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The KPMG/Ipsos Retail Think Tank has stated that retail health in the UK dropped in Quarter 4 2017 – the first time this has occurred over the golden quarter since 2012.

  • The overall health of UK retail dropped one point in Quarter 4 2017.
  • Increased demand during the Black Friday promotional period and in the late run up to Christmas failed to prop up diminishing margins and rising costs.
  • The RTT judged that Christmas sales were discount and on-line led.
  • The RTT highlighted trading results from department stores as being particularly poor in Q4, due to heavy discounting and weak high street footfall.
  • The grocers and discounters were the general winners in Quarter 4, with the RTT highlighting even further disparity between the health of food and non-food retailers.
  • The RTT predicted that retail health would drop again in Quarter 1 2018, with Black Friday activity pulling forward purchases away from the January sales and tougher economic conditions impacting on the spending power of consumers.

Following its quarterly meeting on January 12th 2018, the KPMG/Ipsos Retail Think (RTT) has released its latest findings, stating the health of UK retail fell back in Quarter 4. The Retail Health Index (RHI) dropped one point to 80, taking it back to the level it stood at four years ago in Q4 2014. Despite the positivity of some retailers’ trading results released post Christmas, the RTT felt that the detrimental effect of tightening margins and rising costs, coupled with a worsening economic climate and the fragility of consumer confidence, meant the sector delivered a negative performance in the ‘Golden Quarter’ for the first time in five years.

Bucking the five year trend of retail health remaining stable between the third and fourth quarters, the RTT believes that diminishing margins and rising costs outweighed any increase in demand from Black Friday sales and Christmas trading. With another point drop in the RHI predicted in Quarter 1 2018, the RTT warned that many retailers may find themselves in a precarious position as they head into the New Year.

Of the three main drivers of retail health – demand, margin and cost, it was margin that had the biggest impact on retailers throughout the final quarter of 2017. With extended promotions and heavy discounting across the sector in the run up to Christmas, margins suffered. Whilst trading results were largely poor across the non-food sector, the RTT was keen to highlight there were retailers that had bucked the trend, with the discounters performing particularly well on the high street.

Members acknowledged that economic conditions in the quarter had generally been better than originally thought, but high personal debt levels, the interest rate rise and Brexit uncertainty all conspired to soften demand and curtail spending at the tills.

The RTT discussed the poor performance of clothing and footwear retailers in October and November, with the unseasonably warm weather heavily restricting sales. This forced many into unplanned discounting after Black Friday to clear. It was agreed it was a bad start to the quarter, although there was a slight recovery during the cold snap in the weeks leading up to Christmas.

There was a big shift towards online shopping during Black Friday and Christmas. Whilst the boost to sales was encouraging, the additional cost of fulfilment from online orders squeezed margins even further, all on top of the original promotional discounting. The RTT agreed that retailers were in general better prepared in 2017, but further investment is required to create seamless multichannel experiences for consumers, as the rise of online shopping has fundamentally changed the way that retailers need to approach Black Friday and Christmas. The trend in online shopping also resulted in the major e-commerce retailers taking a significant extra share of sales in the run up to Christmas, meaning that high street non-food retailers were left with a smaller market of customers to sell to than in previous years.

Climbing costs provided further issues for retailers in Quarter 4. Challenging exchange rates continued to impact on the cost of goods, while temporary Christmas staff increased wage bills and the ongoing investment in compliance all worked against the sector.

The RTT acknowledged that the difficult trading environment for retailers would lead many to work with landlords to negotiate new deals on their property portfolios – or look to close stores through Company Voluntary Arrangements. It is already being reported that major retailers plan to reduce their store footprints, and the RTT warned there might be more to come in the first quarter of 2018.

Food continues to dominate the positive narratives in the retail sector, with the grocers repeatedly outperforming their non-food counterparts. The RTT was keen to highlight the shift in the manner the public was spending its disposable income, with sales in restaurants and the hospitality sector falling. This left the supermarkets in a good position, with consumers looking to save money by eating at home rather than dining out. It was, however highlighted that whilst the grocers performed well, the growth could be described as ‘unhealthy’, as it was largely led by inflation and this is set to continue into 2018.

The RTT predicts that retail health is set to drop a further point in the first quarter of 2018. Demand is expected to be sluggish in January, as the extended period between pay days weighs heavy on customers that are already laden with personal debt, and with consumer confidence fragile, retailers could be in for a tough time at the start of the year. The RTT also noted that spiking oil prices would filter down to utility bills and the petrol pump, putting further cost-pressures on consumers in 2018.

Costs will continue to build in Quarter 1 2018, with investment required in GDPR compliance and the rollout of the next stage of the National Living Wage. The RTT also pointed out that many retailers are actively looking to invest in ‘shadow’ supply chains and suppliers as part of their contingency planning to prepare for different Brexit scenarios.

Whilst some macro-economic indicators were not as bad as expected in Quarter 4, uncertainty in the economy and the outcome of Brexit is still likely to further filter down to the high street in 2018, leaving consumer confidence in a precariously fragile position. The RTT said that this would be a major worry for retailers, as with costs rising and margins expected to come under further pressure, robust demand would an imperative if there is to be any sense of improvement in the retail sector in 2018.

Dr Tim Denison, head of retail intelligence, Ipsos Retail Performance, said: “Online retailing has had a seismic impact on the way that retailers approach both Black Friday promotions and the Christmas trading period. High street footfall fell back sharply during the festive period when compared to last year, as many consumers avoided the bad weather and stayed home to complete their Christmas shopping. To make the most of these increases in online sales, there has to be further investment in productivity and multichannel offerings in 2018, as retailers aim to reduce costs and improve margins, so as much profit as possible is squeezed out of any increases in demand.”

Paul Martin, head of retail at KPMG UK, said: “Productivity will continue to be a key area for attention and improvement amongst retailers in 2018. Costs have been taken out of businesses in recent years, but it’s apparent that there is plenty of room for further improvement. There will also be additional costs that will impact on retailers, with GDPR compliance and Brexit contingency planning both requiring further investment in the coming months.”

Nick Bubb, independent retail analyst, said: “Heading into 2018, margins will continue to be intrinsically linked to demand, as retailers attempt to keep their tills ringing with deep discounting and ongoing promotional activity. Trading conditions are likely to worsen, as consumer confidence remains vulnerable, the housing market may start to struggle and people start to rein in the spending – all pointing towards a very tough time ahead for non-food retailers.”

Martin Newman, CEO at Practicology, said: “The Black Friday promotional activity signaled a big victory for online retailing in 2017, with volumes up year-on-year, it was clear that shoppers abandoned the high street in favour of the sofa to seek out the best deals and discounts. Whether or not retailers made the most of this in terms of profit remains to be seen, investment is still required to create seamless multichannel propositions and I expect a bigger focus on building systems that display a true ‘single view of stock’ – all which will help reduce the cost to serve and improve the profitability of online transactions.”

James Sawley, Head of Retail & Leisure, UK Corporate Banking at HSBC, said: “Clothing and footwear retailers struggled through October and November, as the unseasonably warm weather left stock piling up. As a result, many took part in the Black Friday promotions in an attempt to drive demand, but this in turn hurt margin as discounting was deep and continued until Christmas. Looking ahead, 2018 could bring further troubles, with the usual demand during the January sales expected to be minimal as many sales have been dragged forward by Black Friday.”

Jonathan De Mello, lead retail consultant, Harper Dennis Hobbs, said: “Demand driven by promotion has kept retailers busy, but with margins squeezed so tight the benefit of the extra sales will not have had the desired, or required, impact to retailers. Retailers may have found themselves in a cycle of buying stock solely for promotion, a practice that could lead to issues if demand falters as consumer confidence stutters due to worsening economic conditions.”

Maureen Hinton, group research director, GlobalData Retail, said: “Non-food retailers are the casualty of changing consumer demand. With incomes being squeezed and leisure spending prioritized there is less money for discretionary purchases leading to over-capacity in the market. This is behind much of the heavy discounting in 2017 and, with increasing costs, margins are narrowing further. We are likely to see more casualties in 2018 as conditions will not improve.”

Martin Hayward, founder of Hayward Strategy and Futures, said: “Looking back at Quarter 4, Black Friday delivered high volumes of sales for retailers, but these will likely impact on the traditional January and Boxing Day sales, with many purchases being brought forward into November. January is traditionally a tough month, with the extended time between pay cheques and the extra spending over Christmas, retailers often rely on a bump in demand from the January sales – if they fail to materialise this year it will make for a very tough start to 2018.”

Mike Watkins, Head of Retailer and Business insight, Nielsen, said: “The distinct gulf in performance between food and non-food was evident again in Quarter 4, and I expect this to continue to be the narrative deep into 2018. Margins may have compressed in the run up to Christmas with many giveaways in the stores and on the shelves across the UK. Shoppers kept spending at supermarkets however and it was a multi channel December with online grocery shopping complimenting spending in stores, which still accounted for over 93% of grocery sales. Where there was a shift in shopping habits, it was in non-food retailing starting with Black Friday and continuing through to the end of the year, with consumers moving away from store shopping and into online. This will have added to the cost of fulfilment and returns for retailers.”

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