21 July 2020
- The second quarter of 2020 saw retail health plummet by 10 points to a record low RHI score of just 61
- The RTT predicts that health will improve by 3 points as pent up demand is released, but that will depend on the general mood music, the unwinding of the furlough scheme and its impact
- This quarter, the RTT pointed to the significant divergence between food and non-food retail health, with the members stressing that overall health cannot be looked at without observing the difference between them
Following its latest health assessment, the KPMG/Ipsos Retail Think Tank (RTT) has determined that retail health worsened severely in the second quarter of 2020. The RTT’s Retail Health Index (RHI) – a quantitative and qualitative assessment of demand, margin and cost – fell by 10 points, bringing the index to a record low of just 61 – down nearly 40% if compared to its initial basing (RHI score of 100) in 2006.
The RTT stressed that there have been more promising signs in recent weeks, especially with the latest BRC-KPMG Retail Sales Monitor showing total sales up 3.4% in June. Indeed, throughout the quarter, performance appeared to improve month-on-month, albeit April’s performance was an unimaginable low and was subsequently hard to recover from. Despite the recent uptick, the prolonged lockdown restrictions and the closure of large swathes of the industry – especially non-food – severely weighed down health overall. The RTT agreed that overall health no longer reflected the extremes being noted between essential and non-essential retail. If looking at food versus non-food, food’s health was believed to be strong, while non-food’s health was drastically low.
Looking ahead, the RTT believes that the third quarter of 2020 will be more promising, with the unleashing of pent-up consumer demand helping to revive health to a degree. There are, however, still major concerns around how long that uptick will last, with the RTT currently predicting that health will recover by 3 points, moving the RHI score up to 64. This, the think tank’s members stress, will be dependent on how the ‘mood music’ plays out in the coming months. If looking at the food versus non-food split, the improvement of food’s health is predicted to ease off, while non-food’s health is expected to rebound in the upcoming quarter.
Reflecting on the second quarter of 2020, Mike Watkins, Head of Retailer and Business Insight at Nielsen, said:
“While many retailers will have been expecting a challenging second quarter, few would have been able to comprehend the extent of COVID-19’s impact, nor the length and breadth of the lockdown restrictions that came along with it. The fallout was certainly worse than anticipated earlier in the quarter, but the return of growth in the last few weeks has provided slight relief for the lucky few that have been able to capture it.
“What is clear is that not all sectors of retail have been impacted equally. With the closure of restaurants and pubs and limited travel, the shift away from out of home consumption has been somewhat of a bonanza for grocery – logistical challenges aside – while non-food retail, especially fashion, has really suffered. Overall, there is no doubt that retail has been weakened by the pandemic and the impact of that will be more structural change to business models.”
If looking at retailers’ margins, grocery and other essential categories had little reason to discount, with such strong demand throughout the quarter. Meanwhile, other categories were hard pressed to shift excess stock, even with slashed pricing in place. When it came to cost, government relief initiatives and rent reductions may have offered a helping hand, but additional costs – ranging from additional staffing costs and warehousing to logistics and fulfillment – eroded bottom lines even further.
Looking ahead to the third quarter of 2020, James Sawley, Head of Retail & Leisure at HSBC, said:
“With lockdown restrictions easing and sales up, it’s clear that consumers are starting to unleash pent up demand. They are finding ways to treat themselves, perhaps even diverting spend that would have otherwise gone towards a summer holiday. That will naturally be a real opportunity for retailers – provided they can capture it – but it’s unlikely to undo the damage of sales lost earlier in the year. The key question now is: how long will the release of pent up demand continue? There are naturally real concerns growing around the threat of unemployment and the possibility of local resurgences of COVID-19, which retailers will need to be on the alert for.”
Putting consumer demand aside, the RTT collectively feels that costs in the coming quarter will need to be watched closely, especially as furlough schemes unwind and rent demands return. Likewise, margins will be under pressure as retailers balance ‘buying consumer demand’ through slashed pricing with their core aim of trying to make a profit. While the RTT expects a slight recovery in the coming quarter – especially in July and August. September was identified as the month to watch, being key in terms of sales volumes. Those volumes however, could well be significantly impacted by the unwinding of the furlough scheme and the possible return of consumer anxiety.
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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.