- First quarter of 2021 saw retail health perform better than expected and remain flat – despite a third UK lockdown
- Retail health predicted to grow by 3 points during Q2 2021 as consumers release pent up demand for high street shopping
- Consumers sitting on savings predicted to make up for lost time as they shop for occasions
Pent up demand and savings accrued during lockdown are set to improve the health of the retail sector over the coming months as the UK moves to the next phase of its recovery plan, according to the KPMG/Ipsos Retail Think Tank (RTT).
Following its latest health assessment, the RTT has determined that pent up demand from consumers will see the Retail Health Index (RHI) rise by 3 points to 71 in Q2 2021, a considerable improvement from its nadir of 61 points for the same quarter last year.
The main driver of the improved RHI – a quantitative and qualitative assessment of retail demand, margin and costs – is predicted to be demand over the next quarter, as a result of a shift in spending patterns, with consumers choosing to spend on fashion and clothing as they shop for occasions and get back to socialising. The mood of the nation will be about spending on looking good again and making up for lost time. The RTT predicts the shift in spend will see a gradual move away from spending on in-home grocery consumption, DIY, technology and household items, which sustained retailers during the lockdown earlier in the year in favour of the hospitality sector. Overall it will be a strong quarter for non-food retailers and given the timings of the re-opening milestones, it will take time for food sales to lose momentum
Stronger demand goes hand-in-hand with healthier margins, so this will reduce pressure on non-food retailers in the quarter ahead. Furthermore, the swing back to fashion, which is a higher margin category, will also contribute to stronger overall margins. The RTT registered some concerns of storm clouds ahead for margins in the food sector, as demand there begins to weaken.
The RTT predicts that costs will stay relatively stable, with rises in energy and commodity prices being partly offset by a strengthening pound. There will be savings on business rates and rent and the main costs of re-opening stores will be around re-stocking and labour costs as staff come back to work having been furloughed for much of the year. Retailers will be struggling to know whether they can afford to reduce the cost to serve online demand, as the swing back to store unfolds. The likelihood is that retailers will hedge their bets rather than pull resources at this point from their online service.
Commenting on the prospects for retailers for the next quarter, Paul Martin, UK Head of Retail at KPMG said :
“As the country slowly re-opens, consumers are eager to break free from home and get back into stores, and pent up demand will drive a much-needed sales boost for high street retailers.
“In addition, particularly for fashion and beauty products as consumers wait for hospitality venues to fully re-open, there is an estimated £140 billion of savings which could be used as consumers’ moods shift to spend mode.
“We are expecting much of the shift in spend to gradually move away from the supermarkets and technology retailers who benefited from high demand for food, computers and home entertainment as the country was locked down through winter.
“Retailers face an interesting few months as they assess the level at which online shopping falls back, in favour of people hitting the stores. We expect ecommerce levels will soften over the next quarter, which could help retailers with their high fulfilment costs. There are a few black clouds on the horizon however, as interest and some repayments on Coronavirus Business Interruption Loan Scheme (CBILS)
and bounce back loans given to support retailers at the beginning of the pandemic will need to start being paid from April alongside deferred rental payments.”
Retailers perform better than expected during lockdown
The optimism for Q2 comes as the RTT determined that the retail sector performed better than expected in the first quarter of the year despite the impact of a third lockdown, thanks to strong online spending.
The RHI put retail health as flat at 68 points in the first quarter of 2021 despite non-essential retailers being closed for three months. The unexpected strength of retail sales in the first three months of the year was driven in the most part by consumers spending on groceries and hard line categories such as technology, furniture and homeware as people stayed in their homes over the winter months. The lockdown diverted considerable consumer spend from travel, hospitality and entertainment into retail.
Commenting on Q1 retail health, Dr Tim Denison, Head of Analytics and Insights at Ipsos noted :
“Plunged back into the realities of lockdown at the start of the year, when it was dark and miserable, was hard for everyone. However, that mood of depression lifted as the quarter wore on to one of growing optimism thanks in part to the rapid vaccine rollout. Retail sales in Quarter 1 reflected this transition. The start of the year was very soft, but sales growth had picked up by March leaving the retail sector on an improving trajectory by the end of the first quarter with significantly more spent by consumers than forecast. People have responded well to the lot they have been given.
“Margins remained under pressure in the quarter thanks to some sales mix dilution to lower margin categories, some degree of clearance to provide warehouse space for new season goods and rising return rates. Despite this, there was no return to unnecessary give-aways in food, nor sweeping ‘fire’ sales in slow-moving categories such as fashion.
“The impact of new EU trading arrangements and rising logistic costs had a detrimental impact in the first three months of the year as freight costs, particularly shipping, spiked, , but this was offset in part by the continued Government support which helped to ameliorate costs in the retail sector. There is no doubt though that the cost agenda is getting more challenging.
“As we look ahead to the rest of the year, market conditions offer scope to spark a big surge in consumer spending. The full re-opening of the hospitality sector will likely see a dilution in retail spend in favour of leisure, entertainment and hospitality as well as inclination to save over excessive spend. With a lot of government support measures remaining in place until September, the economy should be in much better health and more ready to cope without these lifelines by then.”
Note to Editors:
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About the KPMG/Ipsos Retail Think Tank (RTT) and Retail Health Index:
The RTT panelists 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
- Tim Denison – Ipsos Retail Performance
- Jonathan De Mello – CWM Retail Consulting LLP
- 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.