The KPMG/Ipsos Retail Think Tank (RTT) has determined that retail health in the first quarter of 2019 deteriorated further as a result of wavering demand, increasingly squeezed margins and ever-higher costs for retailers. This brings the latest retail health index (RHI) score to 77 – only just one point above the historic-low of 76, recorded during the double-dip recession of 2012/13.
Looking ahead to the second quarter, the retail think tank members were a little more optimistic, pointing to the later occurrence of Easter, brighter weather, as well as the delay of Brexit and subsequent impact on the consumer’s psyche. However, while the quarter holds more promise, the RTT predicts that health will only flat-line at best due to increased cost to retailers – holding the RHI score at 77.
Commenting on the overall health of retail currently, Dr. Tim Denison, co-chair of the RTT and head of retail intelligence at Ipsos Retail, said: “The remorseless strain on retailers continued in quarter one, culminating in yet more casualties on the high street. All three drivers – demand, margins and cost continued to put downward pressure on retail health.”
Paul Martin, co-chair and UK head of retail at KPMG, added: “The Easter sunshine will surely have provided many retailers with a positive start to the second quarter of 2019. However, while some measures may suggest that this has indeed been the case, retailers cannot hide from the continuing consumer uncertainty and importantly, the ongoing structural changes within the sector which remain a key driver of instability”.
Retail Health Index: Taking a closer look
Reflecting upon Q1 2019:
Looking more specifically at retail health in the first quarter of 2019, the RTT members were in agreement that health had indeed deteriorated. Nick Bubb, retail analyst, echoed Paul Martin’s argument that “retail continues to face ongoing structural change”, although he also flagged that “High Street spending in the first quarter of the year held up relatively well, given the Brexit uncertainty”.
Meanwhile, Jonathan De Mello of Harper Dennis Hobbs, added that: “It’s clear that retailers lost out on spend due to the later timing of Easter, but this is by no means the only component influencing sales. There’s simply been little in the way of events-based retail, which hasn’t helped during these challenging times”.
Commenting on grocery specifically, Mike Watkins, head of retailer and business insight at Nielsen UK, added that: “Food and drink sales momentum is very dependent upon events, weather and promotions, of which there was little to the benefit of grocery in the first quarter. While industry growth was not too bad over the first three months at 2.4%, much of this growth was concentrated in the discount and online channels, pointing to a more downbeat consumer sentiment. What’s more, food price inflation has been at the highest level in 5 years and alongside other cost of living increases, such as energy and fuel, this will inevitably have an impact on retail spend”.
While the latest health assessment pointed to overall decline, James Sawley, head of retail & leisure at HSBC, was quick to stress that there have still been some retailers bucking the overall trend. He said: “There have actually been a few retailers that have performed surprisingly well in recent financials – even some retailers in the oversaturated and highly competitive mid-market space. However, aside from those few exceptions most have evidently struggled – albeit not as badly as could have been expected.”
Alongside multiple references to the later timing of Easter, RTT members also widely cited the uncertainty of Brexit as key cause of ill-health during the first quarter of 2019. Maureen Hinton of Global Data suggested that: “Major retailers have failed in recent months, and while that may in part be the fallout of a disappointing final quarter in 2018, we can’t overlook the fact that Brexit has added to consumer uncertainty – making shoppers more protective and selective of their discretionary spend.”
James Knightley, chief international economist at ING, added that: “The softened demand in retail experienced during the first quarter of the year nods to the peak in reservations around Brexit. This has no doubt meant that margins came under increase pressure, just as retailers grappled with the Brexit related inventory supply challenges and managing warehousing.”
Expected performance in Q2 2019:
Looking ahead to the predicted performance in the second quarter of 2019, the RTT members focused predominantly on the significance of Easter performance, the likelihood of improved weather and of course the fact that Brexit has now been pushed back until 31 October 2019. However, while these factor were likely to benefit retailers, the think tank warned that increased costs to retailers would overshadow the possibility of improved retail health.
Looking first at Easter’s timing, there was mass agreement among the RTT members that its later occurrence would benefit retail health in the second quarter of 2019. Indeed, Mike Watkins said that: “Easter, along with the final weeks of June, are likely to be enough to determine the success or failure of the second quarter of 2019“.
Coupled with Easter, the significance of weather and its impact on consumer demand was also highlighted as a key driver of performance during the quarter. Maureen Hinton flagged that: “Weather will naturally influence demand and could really benefit home and garden sales in particular”. Meanwhile, Mike Watkins echoed this, stressing the correlation between weather and categories such as fresh foods and fashion was hugely important.
The impact of Brexit’s delay was a little less clear, although the majority of members did believe that it would improve consumer spend in the short-term. James Knightley said that “Brexit anxiety has dissipated somewhat in light of the delay”, meanwhile Martin Newman of The Customer First Group, added that: “Brexit may have been delayed until later in the year but the uncertainty does still remain. Consumers are unlikely to loosen the purse strings completely”.
Jonathan De Mello highlighted that there had been little foreign exchange volatility, thus providing retailers with a little more stability. The overarching hope of many of the RTT members was that consumers would ease their sense of caution and continue to spend, perhaps even on big-ticket items which have been overlooked in recent months.
Despite the somewhat rosier picture where Easter, weather and Brexit are concerned, it was increased costs that presented the RTT members with the biggest concern in the months ahead. This, they believe, will prevent the industry from improving its health, holding the RHI at 77. Jonathan De Mello flagged that: “Retail costs don’t look set to be as kind in the second quarter of 2019. The new financial year presents many retailers a whole array of added costs to contend with, whether that be increased pension contributions, minimum wage increases and of course, business rates for those who fall outside of the prerequisites for the recently announced relief”.