28 April 2020
- The Retail Health Index fell by 3 points to 71 in the first quarter of 2020, a new record low
- Health is predicted to deteriorate further and even more sharply in the second quarter of 2020 – by 9 points to 62 – although this is highly dependent on the length and form of the UK’s lockdown measures
- There was little doubt that retail health was in a far worse position than that experienced in the shadows of the 2008/09 financial crisis.
Following its latest health assessment, the KPMG/Ipsos Retail Think Tank (RTT) has determined that UK retail health worsened substantially – by 3 index points – in the first quarter of 2020, with the impact of COVID-19 being the key driver obliterating previous hopes of any recovery. This takes the RTT’s Retail Health Index (RHI) – a quantitative and qualitative assessment of demand, margin and cost – to 71, a new record low.
An even more seismic drop – by 9 index points, taking the RHI score to just 62 – is predicted in the coming (second) quarter, this would be greater than the drop recorded in the shadows of the 2008/09 financial crisis. The RTT members do however, stress that the magnitude of this downward shift is highly dependent on the length and nature of the country’s current ‘lockdown’ restrictions, and the impact this has on consumer and business psyche. If the members’ future assessment comes to fruition, the health of retail will have fallen by 38 points since the think tank’s inception in 2006, when the index was originally based at an RHI score of 100.
First Quarter of 2020 – Reflection:
The RTT members had previously been ‘cautiously optimistic’ about the prospects for 2020, predicting that retail health would likely hold steady at 74 in the first quarter of the year. Indeed during the RTT’s assessment back in January this year, the members previously held high hopes for the reemergence of political and economic certainty following the conclusive General Election, which they believed would benefit the sector in subsequent quarters.
COVID-19 however, has quickly eclipsed even the sector’s previous woes, and with it any hopes of improved health for the foreseeable future. The nation’s lockdown, and its impact on demand in particular, has sealed the fate for many retailers, especially those deemed ‘non-essential’.
Reflecting upon health in the first quarter of 2020, Paul Martin, co-chair of the RTT and UK head of retail at KPMG, said:
“If looking at total sales in the UK over the first quarter of 2020, non-food retail was on a -1% trajectory in both January and February. However, from mid-March onwards, the decline was far more severe as anxiety around COVID-19 started to rapidly rise. The lockdown only came into effect on March 23rd, but non-food retail sales fell by anything from 50 to 100 per cent thereafter, dependent on whether the retailer in question had any stable online operations or not.
“The lack of consumer engagement was mirrored by footfall figures during the quarter too, which fell substantially as the health consequences of COVID-19 became clearer as the quarter progressed. A record decline in footfall of 14.2% was recorded in February, whilst that low was quickly superseded by a fall of 51.3% in March – and that only measured the footfall at stores which remained open.
“Grocery and online sales have soared though, especially towards the back-end of March as consumers started to stockpile despite calls not to. Despite this seemingly beneficial rise for ‘essential’ or online retailers, even this uptick wasn’t enough to offset the declines noted throughout the quarter and across the sector more broadly, as has been made painfully clear by recent retail sales figures.”
Second Quarter of 2020 – Prediction:
Looking ahead to the prospects in the second quarter of 2020, the RTT are in collective agreement that much depends upon both the length and form of the country’s social distancing measures, which in itself sparked heated debate. That said, there was little doubt that the situation faced by retailers today would be worse than anything that has been experienced in the history of the retail think tank’s index, including the 2008/09 financial crisis.
As the RTT’s economist, Ruth Gregory of Capital Economics, outlined: “We think that the lockdown implemented to contain the coronavirus will trigger a peak-to-trough fall in GDP of around 25% in the first half of this year, which would dwarf the 6% drop during the 2008/09 financial crisis. Retail sales could fall by as much as 30% in parallel.
“Meanwhile, although not all of those applying for Universal Credit will have been made unemployed, the 1.75 million new applications lodged in the four weeks to 9th April will probably raise the unemployment rate from 4.0% in February to 5.3% in April. And if some firms find that they cannot balance the books once the government support ends, then worse may be yet to come.”
Being the principal driver of health, the RTT focused their attention largely on demand, or rather the lack thereof, in the upcoming quarter. To a lesser degree yet still significant, margin and cost were also predicted to weigh retail health down. Cost pressures impacting retail margins were said to be working their way through food supply chains, whilst non-food items would need to be largely written off. Meanwhile, fixed costs relieved by government intervention – while wholly supported and welcomed – weren’t likely to fully compensate for rising variable costs elsewhere, especially by those still trading.
Commenting on the prospects for health in the second quarter of 2020, Tim Denison, co-chair of the RTT and director of retail intelligence at Ipsos Retail Performance, said:
“As was clear through heated debate, the longevity and nature of the current lockdown measures is largely unknown, but there remains little doubt that retail will be severely impacted – at levels eclipsing what had previously been experienced during the 2008/09 financial crisis. Unlike previous historic downturns, this is not only about the consumer’s response to what is occurring around them, but rather the mechanics of daily life have fundamentally changed, forcing the consumer’s hand and blocking demand. Even when restrictions are lifted – whenever and however that may be – it’s unlikely we’ll see a return to ‘normal’ by any means.
“There are a myriad of dynamics at play and not all retailers are feeling the pain equally – there is a clear divide between ‘essential’ and ‘non-essential’, between online and physical channels, as well as between ‘premium’ versus ‘value’. The cons will likely outweigh the pros though. Indeed, even those noting surges in sales aren’t necessarily finding it easy to translate these additional sales into profit. We all know that home delivery for example, isn’t always cost efficient.
“Government schemes and relief have of course been welcomed, easing some fixed cost pressures like business rates and staff costs. However, other costs have arisen, including those relating to: additional people power, airfreight, supply chain and storage, or product manufacturing for example. It’s easy to assume that those still trading have it easier, but that’s not the case. Likewise, those not trading still have bills to pay, with costs inherently sticky.
“The future is rather murky, and consumer confidence is likely to be volatile for the foreseeable future, especially as the longer-term impact of the pandemic becomes clearer. Retail isn’t likely to be a high priority for most and it remains to be seen whether retail health will recover sharply or slowly, if indeed it recovers fully at all.”
Note to Editors:
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About the KPMG/Ipsos Retail Think Tank (RTT) and Retail Health Index:
The RTT panellists rely on their depth of personal experience and sector knowledge, and review a comprehensive bank of industry and government datasets and include 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 – GlobalData Retail
- Paul Martin – KPMG
- Martin Newman –The Customer First Group
- James Sawley – HSBC
- Mike Watkins – Nielsen
- Ruth Gregory – Capital Economics
The intellectual property within the RTT is jointly owned by KPMG (www.kpmg.co.uk) and Ipsos Retail Performance.
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 by KPMG and Ipsos Retail Performance (formerly Synovate) 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.
- 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.
- 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.
- 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 judgments 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.