The KPMG/Ipsos Retail Think Tank (RTT) 2018 has determined that the health of the high street flatlined, in Q2 2018, keeping the Retail Health Index (RHI) at 79. Though this was better than forecast, it marks the ninth consecutive quarter of negative or flat performance, with the RTT anticipating a further point decline in Q3.
- UK retail health flatlined in Q2 2018, but is set to deteriorate again in Q3
- Demand has been choppy
- Brexit will be felt by retailers before the end of the year
- Rent on some warehouses is more expensive than Bond Street
- Q4 could be make or break time for many UK retailers
Despite the weather, the Royal Wedding and the Football World Cup providing an exceptional boost to the second quarter of the year, the ‘feel good factor’ they’ve created has masked rather than mended the health of UK retail. Pressures on margin was a particular worry in Q2 according to the RTT.
Tim Denison, Head of Retail Intelligence at Ipsos Retail Performance and co-chair of the RTT explains: “Whilst the health of the high street is far from where we’d like it to be, when you consider the scale of the challenges UK retailers are facing, Q2 delivered stronger overall demand than we had anticipated. This mollified the impact of the rising National Living Wage and automatic pension enrolment contributions. But, it has been a case of exceptions, rather than fundamentals, that has helped ease the way. All the same challenges still exist and with political and economic storm clouds building, the final quarter of this year in particular looks set to be tough.”
Some familiar themes prevailed in Q2. The fortunes of food and non-food retailers continue to diverge and margin and cost pressures remain relentless across the sector.
Commenting further, Paul Martin, Head of Retail, KPMG UK and co-chair of the RTT says: “Despite the well documented challenges, the UK retail market is actually growing. We have small start-ups at one end of the market and big online retailers at the other, who are working symbiotically – a large proportion of the various online marketplace’s sales comprises independent retailers – and enjoying strong growth as a result. But, there is no avoiding the fact that for the majority of players in the middle, and on the high street, things are tough. Now that England are out of the World Cup, and the heatwave is coming to an end, the artificial inflation enjoyed from April to July won’t hold out, by September many retailers will be back on the slippery slope.”
Discussing trends in demand and discounting, James Sawley, Head of Retail & Leisure, HSBC said: “From what I’m hearing in the market, it has been a very choppy year so far. We’ve had snow, storms and heatwaves and the ups and downs in the retail sector reflects that. Where we have seen increased demand, it has generally been driven by promotional activity – that’s not healthy demand.”
Martin Hayward, Founder of Hayward Strategy and Futers, adds: “Almost week by week retail demand is changing. April was a bit of a bloodbath, May bounced back and June saw stores offering heavy discounts. Whilst discounting increases sales, it’s a very costly exercise. Not only are you selling at a discount but you’re also spending more on marketing and distribution.”
Jonathan De Mello, Lead Retail Consultant, Harper Dennis Hobbs, comments further: “London’s West End is seeing a fairly significant decline in footfall which is worrying as the West End is in many ways a barometer for the UK.”
Reflecting on Brexit, Martin Newman, Chairman, Practicology: “Political uncertainty has escalated, for the first time corporates are speaking out which shows a change in tone and pace. It seems that everything is coming together at one time for retailers – margin, demand and costs are all under cosh, when you combine that with a tumultuous political agenda the remainder of the year will be tough.”
James Knightley, Chief International Economist, ING adds: “At the moment the market looks ready for an interest rate rise in August but with just months to agree a Brexit deal, there is no certainty around how markets will react week to week, or how the Bank of England will decide to respond to that.”
Commenting on trends in retail rent, Jonathan De Mello, Mello, Lead Retail Consultant, Harper Dennis Hobbs, said: “Rents haven’t gone down, they are still a huge challenge for most retailers, but property prices are declining. As a result, there are some landlords offering rent free periods or capital contributions, so retailers can get a decent deal without landlords devaluing their property by lowering rent.”
James Knightley, Chief International Economist, ING adds: “We now have a strange situation where some warehouses are more expensive than Bond Street! That’s not just because of demand from online retailers but also because of Brexit. People want storage not shops.”
Finally, on the outlook for the rest of the summer, Maureen Hinton, Group Research Director, GlobalData says: “There is still potential to sell seasonal related goods in Q3 as the heatwave continues, as consumers will regard them as a worthwhile investment – however retailers who bring in autumn stock in August will find it harder to move it”
Nick Bubb, Retail Analyst says: “September is the key month in Q3, reflecting the importance of the “back to school” season, and clothing retailers will be hoping that the prolonged spell of hot weather doesn’t continue into the autumn. Regardless of the weather, consumers suffering from a World Cup hangover may not be in much of a mood to spend, if interest rates go up in August and Brexit uncertainty worsens”.
Mike Watkins, Head of Retailer and Business, Nielsen UK concludes: “Food retail is enjoying even better growth than we anticipated but demand in the food market is not enough to outweigh the store closures and heavy discounts the sector is facing elsewhere. The discretionary spend on the World Cup is a drop in the ocean when you look at the challenges UK retail faces. There is no denying that we are not in as good a place as last year. Q4 2018 will be make or break time for many UK retailers.”