Friday 16 October 2020
- The third quarter of 2020 saw retail health recover six points with the Retail Health Index score climbing back to 67, from its Q2 nadir of 61, thanks to the release of pent-up demand
- The RTT predicts that health will improve by a further one point during Q4, albeit with a renewed disparity between food and non-food retail
- Grocery sales are likely to bolster the health index in the coming months, with consumers expected to hold multiple celebrations over the Christmas period.
Following its latest health assessment, the KPMG/Ipsos Retail Think Tank (RTT) has determined that retail health saw a qualified recovery between July to September compared to April to June. The RTT’s Retail Health Index (RHI) – a quantitative and qualitative assessment of demand, margin and cost – rose by six points, bringing the index to 67. This follows on the back of the sharp dive in the Index by 10 points the quarter before.
With the latest BRC-KPMG Retail Sales Monitor showing total sales up 5.6% in September, the RTT collectively agreed that the retail sector has made an impressive bounce back as the easing of lockdown restrictions caused pent-up demand to be released. The bounce in Q3 was twice as great as predicted in July.
There has been a particularly strong uplift in homewares and electrical sales thanks to the cut in stamp duty spurring home moves and unspent holiday savings being ploughed into DIY and home improvements. Formal and occasion wear fashion has been slower to recover as a result of home working, while sports/leisure and casual wear sales have grown at pace. Grocery sales continued to grow well, as consumers switched from eating out to eating in, notwithstanding the Government’s Eat Out to Help Out scheme.
A strong recovery in demand was the main driver of better health in Q3, but RTT members also agreed that a reduction in costs had also contributed significantly. However, they acknowledged that this was partly a function of deferral, thanks to the Government’s furlough scheme, rental holidays and movement away from quarterly payments and business rate relief. The hike in costs resulting from the accelerated investment in online activities in Q2 were not considered to be a further drain to health in the quarter.
Margins generally remained well managed and under control and had no impact overall on the state of retail health. Promotions on average were considered to be no deeper or wider ranging than the quarter before and were not a cause of undue alarm.
Reflecting on the third quarter of 2020, Paul Martin, KPMG’s UK Head of Retail, comments:
“The last quarter saw an impressive rebound in retail sales, with consumer spending increasing significantly. Pent-up demand created by lockdown restrictions, along with the mini housing- and working-from-home boom have been major factors in the quarter’s growth.
“Online sales have continued to grow and so fashion retailers have had to work hard to encourage shoppers through the doors of their stores.
“Relief from Government schemes and landlords have outweighed increased operational costs over the last quarter, and this has been a major contributor to retail health.
“That said, the overall health index for this quarter is still far lower than all previous years, so we cannot ignore the fact that consumer confidence remains low.”
Looking ahead to the next quarter, the RTT thinks that retail health will grow by one point, ending the year still down five points on its level before the pandemic struck. With pent-up demand having run its course, consumer spending is expected to be more in line with household incomes compared to Q3, and so demand is anticipated to have a small positive impact on health. While much of the population will still have the same consumer power as before lockdown; pay cuts, job losses and the move to the Job Support Scheme are likely to have a larger impact on non-food health. Consumer confidence may also be knocked by the threat of a second nation-wide lockdown, and a No Deal Brexit.
Taking this into account, the Think Tank’s experts acknowledge that some retail sectors are going to have a difficult period over the coming quarter. Cities will continue to see a footfall decline of up to 50%, and formalwear and occasion wear retailers will take a hit.
On the flip side, grocery sales are expected to grow, with the population expected to hold multiple celebrations to mark the end of a difficult year (whilst still meeting the Rule of Six law).
Putting consumer demand aside, the RTT collectively feels that costs in the coming quarter will begin to creep up, as the national furlough scheme comes to an end, and landlords follow up on rent demands and arrears.
Dr Tim Denison, Director of Retail Intelligence at Ipsos, comments:
“Following the bounce in retail health in Q3, the next quarter could paint a very different picture, largely propped up by a growth in food and drink sales in the run up to Christmas.
“However, there are serious questions about how the grocery sector may cope with the usual last-minute surge to supermarkets. Also, online delivery will be at a premium due to the need for safe distancing in warehouses and fulfilment centres.
“Of course, everything can change in an instant if further restriction measures are needed to contain the virus.”
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
- 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.