Retail health in the UK

The KPMG/Ipsos Retail Think Tank has stated that Quarter 3 2017 brought some respite to retail health. After two quarters of decline, it levelled out, but it is predicted to drop again in Quarter 4. If true, this would represent the first time that retail health would have declined between a third and fourth quarter since 2012.

  • The overall health of UK retail remained level in Quarter 3 2017.
  • Improving demand over the summer months contributed to a better performance for retailers, holding off a third consecutive drop in retail health this year.
  • The RTT predicted that retail health would worsen in Quarter 4, with increased demand at Christmas failing to outweigh the negative pressures on cost and margin.

Following its quarterly meeting on October 17th 2017, the KPMG/Ipsos Retail Think Tank (RTT) has released its latest finding, stating the health of UK retail flatlined in Quarter 3, ending a run of two consecutive negative quarters. The RTT agreed that the Retail Health Index (RHI) should remain at a level of 81, making it the first quarter in 2017 that it hasn’t fallen.

The RTT predicts that retail health is set to drop one point to 80 in Quarter 4, bucking the four-year trend of retail health not downturning between the third and fourth quarters. With Christmas shopping usually propping up Quarter 4’s performance, the RTT felt that, this year, the increased pressure on cost and margin, coupled with the full impact of currency hedging unwinding and wage deflation, will result in retail health falling back in Quarter 4.

In recent years, demand amongst consumers during Black Friday sales and Christmas has been the primary driver for maintaining the state of retail health in the final quarter. However, the RTT felt that this year may be different. Members speculated that demand might be a little softer thanks in part to some non-food sales being brought forward into Quarter 3 by the early arrival of autumnal weather. Consumers are also expected to be more hesitant in their spending, with pressure on household finances building as personal debt levels increase, interest rates edge up, wages shrink and inflation continues to rise.

The RTT discussed how promotional activity was expected to impact on retail health and, very much like in Quarter 3, the end of the year would see many retailers entrenched in a cycle of deep discounting in an attempt to drive up demand at the expense of margins. Further damage to margins will be felt by the full effect of currency hedging unwinding – with many retailers locked into poorer dollar currency rates for the remainder of the year.

Cost continues to be an issue for retailers across all areas of the sector, with substantial investment taking place to both improve internal productivity, and deliver a true multichannel offering to customers. Efforts to strip out cost continue to be a high priority with head office staff remaining vulnerable. The expense of fulfilment for home deliveries continues to impact on retailers’ costs and squeezed margins. This is predicted to intensify in Quarter 4, with the RTT expecting online sales to make up a higher percentage of total sales throughout Christmas and Black Friday promotional activity.

On a positive note, the RTT highlighted that the grocers performed better than predicted in Quarter 3, and this is expected to continue throughout the remainder of the year. Food price inflation was a major contributor and the sales of premium and mid/high range private label items have been strong. The RTT also detects the start of a shift in the way consumers are spending their disposable income. With less money now making its way into the leisure and hospitality sector, the grocers are benefiting from more people staying at home and buying ‘Food To Go’ ranges, rather than eating out.

Dr Tim Denison, head of retail intelligence, Ipsos Retail Performance, said: “After some welcome respite in Quarter 3, this coming quarter looks more challenging.  The state of retail health is in danger of reaching a tipping point not seen since 2012, when the festive ‘shot in the arm’ isn’t enough to counteract the ongoing issues with rising costs and squeezed margins.”

Paul Martin, head of retail at KPMG UK, said: “Many retailers saw an improved performance in Quarter 3, with cooler than usual autumnal weather boosting the apparel sector, which has had a difficult year to date. Continued macro-economic uncertainty and potential interest rate rises looming on the horizon could dampen consumers’ spending in the run-up to Christmas and therefore, forecasts for the golden quarter are not looking bright. The next few weeks’ trading will determine whether or not 2017 is a success or failure for retailers.”

Nick Bubb, independent retail analyst, said: “Q3 demand was stronger than expected, helped by the surprisingly autumnal weather and food price inflation, but some Non-Food sales were brought forward and there is likely to be a reckoning in Q4, as Brexit worries start to bite and interest rates edge up at last, with warmer weather getting October trading off to a bad start.”

Maureen Hinton, group research director, GlobalData Retail, said: “Retailers felt the benefit of a slightly better performance in Quarter 3, with fashion, food, and health and beauty, the three largest sectors, showing some improvement. The cost of fulfillment will play heavy on the minds of retailers heading into the fourth quarter. Black Friday sales and promotional activity leading up to Christmas will already tighten margins, and the added cost of home delivery and returns will only impair retail health further.”

James Knightley, chief international economist, ING, said: “Whilst there is no doubt that political and financial influences play a huge part on the health of the retail sector – and there is much uncertainty in both of those areas, it seems that this has yet to fully trickle down to the consumer. Job numbers are improving, consumer confidence although poor in July, bounced back throughout Quarter 3, and people are still spending. What needs to be closely monitored is the consumer’s continued reliance on credit, as personal debt is playing a big role in keeping the retail sector ticking.”

Martin Newman, CEO at Practicology, said: “In order to meet customer expectations, retailers are continuing to invest in creating a true multichannel offering to customers. Driving footfall and building experiential spaces for people to shop is expensive, and the inflated fulfillment costs of home delivery and click and collect services is impacting on margins – something that is only expected to intensify throughout the Black Friday sales and in the run up to Christmas.”

James Sawley, Head of Retail & Leisure, UK Corporate Banking at HSBC, said: “Retailers may find themselves in a position where they are having to ‘buy’ sales in Quarter 4. Demand has been sluggish for a while now, and although there was a slight improvement over the last three months, discounting and prolonged promotional activity is set to dilute retailers’ margins in the run up to Christmas.”

Jonathan De Mello, lead retail consultant, Harper Dennis Hobbs, said: “Costs continue to mount up for retailers, but many are self-inflicted with heavy investment in new flagship stores, the development of multichannel offerings and improvements to head office productivity and company-wide efficiency. Historically demand leading up to Christmas at least makes up for high costs and squeezed margins, but this year we could see retail health fall back as pressure on margins outweighs waning demand.”

Martin Hayward, founder of Hayward Strategy and Futures, said: “There are a number of ‘dangerous’ elements within the retailing sector and the wider economy that continue to bubble away in the background – household debt, poor consumer confidence, increasing costs and weak sterling to name but a few. These are all having a negative impact on retailers in its own way, creating a perfect storm that continues to impair retail health. The real danger lies in one of these elements intensifying and at that point you would expect to see some retailers really start to struggle.”

Mike Watkins, head of retailer and business insight, Nielsen, said: “The summer months treated the supermarkets well, and demand within the food and drink sector in the run-up to Christmas should provide the environment for a good to end the year. Consumers are still trading up with more premium private label products being purchased and ‘Food to Go’ ranges are also proving popular. If shoppers` discretionary spend shifts away from the hospitality and leisure sector, with more people ‘staying in’ instead of eating out, and if some of the savings made in the non-food channel are spent on treats and indulgences, then food retailers could be the surprise hit this Christmas.”

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