- Better than expected performance in second quarter of 2021 drives retail health to pre-pandemic levels
- Retail health predicted to grow at a much slower pace over Q3 2021
- Rising inflation and the ‘pingdemic’ could see growth slow significantly by September 2021
The surge in sales that lifted the retail sector during Q2 2021 looks set to continue into the early part of Q3 2021 but a rise in inflation, increase in supply chain costs and staffing pressures could force a summer slowdown, according to the latest retail health assessment by the KPMG/Ipsos Retail Think Tank (RTT) analysts.
The health of the retail sector grew more strongly than expected in Q2 2021 according to the latest health assessment by the RTT. Pent up demand from consumers led to a buoyant retail sales quarter, which saw the Retail Health Index (RHI) rise by 4 points to 72 taking it above pre-pandemic levels.
Strong demand from consumers heading to re-opened high streets, and a willingness to keep on shopping both online and in-store for higher margin categories such as fashion, led to a boom for retailers looking to recover from months of closure. Retail margins in Q2 were kept healthy as the euphoria of consumers able to shop in-store again reduced the need for retailers to discount, but costs showed signs of rising with employment and supply chain costs starting to increase.
With early indications from July sales figures that consumer demand remains strong, the RTT predicts retail health will continue to grow in Q3, albeit at a much slower rate. The RTT predict retail health will grow by 2 points during Q3 due to the reopening of hospitality and travel taking share of wallet from consumers and rising cost pressures impacting the overall economy. Rising inflation, staffing pressures, increases in commodity and component costs, stalling consumer confidence and an escalation in Covid positive cases could lead to an economic slowdown as we head into the end of Q3.
Commentingon the prospects for retailers for the next quarter, Paul Martin, Head of Retail at KPMG in the UK said:
“The strength of performance across both non-food and food categories in Q2 2021 was even stronger than anticipated and retail health is now back to pre-pandemic levels.
“The feel good factor from the Euros has helped to get July off to a great start, but with the full reopening of the leisure, hospitality and travel sectors we can expect retailers to be fighting for share of wallet as consumers look to re-start social engagements and holidays.
“Whilst it was inevitable that there would be a bit of a slowdown as the economy climbs back to its pre-crisis level, early signs are that it is coming sooner than expected with GDP figures falling short of expectations. Retailers are facing increases in employment costs due to the shortage in workers, not helped by the so-called pingdemic which is forcing large numbers of staff to self-isolate. Supply chain costs are continuing to put pressure on margins and the rise in inflation will no doubt eat into households’ spending power. This could all have an impact on how well the retail sector continues to recover as we move through the next quarter. Whilst I expect growth to continue, it is likely that things will slow down as we move through Q3 2021.”
Is the shakeout in retail complete?
As a result of the pandemic there were a number of casualties on the high street, but the RTT argues that this has led to a much healthier industry.
The physical demise of some well-known brands during the pandemic helped to reduce the number of struggling businesses and moved market share to more profitable retailers. However, questions remain around whether the market is growing or if spend from retail casualties is just re-circulating.
The RTT believe that Q2 2021 could be a bit of a tipping point with more profitable retailers emerging and the industry generating positive cashflows.
RTT member James Sawley from HSBC observed:
“The size of the UK retail economy is growing and this next quarter has the potential to surpass its pre-covid levels.
“Where we have seen old brands be acquired by newer and more efficient companies in the market, you could argue that the retail industry has emerged from the pandemic in much healthier shape. The sector is growing with fewer, but stronger players and there is no longer a race to the bottom.
“Stronger demand goes hand-in-hand with healthier margins which will reduce pressure on non-food retailers in the quarter ahead but there are some much longer term issues that the retail industry needs to face head on to maintain its health. We are starting to see supply chain, fulfillment and shipping costs really start to feed into the P&L as well as labour inflation across the retail space. Global agriculture commodity prices are rising at the fastest pace since 2012. This will put pressure on margin and costs, which retailers won’t want to pass on to already cautious consumers who are facing much larger inflation issues around the price of fuel and energy.
“Of course, everything hinges on how we manage our way through the rising COVID cases. The risk to the health of the retail sector is that the virus will restrain economic activity either because it prompts people to be more cautious or because we see some restrictions having to be reintroduced. This next quarter will be a vital point in the continuing health of the retail market in 2021.”
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
- 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 – NielsenIQ
- 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.