues associated with like-for-like sales figures, the Retail Think Tank concluded that it still has a vital role to play in helping to understand a company’s underlying performance. But if it is to continue to be relevant to stakeholders, it needs to adapt to the new realities of retail today and be consistent across the retail sector.
In order to provide this consistency, the Retail Think Tank suggests a set of guiding principles that retailers should follow when drawing up like-for-like figures, taking the view that areas excluded from total sales, to derive like-for-like sales should be kept to a minimum.
The following principles should form the basis of standard approach for calculating like-for-like sales:
New stores and store closures
Like-for-like measurements were introduced to reveal the underlying performance against previous periods. Including new or closed stores would render the metric meaningless and so must continue to be excluded. New stores should be introduced on their 12 month anniversary for year on year calculations.
VAT can be easily broken out of sales figures. Retailers should provide like-for-like sales figures both including and excluding VAT, in order to aid the comparisons between retailers who have varying mixes of products attracting VAT at different rates.
Pricing is an integral part of the overall sales proposition and hence no adjustment should be made for pricing changes.
The impact of store refurbishments should be considered a regular part of doing business and as such should not be excluded from like-for-like sales and no adjustment made for the period of closure. Only in circumstances where a store has to close for a substantial period of time due to a fundamental transformation and it contributes a significant portion of the chain’s income should an adjustment be made. In such circumstances it should be treated as a new store.
Store extensions, mezzanines, etc.
The Retail Think Tank concluded that the impact arising from any change to a store that results in an increase to the square footage of that store should be excluded from like-for-like sales as the extension does not represent comparable capacity.
The loss of sales from a store to a recently opened store in the nearby area is difficult to measure in isolation. One member argued that this simply meant the new store was opened up too close to the existing outlet. The Retail Think Tank’s view is that these situations should not be adjusted in like-for-like figures.
Product mix changes
The updating and change of product ranges at stores is a part of life for all retailers and so should not be excluded from like-for-like sales.
Discounts, promotions and vouchers
The Retail Think Tank takes the view that the discount element of any promotional sales should not be included in like-for-like sales. Therefore, any discounts should be reflected in like-for-like sales at the value that the customer paid. In the same vein, future money-off vouchers should only be taken into account at the point of redemption.
It is vital that online sales are incorporated into like-for-like sales if they are to provide external stakeholders with an accurate view of a firm’s underlying performance. Sales generated through the application of new technologies (whether online or mobile) or new distribution channels (such as catalogues) should probably be included in the LFL calculation as they are generated and supported by using existing retail physical store capacity..
In much the same way as for physical outlets, the impact of any upgrades to a website or change in product mix should be included in like-for-like sales, while new website launches should be excluded until after the 12-month anniversary.
Only if sales from alternative channels are demonstrated to be completely independent of the existing portfolio, should they be excluded. The Retail Think Tank expects this to be rare for retailers operating in both physical and virtual space as the brand and marketing impact would be difficult to separate even if it were possible to attribute individual sales directly to one channel or another.
Time periods and trading updates
Where possible, sales updates from retailers should cover the same trading periods as their competitors and be comparable to previous periods. This is particularly true over the vital Christmas period, where retailers in the past have chosen different trading periods to report on.
Like-for-like is a widely used, but often misunderstood measure. Its usefulness to external stakeholders is limited, due to a lack of comparability between retailers’ figures. The increasing importance of online sales and the lack of growth in new outlets could see the metric quickly become obsolete without substantial change and standardisation.
The Retail Think Tank recommends that a set of guiding principles be created for retailers to adopt, allowing external users of the figures to easily assess and compare the underlying performance of companies.
Any set of principles should seek to minimise highly judgemental exclusions from the like-for-like calculation, with only the impact of new, extended or closed stores justifiably excluded. Any measure must take into account online and multi-channel sales, with exclusions only for new websites. The fundamental principles are transparency and clarity. A user of the published sales data should be able to breakdown total sales of a retail business into its constituent parts in order to get a clear picture of the drivers of performance.
The RTT calls upon the industry and leading retailers to work together on drawing up these guiding principles to ensure like-for-like sales remains a relevant metric for the 21st century. Such guidance should recognise that any measure of like-for-like sales is just one of a broader set measures required to achieve a full understanding of the performance of a retail business.
Part II: In detail – Individual views of the RTT members
Helen Dickinson, KPMG: “Like-for-like sales still a relevant barometer of performance…?”
Like-for-like sales growth remains a key benchmark for retailer performance and is widely used and quoted by both analysts and retailers in the market place.
However, there is no standard definition or calculation methodology. Retailers are not consistent in the way they draw up their like-for-like figures and practice varies widely on how the metric is used. Some retailers do not give weekly LFLs whilst others religiously provide this information. The continued validity of this much loved measure, given the diversity of measurement methods, and range of trading periods quoted, is questionable.
The debate on what should or more importantly shouldn’t be included continues to baffle many a retailer; how should refurbishments, extensions, cannibalisation, VAT changes, multi-buys, discounted sales be treated?
In addition, considering the heavy price-led promotional activity currently in the market place, is LFL really a true reflection of a retailer’s performance? We have seen many a retailer boost sales by slashing prices in the current climate and report LFL sales growth, but does that indicate a strong performance? What about the impact on margin, profits and cash?
However, the biggest challenge to the relevance of the ‘traditional’ LFL metric is what to do about online sales. In a world where multi-channel retailing is here to stay, is a measure that is based purely on transactions from physical shops really the best metric to use? Or should sales through other channels be included?
From an internal management point of view, management should be taking a balanced view across the business of all the drivers of overall performance (i.e. beyond LFL sales) and provided they are consistent in their methodologies of calculation, a balanced view of all such measures will provide useful decision making tools.
But what’s appropriate for one business internal decision making will not necessarily by appropriate for another. Hence we are left with a challenge around what is an appropriate external measure of relative performance. Banishing the LFL as a measure to benchmark relative performance is not necessarily the answer, but greater consistency and transparency on how retailers calculate this much loved measure is long overdue.
In a world where stakeholders continue to demand clarity over published KPI’s – both financial and non-financial, surely it is only a matter of time before a ‘standard’ measure, or at the very least some clear best practice, becomes a reality.
Richard Lowe, Barclays Corporate: “To view any metric in isolation can be disingenuous”
In recent years like-for-likes have become the de rigueur comparative when trying to distinguish between the good, the bad and the ugly in terms of high street performance, and it is easy to understand why.
Like-for-like figures strip out the effects of new store openings and refurbishments and therefore give what is considered to be an accurate picture of underlying performance.
But like-for-likes sales figures are just one of a number of key performance indicators and, as is the case when considering any type of business’ performance, to view any metric in isolation can be disingenuous. Coupled with this, today’s retail landscape is undergoing a quiet revolution.
Like-for-likes became popular at a time in our retail history when growth was largely driven by store openings and new shop space was being offered up in large out-of-town shopping centres including Meadowhall, Lakeside, Metrocentre and Manchester’s Arndale Centre. Today, there is limited new shop space coming into play in the UK and the real opportunities lie on the virtual high street. The lack of accounting standards around like-for-likes mean there is no clarity as to how internet sales should be accounted for. A retailer may well be enjoying remarkable online growth with sales driven through a combination of click-and-collect and purchases made via the internet (often preceded by a store visit) but these are not visible if you were to look at the business’ like-for-likes in isolation.
The lack of accounting standards around like-for-likes also causes distortion, particularly when stripping out stores which have been refurbished. Shops can be discounted whether they’ve had a lick of paint or a total refit.
Rising inflation is also eroding the accuracy of the metric. Price increases can help a retailer put in what appears to be a healthy performance but, in reality, may just be a result of increased prices rather than sales volumes.
A change in product mix can also have a significant impact on the effectiveness of like-for-likes – performance may be improving but, this is not necessarily apparent by looking at a retailer’s like-for-likes alone.
In my view, too much weight is stored in like-for-likes at a time when the retail landscape is undergoing a period defined by change and challenges. As retailers adapt, so to should the way in which their performance is measured.
Vicky Redwood, Capital Economics: “The best macroeconomic measure of sales is one that includes as much as possible”
The debate over how retail sales should be measured is perhaps of most important to analysts wanting to be able to judge different retailers on a comparable basis.
However, it is also important from an economic point of view to understand exactly what the figures are measuring. The Bank of England obviously looks at retail sales figures when deciding what to do with monetary policy, while the sales figures also influence any macroeconomic forecasters’ predictions.
From a macro-economic point of view, the like-for-like measure of sales is not actually much use. Economists care about how much consumers are spending in total. It is largely irrelevant how those sales are split between stores that were already open and new stores.
Similarly, economists like to know the total cash amount consumers have spent – which means including the amount spent in VAT for example.
Indeed, the best macroeconomic measure of sales is one that includes as much as possible – including online and other multi-channel methods of sales. One challenge for the statistical authorities is to make sure they are capturing changes in the way retailers sell and ensure that they are measuring all types of sales.
Mark Teale, CB Richard Ellis: “nice to know, but tells you little about the true health of retail occupiers”
Like-for likes are useful, from the landlord perspective, as a general input in the covenant assessment process – to get a rough feel for the performance of occupiers (or prospective occupiers) – but it takes a lot more to nail-down the actual health of individual players.
The growth of multi-channel retailing is clearly muddying the water. The problem now is differentiating between branch network dependent internet sales and pure internet sales (relatively rare) where no branch network exists or branch networks demonstratively have no impact on the specific internet sales recorded (equally rare). Where goods are paid for via the internet or other non-shop channels but are collected or delivered from branches; or where sales are dependent in any other way on the existence of a branch network (showrooms for example), transactions are branch dependent. Branch dependent sales, and only branch-dependent sales, should be reported in like-for-likes.
This issue is of particular relevance in property markets because of the prevalence of turnover rents. If branch network dependent internet sales are not fully reported, branch turnovers will inevitably be understated. Allowing internet purchased returns at any branch causes similar problems . The long-term risk, if there is not greater transparency/accuracy in multi-channel sales reporting, is that the credibility of both like-for-likes and turnover related leasing agreements will be steadily undermined.
Neil Saunders, Verdict Retail: “number gazing does not drive businesses forward”
It’s probably fair to say that one of the most misunderstood and opaque metrics used in modern day retailing is that of like-for-like sales. It really shouldn’t be this way, of course; the general concept is straightforward enough and, as a measurement, the principle of LFL is a useful one. The problems stem from both the wide variability in what actually constitutes LFL and also from a lack of care in the interpretation of LFL figures that often leads to misuse of the metric, especially in media reporting.
Yet if they are so confusing what is the point of LFL? Generally speaking, the purpose is to allow for a fair assessment of underlying trading performance at individual retailers without taking into account store or space expansion – both of which can have a major, and exceptional, impact on sales growth. In other words, LFL lets retailers and others see how all of their various strategies and tactics are playing out without the impact of exceptional ‘expansionary’ factors.
While LFLs are useful in the context of individual retailers, they are much less helpful when exploring the wider retail picture. Indeed, LFLs should categorically not be used to assess the overall health of the retail economy. Unfortunately this often happens within media circles and often leads to some irksomely inaccurate headlines. Overall health can only be assessed by looking at total spend or sales as this gives the best indication of aggregate demand in the consumer economy; comparatively, LFL sales reflect only a part of consumer spending. Theoretically it is possible to have very robust overall sales growth while LFL growth is strongly negative.
Whether at a retailer or overall level, it is critical not to use LFLs in isolation. They’re just one metric that needs to be looked at alongside others to reach a balanced and informed view. It is also important to understand that there is not one standard definition of LFL. Different retailers have different policies and performance always needs to be assessed in light of the specific accounting treatment behind the LFL calculation.
Even if LFLs are useful and are used properly, there is a question mark over how relevant they will be in five or ten year’s time. With the proliferation of transactional channels, it could be argued that the LFL measure is now essentially redundant. In actuality, this increased complexity probably makes understanding LFLs more, not less, important as, at a retailer level, they can play a key role for decision making in areas such as store consolidation and optimisation.
So, LFLs will likely remain a key measurement tool for retailers. But never should they become the be-all and end-all. In retail, as in other businesses, numbers are just the result – a kind of shorthand for all the strategising, decision making and execution. They certainly provide a useful guide and steer for future planning, but number gazing does not drive businesses forward. Only innovation, planning and hard work can do that.
John Dawson, University of Edinburgh: “comparisons are odious”
Like-for-like sales while apparently simple are open to multiple interpretations. LFL is usually ‘defined’ as sales in shops that have been opened for all the period under consideration.
Some statistical issues. How is LFL calculated?
Which stores are to be included is the first statistical issue. LFL sales require the store to have been open over the period under consideration, but stores are seldom static with extensions, refurbishments, re-merchandising, etc. being undertaken. What degree of ‘sameness’ is required for a store to be included in LFL calculations?
There is then the time period involved, for example sales for a week or month compared with sales for an earlier week or month and linked to this is the elapsed time of the earlier period, thus week on previous week sales or week on same week previous year sales.
Having established the stores to be included and the time period, it is then necessary to decide what constitute ‘sales’. The ways of allocating sales to stores may differ from firm to firm; for example with different treatment of internet click and collect sales, of coupon sales, of staff discounts, of VAT, etc. in calculating store sales.
Within a firm these statistical issues are likely to be consistent, so evaluations of individual stores and inter-store comparisons within a firm can be meaningful. But the statistical issues often are very different in different firms so inter-firm comparisons and sector level figures resulting from aggregation lose meaning.
Some interpretation issues. What does LFL mean?
Interpretation of LFL figures are affected by issues that are external to the retail sector, sectoral changes and also internal strategic issues in the firms.
External factors include changes in the retail timetable, for example the timing of Easter and the day of the week on which Christmas Day falls, and also big differences in weather. These all affect the interpretation of LFL sales, at all levels of aggregation.
Sector changes affect interpretation through different levels of inflation being present at the compared time periods (this is particularly the case with year-on-year comparisons). The way that channel structure evolves also affects interpretation with shifts away from store based selling, which is the basis of LFL calculation, having the potential to reduce the total of store based sales even within an overall growing market.
Many of the issues of interpretation are at firm level with LFL affected by a firm’s policy having an impact at store level. It is perhaps at this level that LFL has most meaning. For example a change in promotional strategy or a change of emphasis on category mix (extended non-food ranges in a superstore, change in balance of mens’ and womens’ wear in a fashion store) or even a change of manager, between the time periods considered, may affect LFL.
Within firm LFL can be a useful measure but with the current confusions, when using it for sector level figures and inter-firm comparisons there is often much ado about nothing.
Tim Denison, Synovate: “change is one of the few constants in modern-day retailing”
What value nowadays can be placed on the age-old metric of “like-for-like sales”? Its purpose, clearly, is to provide a true reflection of underlying sales, unaffected either by changes in the size of a retailer’s estate or other factors that could ‘artificially’ colour its comparable trading performance.
Nobody could argue that this information is not useful, in principle, to the management team. When broken down by volume and value and compared against like-for-like footfall, it enables the business to establish the key forces driving the performance of its estate.
As an internal measure, it has always had intrinsic merit, as long as the retailer has established rule sets to accommodate refit programmes, expanded space in stores etc. etc. However, as retailing becomes increasingly multi-channel, management teams need to establish quickly how to account for new practices in order to retain the metric’s relevance, worth and inside track.
Where like-for-like sales figures have least meaning and significance, to my mind, though is as an external measure of a retailer’s performance. Without an industry standard, retailers have understandably been creative in how they chose to declare like-for-like sales publicly.
Mezzanine floors and loyalty card redemptions spring to mind as two examples in recent times that gave rise to inflated like-for-like figures released externally, and, before that, petrol sales when supermarkets began installing forecourts.
Such is the dynamism in retail offer amongst the so-called “grocery” multiples, expanding into non-food lines, financial services and beyond, that an accurate measure of like-for-like is something that is genuinely difficult to gauge. Beyond that, online sales present a whole new area of potential confusion over the metric, particularly if such sales are attributed to local stores.
To the outside world, the value of disclosed like-for-like sales figures is diminishing, simply because all too often they neither provide a fair reflection of underlying sales, nor do they provide a fair comparative base between retailers. Internally though, where the company standard has been defined and regularly reviewed, it will still deliver powerful insight and so remain.
Nick Bubb, Arden: “the devil and the debate is in the detail”
“Like for like” sales are the best measure of underlying sales trends and they are widely used in the City as a measure of retail performance, because they exclude the effect of opening new stores on total sales. After all, it is easy to open new stores, as the big supermarkets are doing, and claim that overall sales and market share are booming.
Retailers who are growing their store estate particularly quickly may well claim that LFL sales are not a fair measure of all that their business is doing, but the City is rightly suspicious of retailers who refuse to give LFL sales figures. After all, human nature would suggest that such retailers probably don’t give LFL sales figures only because the figures don’t look very good…because otherwise they would be shouting about them.
The standard definition of LFL is to include stores that have been open for more than 12 months, although some retailers take a more conservative view and only include stores that have traded a full year at the start of their financial year. But the devil is in the detail and the debate is about the detail…
It is easy to pick the “best” period to report upon, particularly at the key Christmas period. It is also easy to “buy” sales by cutting prices, so it is becoming normal to show the movement in LFL gross profit alongside LFL sales, to show if gross margins are suffering in order to grow sales
It should also be clear whether sales include or exclude VAT, as when VAT goes up it is easy to show “growth” in VAT-inclusive sales.
One major problem is that stores which are over one year old don’t necessarily stay the same, in that ranges and merchandising can change and even the size of the store can change. But it is stretching the definition of LFL to include store extensions in LFL, even though the store has not changed and the major supermarkets are particularly culpable in this regard. It is absurd, not least when underlying LFL sales are weak, for supermarkets to claim some sales growth by effectively including new space in the form of extensions. This policy of including store extensions in LFL should be banned.
A more tricky point is when stores get a significant investment in store refurbishment, with the express aim of improving sales, but as the more significant the investment is in reformatting the store, the more disruption there will be during the revamp process, in terms of losing sales, in the round it is probably fair to include refurbished stores in LFL.
But one of the bigger issues is whether LFL sales should include online sales, as the fast growth being seen in online retailing is bound to flatter the figures. But the very point of “click and collect” and multi-channel retailing is that for the best brands it shouldn’t really matter where the sales come from. Indeed it is getting hard to know where the boundaries lie. After all, if customers research a purchase by looking around a store, but then order online for their convenience and pick up the order in-store is the purchase a store or online order? In this age of “bricks and clicks” it is reasonable to include online sales in LFL sales, but it would helpful if online growth is separately disclosed, so that the performance of the stores themselves can be monitored.
Note to Editors:
First mentions of the Retail Think Tank should be as follows: the KPMG/Synovate Retail Think Tank. The abbreviations Retail Think Tank and RTT are acceptable thereafter.
The RTT was founded by KPMG and Synovate (formerly SPSL) in February 2006. It now meets quarterly to provide authoritative ‘thought leadership’ on matters affecting the retail industry. All outputs are consensual and arrived at by simple majority vote and moderated discussion. Quotes are individually credited.
The Retail Think Tank has been created because it is widely accepted that there are so many mixed messages from different data sources that it is difficult to establish with any certainty the true health and status of the sector. The aim of the RTT is to provide the authoritative, credible and most trusted window on what is really happening in retail and to develop thought leadership on the key areas influencing the future of retailing in the UK.
Its executive members have been rigorously selected from non-aligned disciplines to highlight issues, propose solutions, learn from the past, signpost the road ahead and put retail into its rightful context within the British social/economic matrix.
Date Published: 2/15/2011 4:35 PM
Note to Editors:
The RTT panellists rely on their depth of personal experience, sector knowledge and review an exhaustive bank of industry and government datasets including the following:
Members of the RTT are:
- Nick Bubb – Independent Retail Analyst
- Dr. Tim Denison – Ipsos Retail Performance
- Jonathan De Mello – Harper Dennis Hobbs
- Martin Hayward – Hayward Strategy and Futures
- Maureen Hinton – Conlumino
- James Knightley – ING
- Richard Lowe – Barclays Retail & Wholesale Sectors
- David McCorquodale – KPMG
- Martin Newman – Practicology
- Mike Watkins – Nielsen
First mentions of the Retail Think Tank should be as follows: the KPMG/Ipsos Retail Think Tank. The abbreviations Retail Think Tank and RTT are acceptable thereafter.
The RTT was founded in February 2006. It now meets quarterly to provide authoritative ‘thought leadership’ on matters affecting the retail industry. All outputs are consensual and arrived at by simple majority vote and moderated discussion. Quotes are individually credited. The Retail Think Tank has been created because it is widely accepted that there are so many mixed messages from different data sources that it is difficult to establish with any certainty the true health and status of the sector. The aim of the RTT is to provide the authoritative, credible and most trusted window on what is really happening in retail and to develop thought leadership on the key areas influencing the future of retailing in the UK. Its executive members have been rigorously selected from non-aligned disciplines to highlight issues, propose solutions, learn from the past, signpost the road ahead and put retail into its rightful context within the British social/economic matrix.
Definitions: The RTT assesses the state of health of the UK retail sector by considering the factors which influence its three key drivers.
1. Demand – Demand for retail goods and services. From a retro-perspective, retail sales, volumes and prices are the primary indicators. When considering future prospects, economic factors such as interest rates, employment levels and house prices as well as others such as consumer confidence, footfall and preferences are used
2. Margin (Gross) – Sales less cost of sales; the buying margin less markdowns and shrinkage. Cost of sales include product purchase costs, associated costs of indirect taxes and duty and discounts
3. Costs – All other costs associated with the retail operations, including freight and logistics, marketing, property and people
The Retail Health Index – how is it assessed?
Every quarter each member of the RTT makes quantitative assessments of the impact on retail health of demand, margins and costs for the quarter just completed and a forecast of the quarter ahead. These scores are submitted individually, collated and aggregated in time for the RTT’s quarterly meeting. The individual judgements on what to score are ultimately a combination of objective and subjective ones, drawing upon a wide range of hard datasets and softer qualitative material available to each member. The framework follows the example of The Bank of England Agents’ scoring system on economic intelligence provided to the Monetary Policy Committee.
The aggregate scores are combined to form the Retail Health Index (‘RHI’) which is reviewed at that meeting and occasionally revised after debate if members feel it appropriate. The RHI tracks quarter on quarter changes in the health of the UK retail sector and as such provides a useful and unique measured indicator of retail health. The index ‘base’ of 100 was set on 1 April 2006. Each quarter, it assesses whether the state of health has improved or deteriorated since the previous quarter. An improvement will lead to a higher RHI score than that recorded in the previous quarter, and with a deterioration leading to a lower score. The larger the index movement, the more marked the shift in the state of health.
The RHI has two main benefits. Firstly, it aims to quantify the knowledge of the RTT members in a systematic way. Secondly, it assesses the overall state of health of the UK retail sector for which there is no official data.
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