credit card

– Retail risks losing out to other experiences next year –

– The National Living Wage, cyber security and operating model change will be at the top of the boardroom agenda –

– Delivering a seamless omni-channel experience will continue to challenge retailers –

30 December 2015

With consumer confidence faltering, the KPMG/Ipsos Retail Think Tank (RTT) warns that retail sales growth is set to edge back in 2016 from c1.8% to around 1.7% as consumers look to other sectors in which to spend their disposable income.

Introduction

James Knightley, Senior UK Economist at ING said: “With wages finally responding to the tightness in the labour market and spending power further boosted by the plunge in energy costs, consumer fundamentals are looking in excellent shape right now. This positive momentum looks set to be carried through into the New Year with employment growth having re-accelerated following a General Election related lull, consumer confidence at close to record highs and demand for credit continuing to strengthen.” 

“For the first time in 8 years we now have an optimistic consumer mind-set around local job prospects, personal finances and immediate spending intentions. This will stimulate demand across non-food and out of home channels,” added Mike Watkins, Head of Retailer and Business Insight at Nielsen UK.

However, despite much to be positive about, the RTT highlights that the way people are shopping has fundamentally changed and that while there is, in the main, more money in consumers’ pockets, this isn’t hitting the retail tills. So what does this mean for the future of the retail sector in 2016?

Where will the money go? 

A big question reflecting on 2015 is where all that extra consumer spending went? Maureen Hinton at Conlumino said “consumers are looking beyond retail for goods and services to spend their money on. This is making it much harder for an over-subscribed retail sector. Leisure, culture, entertainment, have shown much stronger growth than retail over the past five years and this trend is being exacerbated by an aging population.”

Nick Bubb, Retail Consultant added “ there is little evidence that pubs and restaurants have done that much better from the growth in real personal disposable incomes in 2015 and only modest evidence that consumers have splashed out on new cars and holidays instead.”

The RTT believes that early repayment of mortgages, experiential activities and paying tradesmen to upgrade properties are absorbing a higher percentage of consumer spend and will continue to do so in the coming year. As such, if consumers weren’t feeling motivated to spend on retail during 2015, macro uncertainties in 2016 are likely to make it another tough year for the sector. 

Further political uncertainty…

Drawing a parallel with last year’s outlook, Dr Tim Denison, Director of Retail Intelligence at Ipsos Retail Performance, said: “In 2015 the uncertainty of the outcome of the general election put the country on hold for months. In 2016 the uncertainty over the wake of the EU-referendum threatens to be a destabilising factor,” weakening both business and consumer confidence with negative implications for spending. 

Added to this, a significant threat to retailers over the next year is the potential interest rates rise. “With domestic demand looking strong and last year’s plunge in the oil price dropping out of the annual CPI calculation, headline inflation is likely to rise fairly swiftly through early 2016,” said James Knightley.  Both these factors are likely to make consumers and retailers somewhat jittery about the future.  

…and added complications for 2016

Building on difficult prospects for the coming year, at the top of the boardroom agenda post-Christmas will certainly be the implementation of the National Living Wage before April 2016. David McCorquodale, UK Head of Retail at KPMG highlighted that this will result in “a significant overnight increase to the cost base but much more complex than a simple rise in hourly rate as it  has a knock on impact on, inter alia, pay differentials, staff discounts, tea breaks and pensions. It is further complicated with the wage set to increase for each of the next four years.”

An additional complication for 2016 is the review rather than adjustment of business rates being undertaken by local authorities. “This will, to a certain extent, level the playing field for centres outside the South East that are in desperate need of retail-led investment,” explained Jonathan De Mello, Head of Retail Consultancy at Harper Dennis Hobbs, “but will certainly force retailers in 2016 and beyond to re-evaluate their approach to location strategy.”  

To address escalating costs as a result of these changes, there’s been some speculation in the industry that we may see moderate price increases to help protect margins. Richard Lowe, Head of London at Barclays Corporate Banking, highlighted that “high levels of employment in the wider economy should mean that consumers have good levels of disposable income, but I think it’s important that retailers don’t overplay their hand when considering price points… As tempting as price increases are, it’s really cost management that has to be the priority in 2016.”

Moreover, the RTT agrees that only those with the strongest and differentiated brands will be able to pass this cost increase onto the consumer. Instead, the majority of retailers will need to closely examine how productivity can be improved through more efficient use of resources or technology solutions 

More striving for the omni-channel dream

In order to best ride the wave of complications and uncertainties in the year ahead, the RTT suggests retailers will be further challenged to adapt business models and find new ways to better serve customers. “Retailers will aim to deliver what we would describe as a seamless multi-channel customer experience,” said Martin Newman, CEO at Practicology, “one where the shopper is supported and served irrespective of the mixture of channels they use.”

However, fulfilling this omni-channel experience profitably cannot be done from systems and processes designed for just one or two channels which means we are likely to see more investment in technology, mobile, fulfilment options and convenience for consumers in the year ahead. In fact, “the rising costs involved in providing an attractive and efficient omni-channel service is a growing threat that must be managed carefully,” highlighted Richard Lowe. “I see this as the biggest single issue for retailers at the moment – finding the right cost balance between the range of sales channels on offer could be the difference between a positive and negative outcome in 2016.”

Technological innovation will continue…

So as part of the drive to deliver a seamless, joined up consumer experience, the RTT believes technology will continue to be at the heart of retailing in the coming year with everything from payments to delivery being transformed by the ‘digital revolution’. As David McCorquodale said: “not every self-service checkout is welcome but the use of technology to enhance the experience and eliminate friction in the customer journey is increasing and I’d expect to see further innovations in 2016.”

As consumers continually adapt to technological advances, so too must retailers. “The technology drive is integral to future success,” added Dr Tim Denison. “Stripping out complexity on the one hand, to make shopping easier and quicker, and adding intelligence on the other, to make it more personal and rewarding. Bringing intelligence of current customer behaviour to the heart of the business, making big data effective to deliver on-demand service through retail analytics will be instrumental in making retailers more agile and responsive.”

…but cutting corners to keep up could put cyber security at risk

At the heart of technological advances, is the use of data to know customers and anticipate their needs. But as retailers get to know their customers more intimately so data governance and protection becomes more and more important. According to Dr Tim Denison, cyber security is a “pre-requisite to deliver in 2016, as ‘trust’ becomes as important to retailing as ‘experience’.” 

David McCorquodale added; “hackers have moved from hacking governments and financial institutions to the retail sector because of the amount of bank and other personal details held by retailers.  As cyber criminals become increasingly more sophisticated, company defences have to gain sophistication too as any breach is hugely damaging.”

Therefore, following a number of high profile blunders during in 2015, the RTT anticipates that the issue of cyber security will remain at the top of the boardroom priority list.

Weaning consumers off a diet of discounts

In the past, retail promotions were implemented as a reaction to an unexpected slowdown in sales (often weather related), the need to clear seasonal stock, or participation in planned promotional `events` eg. Mother’s Day. However, the RTT highlights that shoppers no longer think this way, but rather consumers plan spending in advance (particularly for big ticket items), shop around for the best deals, and chase promotional discounts from outlet to outlet.

Mike Watkins noted that “the digitally enabled world of shopping for `anything, anytime and from anywhere` has tipped the balance of power so that consumers are now in control.” As such, the RTT predicts that, going into 2016, the scars of austerity continue to linger and consumers will remain inherently cautious about discretionary spending so will remain hooked on this diet of discounts.

Retailers therefore need new strategies and customer propositions that really do save consumers money, and at the same time, generate incremental demand.

“Promotions will have to be multi-channel, which brings with it the risk of adding to supply chain costs but more importantly, strategies need to be technology driven, where `big data` is key to making the crucial supply and margin decisions,” added Mike Watkins.

Retailers need to get personal

As part of weaning consumers off the perpetual discounting trend, the RTT believes that 2016 is the year retailers will need to redouble efforts in finding ways to encourage long-term loyalty from customers and the key to this will be personalisation.

Martin Hayward, Founder at Hayward Strategy and Futures, said “in many retailers the promise of a digital future, where offers are personalised and relevant has so far been missed…Many customers want to feel valued, and want to build relationships with their chosen suppliers but we are currently often making this hard for them to do…For long term brand health, retailers have to focus again on their most important customers. Get to know them, talk to them and love them. The data exists, the tools exist and the customer would love you to do it – the appeal of relentlessly chasing the deal is beginning to diminish.” 

As such, while being competitive on pricing, deals and rewarding regularly returning customers remain key lynchpins in retailers’ strategies, Martin Newman highlighted that “customer experience will be an important defining factor in how successful retailers are in 2016.”

More pressure for the grocers

The RTT agrees that the big supermarkets will remain the “wooden spoon” of the retail sector. “Despite weak comps, LFL sales remain firmly negative for the big supermarkets as a result of persistent food price deflation and the market share growth of the discounters Aldi and Lidl,” said Nick Bubb.

Nielsen Homescan figures demonstrate that the market share of the ‘Big Four’ has fallen from 75% to 70% in the last 5 years as a consequence of the discounters achieving a breakthrough FMCG market share of 11%.

Maureen Hinton added “the food discounters (or more accurately, budget retailers) and general merchandisers will continue to take share because of their increased availability to consumers via new store openings.  But volumes are not rising enough to support all this expansion and there has to be some consolidation in the sector to take out the excess supply.”

According to Mike Watkins, Nielsen fully expects the market share gains for Lidl and Aldi to continue in 2016, so next year seems unlikely to bring much relief for the big supermarkets. The outlook is that the hard grind will continue, with the added complication that there will be higher wage bills to pay for and there will be more competition in Online Grocery from Amazon.

Going global

The final key theme for 2016 will be increased internationalisation. On the back of investment this year from the Chinese in House of Fraser and Hamleys, and from South Africans in Phase Eight, New Look, and Office, it’s clear that UK retailers make an attractive investment platform for international players.

 Jonathan De Mello highlighted “many international brands not currently trading in the UK see the UK as an increasingly attractive proposition, given relatively low taxation, a stable economy and retail-friendly labour laws. The UK is often seen as a springboard into Europe by American brands such as J Crew, American Eagle and others, and a test bed for the US for European brands.”

“At the same time, cross-border ecommerce continues to be a big opportunity for UK retailers,” added Martin Newman. “PayPal research has estimated that a staggering 86.4 million overseas shoppers from 29 countries surveyed bought online from the UK in the last year. So even brands who have no physical presence overseas can bolster domestic demand by opening their online store to the world and developing a localised online presence for markets that warrant the investment.”

Overall outlook for 2016

Overall, the RTT believes there is plenty to be positive about going into next year to support an increase in spend and spending power by UK consumers, but it remains to be seen as to how much retail is going to benefit from this.  

“While 2016 is likely to be a much more positive year in growth terms, not all retailers and sectors will benefit,” explained Maureen Hinton.  “An improving economy will not solve the problems of how to deal with the fundamental changes in how consumers shop, and the rising costs of meeting their expectations.”

As such, Dr Tim Denison noted that “2016 will be a tricky year to get the balance right between cost control and investment. Retailers will need to keep on their toes. Success will not necessarily come from running quicker. At times it may come from running in a different direction. Retailers would be well advised to look outside the sector, not just inside, for inspiration and guidance.”  

Part II: In detail – Individual views of the KPMG/Ipsos Retail Think Tank members

James Knightley, Senior UK Economist, ING

Outlook for 2016

With wages finally responding to the tightness in the labour market and spending power further boosted by the plunge in energy costs, consumer fundamentals are looking in excellent shape right now. This positive momentum looks set to be carried through into the New Year with employment growth having re-accelerated following a General Election related lull, consumer confidence at close to record highs and demand for credit continuing to strengthen.

A further positive for the retail sector is the Chancellor’s decision to abandon his cuts to tax credits. If they had been implemented it would have resulted in the incomes of affected households falling by around £4.5bn from April onwards. The fact that this is no longer happening removes an issue that could have hurt consumer spending. 

Nonetheless, there are risks for the outlook that could see demand growth start to slow around the middle of the year. The chief threat is the potential for higher interest rates. With domestic demand looking strong and last year’s plunge in the oil price dropping out of the annual CPI calculation, headline inflation is likely to rise fairly swiftly through early 2016. Rising wages also mean that business costs are rising and in an environment of strong demand there is a growing prospect that businesses will be able to pass these costs on to the end consumer. The US Federal Reserve has already started to raise interest rates and the Bank of England is likely to follow at some point in 2016. Higher borrowing costs mean more income being spent on debt servicing, but there will be a partial offset with higher income for savers.

Another issue is the prospect of the referendum on the UK’s ongoing EU membership being called this year. Prime Minister David Cameron has made no secret of the fact that he would like to get it out of the way assuming he gets a deal that would give the UK greater control over its own domestic policies. This event would dominate news headlines for months given the huge political and economic implications if the UK was to leave – opinion polls suggest the result is too close to call. As such, this could create uncertainty and weaken both business and consumer confidence with implications for spending.

In terms of sterling and the cost of imports for retailers the outlook is somewhat cloudy. Higher UK interest rates mean that sterling should strengthen versus the euro, where the European Central Bank is still trying to stimulate the Eurozone economy. However, the EU referendum and the uncertainty that it brings is likely to make foreign investors nervous about holding UK assets. Consequently, as we saw ahead of both the Scottish independence referendum and May’s General Election, sterling could come under pressure ahead of the vote. We suspect this would be repeated with particular downside risk against the dollar, which will potentially squeeze retailers profit margins.

Dr Tim Denison, Director of Retail Intelligence, Ipsos Retail Performance

Outlook for 2016

It is often instructive to reflect back on what has happened, when contemplating what lies ahead. Consumers certainly had a better time of it in 2015: employment growth and improved job security, the continuation of record low interest rates and minimal inflation. All this, together with robust confidence in the economy and rising real wages, meant it was a healthier year for the consumer, though perhaps not quite as strong a retail recovery as we might have expected. The scars of austerity still linger, with households mindful to pay down debts and find the best bargains, cognisant that low prices no longer equate always to poor quality.

For retailers, 2015 was a year of great endeavour, innovation and ongoing investment, scrambling to adapt to the fast moving, digital age. For some it was more of a struggle than for others, who had begun the task earlier. It was also a year for changes at the top, bringing fresh legs and life to a sector that has been battling to find new means to make process efficiencies and overcome legacy systems and practices.

The speed of change will not relent in 2016. Nor will the demands of consumers. The shopper continues to adapt, as Millennials become the majority, and so must retailers. The technology drive is integral to future success, stripping out complexity on the one hand, to make shopping easier and quicker, and adding intelligence on the other, to make it more personal and rewarding. Bringing intelligence of current customer behaviour to the heart of the business, making big data effective to deliver on-demand service through retail analytics will be instrumental in making retailers more agile and responsive in 2016. When the pace of development is so fast, it is easy to take short cuts or risks and slip up. Cyber security, therefore, is the other pre-requisite to deliver in 2016, as ‘trust’ becomes as important to retailing as ‘experience’.  There is so much to look forward to from a technology perspective in the year ahead.

The business environment is also not without its considerable challenges for retailers in 2016, particularly on the cost side. The introduction of the national living wage and the levy to fund apprenticeships are two added complications in a year when business rates will only be reviewed, not adjusted. While there are signs that the consumer recovery will lose some of its momentum in 2016, demand may be more resilient – let us hope. In 2015 the uncertainty of the outcome of the general election put the country on hold for months. In 2016 the uncertainty over the wake of the EU-referendum threatens to be a destabilising factor.

For these reasons, 2016 will be a tricky year to get the balance right between cost control and investment. Retailers will need to keep on their toes. Success will not necessarily come from running quicker. At times it may come from running in a different direction. Retailers would be well advised to look outside the sector, not just inside, for inspiration and guidance.   

David McCorquodale, UK Head of Retail, KPMG

Prospects for 2016 – People, productivity and operating model under the spotlight

When the dust settles on Christmas 2015, the key focus in retail boardrooms will be the implementation of the National Living Wage before April 2016.  A significant overnight increase to the cost base but much more complex than a simple hourly rate as it  has a knock on impact on, inter alia, pay differentials, staff discounts, tea breaks and pensions.  It is further complicated with the wage set to increase for each of the next four years.

Consumer power and market competition means that passing this cost increase onto the consumer will only be possible for the strongest and most differentiated brands.  Relief from the cost of business rates would help alleviate the burden but retailers cannot hold their breath for this.  The majority of them will instead need to examine closely how productivity can be improved through more efficient use of resources or technology solutions. 

As well as driving efficiencies, retailers are also being challenged to review and alter their business operating models as disruption from alternatives, including the connected world and internet of things, means that properly fulfilling an omni-channel experience profitably cannot be done from systems and processes designed for just one or two channels.   This transformation has already challenged former catalogue businesses, is significantly affecting the grocery sector and will also impact general merchandise retailers.  Driving operational transformation is hard enough, but in the public spotlight of listed company scrutiny the challenge multiplies.

Internationalisation will be another key theme in 2016.  With recent inbound investment from China in House of Fraser and Hamleys, and from South Africa in Phase Eight, New Look, Pep & Co and Office, I believe that UK corporates will continue to provide a good platform for international players from which to drive European sales.  I also see continued overseas expansion from our own retailers as they strive to find more growth than can be generated within our shores. 

Data governance has taken an increasingly important role in the boardroom after some high profile blunders this year.  This is not before time as hackers have moved from hacking governments and financial institutions to the retail sector because of the amount of bank and other personal details held by retailers.  As cyber criminals become increasingly more sophisticated, company defences have to gain sophistication too as any breach is hugely damaging.  Whilst retailers grasp this nettle, I would imagine we will see more high profile cases in the coming year.

Finally, I am excited by the amount of innovation driving change in the retail sector from contactless payments to localisation technology.  Not every self-service checkout is welcome but the use of technology to enhance the experience and eliminate friction in the customer journey is increasing and I’d expect to see further innovations in 2016. 

Richard Lowe, Head of London, Barclays Corporate Banking

Outlook for 2016 

The outlook for the retail industry as we enter 2016 is rather complex. Although there are certainly grounds for optimism in places, with some retailers on track to continue to grow throughout the year, there are a number of headwinds that will need to be addressed over the next 12 months. The introduction of the National Living Wage (NLW) in April is naturally top of the list for many retailers. This is a major development with significant implications across a range of industries, with many retailers fearing the effect the initial rate and anticipated future increases will have on their business models. However, the extra money in the pocket of consumers that could result from an uplift in wages may also present some opportunities for retailers, so the impact of the NLW on the industry perhaps isn’t as clear-cut as it first seems.

The National Living Wage is coming into force at a time when cost concerns more widely are posing some difficult questions for the industry. Embracing omni-channel and finding new ways to reach consumers is an essential part of the modern retailer’s armoury. Indeed, many retailers would be struggling to cope without the additional sales achieved through meeting the demands of the public by offering their products in-store, online and via mobile. As we have witnessed first-hand in the banking industry, we really are in the eye of the ‘digital revolution’ in retail, with everything from payments through to the speed of delivery being transformed by access to technology. However, the rising costs involved in providing an attractive and efficient omni-channel service is a growing threat that must be managed carefully. I see this as the biggest single issue for retailers at the moment – finding the right cost balance between the range of sales channels on offer could be the difference between a positive and negative outcome in 2016. 

To address these escalating costs, some in the industry are speculating that we may see moderate price increases to help protect margins. High levels of employment in the wider economy should mean that consumers have good levels of disposable income, but I think it’s important that retailers don’t overplay their hand when considering price points. In many parts of the retail sector the landscape remains intensely competitive, so for individual retailers to decide that the time is right for prices to start to move could be a bold choice. As tempting as price increases are, it’s really cost management that has to be the priority in 2016.

A positive focus for many retailers that I would expect to continue in 2016 is the push towards international development and expansion. As I’ve seen at Barclays, banks are working hard to support this international growth and doing our best to ensure that our retail sector clients are well positioned to compete on a global scale. The international story is complicated by the uncertainty around both the date and outcome of the UK’s referendum on EU membership, and as with previous votes we can expect some volatility and potential shifting of sales patterns as the referendum approaches.

Despite the challenges we are likely to face over the next 12 months, if retailers are able to recognise what needs to be done as early as possible they can still have a very successful year. I’m confident that the industry has what it takes to deliver a strong result in 2016. 

Martin Hayward, Founder, Hayward Strategy and Futures

 Outlook for 2016:  Putting the long-term back into customer loyalty

2016 will have to be the year that the relentless drive towards short-termism in retail marketing begins to be balanced by a greater focus on long-term brand building, customer loyalty and value protection.

Over the last few years there has been a significant shift towards shorter term promotional activity at the expense of investment in broader brand positioning and customer experience. This has been driven by a number of factors that include the squeeze on consumer disposable income, the arrival of discounters and the growing impact of price-led internet based competition. The outcome has been a bonanza for consumers, who have now been educated to expect to be able to find significant discounts available for most retailers most of the time. 20% off clothing is the norm on a regular basis at M&S et al, 25% off wine every few weeks, and regular £4 off when you spend £40 type promotions at the grocers.

This environment is a dangerous one for long-term retailer profitability and loyalty as consumers either wait for the next discount period or switch retailer to follow the deals.

In many retailers the promise of a digital future, where offers are personalised and relevant has so far been missed. Much of the one to one activity that does exist is overshadowed by the bigger deals publicly available. Why be loyal for a small percentage reward when you can be disloyal for a bigger one?

2016 has to be the year when retailers refocus on driving loyalty for the longer term. Yes of course this involves being competitive on price and deals and rewarding loyalty, but it also means looking to build on the other important drivers of consumer choice. Investing in the brand, what it stands for and explaining why a retailer is a better place to shop are crucial elements of consumer satisfaction that can smooth out short term temptations to stray. 

Many customers want to feel valued, and want to build relationships with their chosen suppliers but we are currently often making this hard for them to do.

There are however some interesting developments begin to gain traction. Marks and Spencer’s “Sparks” loyalty scheme is about rewarding loyalty in an engaging way through exclusive access to events, deals and experiences. Waitrose’s “Pick your own offers” and Sainsbury’s “My coupons” allow the consumer to personalise their rewards in a way that will motivate beyond the value of the rewards themselves.

For long term brand health, retailers have to focus again on their most important customers. Get to know them, talk to them and love them. The data exists, the tools exist and the customer would love you to do it – the appeal of relentlessly chasing the deal is beginning to diminish.

Nick Bubb, Retail Consultant

2016: The grind goes on

2015 was a funny old year: the VAT dog failed to bark, but the much-vaunted economic recovery failed to translate into higher High Street spending.

 A year ago, it seemed likely that higher VAT was unavoidable after the Election, to help “balance the books”, but in the event the Conservatives pre-empted the charge by Labour that they were planning to increase VAT, by specifically ruling out a VAT rise in the pre-Election Budget on March 18th.

 In March, Chancellor George Osborne trumpeted that the UK was “the comeback country” and it is clearly true that a lot of low-paid jobs have been created, but despite the unprecedented amount of monetary stimulus since the 2008 banking crisis the economic recovery remains weak and fragile. The year is ending with consumer confidence wobbling again and overall LFL sales growth trends are flat at best (with Food sales down and Non-Food sales only modestly up).

After another poor year in 2014 (in which it underperformed the UK stockmarket by c33%, having underperformed by c10% in 2013), the Food Retail sector rallied very well at the start of 2015, led by a dramatic recovery in the Tesco share price. But since the spring, the Food Retail sector has come under pressure again and is now nearly 10% down so far this year, with the share prices of Tesco and Morrisons hitting new lows, under their new management teams.

And despite weak comps, LFL sales remain firmly negative for the big supermarkets as a result of persistent Food price deflation and the market share growth of the discounters Aldi and Lidl. 2016 seems unlikely to bring much relief, if any, on either front, so the outlook is that the hard grind will go on for the big supermarkets, with the added complication that there will be higher wage bills to pay for and there will be more competition in Online Grocery from Amazon…

After another decent year in 2014 (in which it outperformed the UK stockmarket by c13%, having outperformed by c17% in 2013), the General Retail sector has also done quite well in 2015 so far, outperforming by the best part of 10% overall, but the gap between the losers and the winners has been wide. 2015 has been a great year for JD Sports, Ted Baker and SuperGroup, but it has been a poor year for Home Retail, Poundland and Game Digital. 

The main mystery about 2015 is where all that extra consumer spending went, as there is little evidence that pubs and restaurants have done that much better from the growth in real personal disposable incomes and only modest evidence that consumers have splashed out on new cars and holidays instead. 

Perhaps the answer is that consumers simply feel in no rush to spend more on Non-Food at a time of price deflation in the market and when there any number of external and Overseas uncertainties, in which case 2016 is likely to be another tough year, not least as there are signs that the housing market is cooling down.

And the problem for store based retailers is that when consumers do decide to spend and when “the weather” is right, they find it is very easy now to just shop Online. The implications of persistently negative “Store LFL” sales and growing penetration of Online Non-Food sales have a long way to run.

Maureen Hinton, Conlumino

Outlook for 2016 

As we head into 2016 there are plenty of positive factors to support an increase in spending by UK consumers.  The economy is growing; wages are rising; more people are in employment than ever before; interest rates are still at an historic low; and price inflation is negligible; all factors that deliver more spending power, but how much retail is going to benefit from this is another matter.

While 2016 is likely to be a much more positive year in growth terms, not all retailers and sectors will benefit, and an improving economy will not solve the problems of how to deal with the fundamental changes in how consumers shop, and the rising costs of meeting their expectations.

Firstly consumers are looking beyond retail for goods and services to spend their money on. This is making it much harder for an oversubscribed retail sector. Leisure, culture, entertainment, have shown much stronger growth than retail over the past five years and this trend is being exacerbated by an aging population – 60+s would rather spend on experiences than buying more goods. 

Moreover though they are the beneficiaries of pension equity release, this new boost in pensioners’ finances is not going into the retail sector in any significant amounts – money spent on their homes is more likely to benefit tradesmen than shopkeepers, as B&Q can testify.  Even when investing in buy-to-lets (which will be less attractive following the Autumn spending statement) they will be not be spending large budgets on furnishing and decorating properties they intend to rent. 

At the other end of the scale the under 30s are investing less in homes as they cannot afford to get on the housing ladder, so are either living with their family or renting, neither of which demands spending on furniture,  DIY or big ticket items. So though there is far more movement in the housing market, growth in the home related sectors will still be under pressure.

Secondly consumers are maintaining the shopping habits picked up during the recession, looking for value and cutting back on waste. The food discounters (or more accurately, budget retailers) and general merchandisers will continue to take share because of their increased availability to consumers via new store openings. But volumes are not rising enough to support all this expansion and there has to be some consolidation in the sector to take out the excess supply. This applies to general merchandisers as well as grocers, particularly the pound shops; having four pound shops on a high street is not going to quadruple spending.

Meanwhile productivity is a key issue for retailers. The shift to online shopping and its many forms of distribution, delivery and collection, will continue to challenge retailers’ operations and logistics, especially as now the increased prospect of active terrorism in the UK will encourage consumers to shop online more frequently and those with physical stores will be forced to spend more on security. This is another cost to accommodate in addition to the introduction of the higher living wage.

Despite the more positive factors encouraging retail spending in 2016, demand is outstripped by supply.  The winners will be those that focus on having the right product, in the right place at the right time for their customers.

Martin Newman, CEO, Practicology

Outlook for 2016

Customer experience will be an important defining factor in how successful retailers are in 2016. This will have a knock-on effect in terms of the operational areas they focus on in order to try and compete, and therefore costs and margin achieved.

At the most strategic level, we see more retailers reviewing their organisational structures and realigning to better serve their customers, as House of Fraser has done in 2015. This is a substantial endeavour for any business, but the investment in re-organisation should ultimately result in happier, more valuable customers.

Off the back of such initiatives, retailers will aim to deliver what we would describe as a seamless multichannel customer experience – one where the shopper is supported and served irrespective of the mixture of channels they use. 

So expect to see investment in mobile, fulfilment options and convenience for consumers. For instance, Argos has launched same-day delivery recently, and River Island has innovated with a service that will deliver an item to a customer if they have placed a click-and-collect order and then can’t get to the store to pick it up. New benchmarks for service and customer convenience will continue to be set through 2016.

Arcadia Group has recently highlighted the challenge of this trend in its annual results. Sir Philip Green commented that Arcadia’s operations are increasingly complex as “The number of channels through which customers choose to purchase and engage with us continually evolves.” For Arcadia Group and other retailers this increasingly includes third-party marketplaces, such as Zalando, as it aims to maximise its online reach.

At the same time, cross-border ecommerce continues to be a big opportunity for UK retailers. PayPal research has estimated that a staggering 86.4 million overseas shoppers from 29 countries surveyed bought online from the UK in the last year. So even brands who have no physical presence overseas can bolster domestic demand by opening their online store to the world and developing a localised online presence for markets that warrant the investment.

Mike Watkins, Head of Retailer and Business Insight, Nielsen UK

Outlook for 2016 

With a stable and possibly improving UK economic environment, notwithstanding caution around the global economy, the outlook 2016 is for another year in which consumer spend continues to grow. 

For the first time in 8 years we now have an optimistic consumer mind-set around local job prospects, personal finances and immediate spending intentions. This will stimulate demand across nonfood and out of home channels.

However there is a different challenge for food retailers where the structural shift to value retailing and online continues and with another year of shop price deflation expected (or at best minimal inflation), there will be  pressure on operating margins. 

The TOP4 Supermarkets will continue to lose market share

Market share has fallen from 75% to 70% in the last 5 years as a consequence of the Discounters achieving a breakthrough FMCG market share of 11% (source : Nielsen  Homescan).

Nielsen expects the market share gains for Lidl and Aldi to continue in 2016 as they accelerate store openings, keep investing in image building media campaigns and start to flex ranges and store formats.

Whilst supermarkets are slowly becoming less reliant on promotions, vouchers, and coupons the `price war` looks set to continue. However we can expect new marketing activities to help drive footfall, conversion and increased spend in store – initiatives which are not only reliant on low price.

The more optimistic shopper with increasing disposable income is looking for enjoyable shopping experiences and food inspiration from Supermarkets. 

Shopper Mission becomes as important as Location for food retailers 

The UK has one of the lowest food store densities per head of population in Europe with store estates built on a legacy of large stores. These stores are already under pressure from value retailers and the shift to online grocery shopping will further cannibalise sales. Amazon is also a new disrupter with the capacity to further change consumer expectations. 

Whilst out of town shopping is the dominant and most heavily invested channel in food retail, there will be added momentum from `proximity retailing`. Consumers are orientating towards smaller store shopping where visits are shaped by lifestyle and spend  is made  across a wider portfolio supermarkets, convenience stores, travel hubs, urban C stores and branded `food to go` formats. 

2016 will also be a year for the reinvention and re modelling of Superstores and even if the financial benefits are 3 to 5 years away. This is a must-do for the many retailers and arguably a better return on capex than new store openings.

Finally, the digital consumer journey enters a new phase next year. Technology has been the enabler and consumer motivation and intent to shop has now changed. The business models of retailers need to evolve again and this will determine not only spend but also profitability.   

Whilst the speed of the journey differs between food and non-food channels, the direction is the same. It is no longer just about attracting shoppers to new stores, it`s about getting new products to the increasingly connected shopper.

Jonathan De Mello, Head of Retail Consultancy, Harper Dennis Hobbs

Outlook for 2016

Given an improving economic backdrop, and – in contrast to 2015 – no general election fuelled uncertainty hitting consumer confidence – my view on the outlook for 2016 is generally positive, from a retail perspective.

Retailers – at least those we represent here at HDH – are very much on the expansion trail, and having recently come back from the Mapic conference in Cannes (Europe’s biggest retail property conference) many international brands not currently trading in the UK see the UK as an increasingly attractive proposition, given relatively low taxation, a stable economy and retail-friendly labour laws. The UK is often seen as a springboard into Europe by American brands such as J Crew, American Eagle and others, and a test bed for the US for European brands.

Given rising demand but a relative lack of new retail space coming on line – as most new retail schemes were put on hold post-2008 – retailers; at least those that want to trade more than a handful of stores in the UK, have over the last few years opened more and more stores in small centres that contain a high volume of their target shopper groups. The reasoning behind this is to maximise profit margin, and many retailers can make good margin in such centres – for example, one multiple retailer client has their best store (by margin) in Epsom, another client has their best stores in Cobham and Parsons Green, and another again has their best stores by margin in Henley and Putney. Clearly, this approach is only tenable for retailers that rely less on footfall and more on a certain type of customer, but it is no surprise that rents have risen in these centres given increasing retailer interest. It is for this reason that we launched our UK ‘Vitality Rankings’ – ranking centres by the quality of their retail offer, as opposed to just quantum of floorspace.

One of the main findings from this research into centre vitality was the identification of continued polarisation in the UK – not just in terms of large and small centres, but also a continued exacerbation of the ‘north-south’ divide, with the majority of the most ‘vital’ centres found in affluent commuter towns in and around London and the South East. 

A potential downside risk to retailers focusing their expansion activity on small affluent/market towns however is the long overdue review of business rates being undertaken by local authorities; the bulk of which will be completed during 2016. Looking at how rents have changed since 2007 shows that nearly 80% of centres across the UK have seen a net reduction in rents – and a rates revaluation will consequently make these centres more competitive. The remaining 20% of centres will see rates increase, and the majority of these centres are in London and the South-East. Marlow – for example – will see a circa 60% increase in business rates payable, whilst Newport in contrast will see an 80% reduction. This will to a certain extent level the playing field for centres outside the South East that are in desperate need of retail-led investment, but will certainly force retailers in 2016 and beyond to re-evaluate their approach to location strategy.   

Note to Editors:

The RTT panellists rely on their depth of personal experience and sector knowledge, and review an exhaustive bank of industry and government datasets including the following:

Members of the RTT are:

  • Nick Bubb – Retail Consultant
  • Dr. Tim Denison – Ipsos Retail Performance
  • Martin Hayward – Hayward Strategy and Futures
  • James Knightley – ING
  • Richard Lowe – Barclays Corporate Banking
  • David McCorquodale – KPMG
  • Maureen Hinton – Conlumino
  • Mike Watkins – Nielsen UK
  • Martin Newman – Practicology
  • Jonathan De Mello – Harper Dennis Hobbs

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. 

For media enquiries please contact:

Jessica Liebmann

PR Assistant Manager, KPMG UK LLP

Tel: 0207 311 3245 / 07551135778

Email: jessica.liebmann@kpmg.co.uk

 

Max Bevis, Tank PR

Tel: +44 (0)1159 589 840

Email: max@tankpr.co.uk

Date Published: 12/30/2015 11:00 AM

Note to Editors:

The RTT panellists rely on their depth of personal experience, sector knowledge and review an exhaustive bank of industry and government datasets including 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 – Conlumino
  • James Knightley – ING
  • Richard Lowe – Barclays Retail & Wholesale Sectors
  • David McCorquodale – KPMG
  • Martin Newman – Practicology
  • Mike Watkins – Nielsen

The intellectual property within the RTT is jointly owned by KPMG (www.kpmg.co.uk) and Ipsos Retail Performance (www.ipsos-retailperformance.com).

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 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.

  1. 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
  2. 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
  3. 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 judgements 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.

For media enquiries please contact:

Max Bevis, Tank PR

Tel: +44 (0)1159 589 840

Email: max@tankpr.co.uk

Retail Health

OUTLOOK FOR 2021

UK retailers should prepare for a brighter outlook for the second half of 2021, with sales growth expected between flat and +3% for the year The competition with the hospitality and leisure sector for pent-up spend will be fierce as restrictions are eased Shifts in consumer behaviour likely to impact the grocery sector permanently Urgent…

Read More
.