Christmas shoppers in a mall

The golden quarter is historically the most important time of the year for retailers to ‘get it right’ – but with Brexit looming, has there been a more critical Christmas period for retailers in the last ten years (since the financial crash)?

October 2018

  • RTT members thought that the non-food sector could have as much as 20% over-capacity and that this so-called ‘Golden Quarter’ could be the catalyst for the most struggling retailers to come under serious pressure. They think that Department stores and Fashion retailers will face the most problems in the months running up to Christmas – and for many it could be the most critical trading period in a decade.
  • The RTT stated that retailers would be looking to the Autumn Budget for relief in alleviating the negative external influences on the sector.
  • Supermarkets are expected to fare better than their non-food counterparts, but food shopping over the festive period could be more restrained and later in the year.

Introduction

The Golden Quarter is traditionally the most important time of the year for the majority of UK retailers – with a huge increase in consumer demand in the lead up to Black Friday, Christmas and Boxing Day Sales. It’s the time of year that many retailers focus on the most, and spend months planning for as ‘getting it right’ can make all the difference in delivering strong trading figures for the year.

Paul Martin, UK head of retail at KPMG highlighted: “Trading during this time may even determine a retailer’s ability to survive, especially given that some retailers generate 80%+ of their annual profits in that quarter alone.”

With the health of the retail sector steadily decreasing over the last two years, and the uncertainty of a Brexit (no-)deal just around the corner, the RTT discussed just how crucial this coming period was for retailers. Compared to a decade ago, in the midst of the financial crisis when retailers faced dire trading conditions, the members explored just how critical the coming months are for retailers in general, and which sectors could be hit hardest by a poor performance over the Golden Quarter.

Now and then

Looking back a decade to the fourth quarter of 2008, James Knightley, ING chief international economist said: “The UK economy was amongst the very hardest hit by the financial crisis with output contracting 6% peak to trough, and unemployment rising by 1.1 million”. Dr Tim Denison, director of retail intelligence at Ipsos Retail Performance, went on to say: “The golden quarter of 2008 saw the RTT’s Retail Health Index crash six points – more than any time since – as the financial crisis broke, discounting became the norm and Woolworths collapsed.”

 

They discussed at length how the current financial climate, while not as toxic as during the financial crisis, had still been working against retailers over a number of years – with the RTT’s Retail Health Index falling two points since the start of 2018 alone. Paul Martin added: “2018 has not been an easy year for a large part of the UK retail sector, and we have already experienced a multitude of high profile business failures.”

 

Tough trading conditions, political uncertainty, shifts in geopolitical trade agreements and rising costs are just a number of external factors impairing the performance of UK retailers, with the RTT agreeing that the margin for error in delivering a positive Christmas trading period has never been tighter. James Sawley, head of retail and leisure, HSBC, commented: “This will be a pivotal couple of months for some retailers from a profitability perspective – those that miss a beat could face challenges with competition so fierce. Some retailers have little room for manoeuvre and could find themselves facing difficulties if they don’t hit desired trading levels.”

Brexit effect

Whilst 2008 clearly impacted heavily on the retail sector, and there were many ‘unknowns’ with what the future would hold in terms of financial recovery, the RTT acknowledged that with Brexit, this current quarter holds a unique pressure for retailers. 

 

Martin Newman, CEO of Practicology, said: “A relentless focus on trading will be required in the next three months by retailers who want to go into the unknown of Brexit in the New Year with businesses that are strong enough to survive further upheaval.”

 

The RTT commented that retailers must make the most of this Golden Quarter’s increase in demand, and it will be a case of ‘making hay while the sun shines’, as the uncertainty of Brexit could impact negatively on consumer demand and retailers’ costs and margin.

                       

Dr Tim Denison added: “With all the uncertainties building around Brexit, and the UK’s trade agreements, the months ahead will be defining times for the industry, challenging the acumen of even the very best leadership teams in retailing.”

At the sharp end

Against a backdrop of store closures and shrinking real estate, the RTT discussed in its latest meeting how a ‘seismic’ correction was underway within non-food retailing. James Sawley said: “We are undergoing a once in a generation correction in the supply base of physical retail stores driven by short term cyclical, and long term structural and social factors.”

Members believed that this shift would highlight the notion of there currently being too many stores and retailers operating on the high street – and this correction in overcapacity, which would affect many different sectors, could reduce store portfolios as much as 20%.

Maureen Hinton, group research director at GlobalData, said: “The UK retail market, along with many other major economies in the west, is suffering from maturity of demand and overcapacity of supply. That said, retailers’ growth, particularly in non-food, is being boosted from casualties in the market. The survivors are picking up the spend that would have gone to these weaker competitors.” 

The RTT highlighted the book and toy sectors as retailers that had already gone through this process, with the surviving businesses picking up the additional demand from competitors that had gone into administration.

Looking ahead to the sectors for which this Golden Quarter is most important, and at the highest risk of overcapacity on the high street, they pointed to department stores and fashion retailers as having real pressure to succeed in the coming months. Maureen Hinton continued: “The ones that will find it toughest are the mass middle market fashion retailers and department stores that have little or no unique offering, and the home related specialists which will continue to suffer from the stagnant housing market.”

The RTT added that the UK high street shopper has become accustomed to a diet of discounting in recent years, something that is expected to continue through the Golden Quarter – impairing retailers even further. Jonathan De Melo, head of retail consultancy at Harper Dennis Hobbs, said: “Retailers will likely be locked into a fierce downward spiral of discounting, which will start a few days before Black Friday and continue throughout the run up to Christmas. This will clearly serve to erode margins – which is the opposite of what retailers need right now – but if they don’t discount then the alternative could be much worse.”

Food

The RTT explained that the biggest pressures facing retailers this Christmas would mostly sit with non-food retailers. The grocers on the other hand are having a better time of it, with members agreeing that they looked in much better shape than their non-food counterparts.

Mike Watkins, head of retailer and business insight at Nielson, said: “The uncertainty surrounding Brexit and the rise of energy and fuel costs have not yet impacted grocery retail spend. There is more good news. Despite 12 months of inflation, volume growth in food retail has turned positive with a 1.1% growth so far in 2018 (Nielsen Growth Reporter).”

As has been the narrative for the previous 24 months, the non-food sector is expected to continue to struggle, with the grocers providing the majority of positive news for the retail sector. They agreed that whilst any discussion around Quarter 4 being ‘make or break’ is only relevant for non-food, there are certain pressures that will be felt by the big 4 grocers this Christmas – in the form of the discounters and a shift in Christmas buying habits.

Mike Watkins continued: “It’s been a slow start and many food retailers are now becoming anxious about Q4 with business models stretched more than ever by the continued shift of sales to discounters and the additional costs of fulfilling online orders. What supermarket shoppers say they want is to reduce and to spread the cost of Christmas. Q4 for many stores is going to be set apart from previous years by being `less big and more late’ with shoppers expected to shop around for the most convenient shop, good prices and best ranges”.

What ingredients make for a good performance in Q4?

With the critical importance of this year’s Golden Quarter for non-food retailers agreed, RTT members discussed a number of key factors that would distinguish successful retailers apart from the rest, and will be set to flourish in this key period.

A focused proposition, whereby retailers concentrate on being really great at one thing, is expected to be a common trait of those businesses that succeed in the run up to Christmas. The RTT members were keen to stress that with the stakes so high, and the competition so fierce, there is no room for error in delivering a shopping proposition that isn’t up to scratch this Christmas. Retailers that don’t have a single focus will risk diluting their offering and that could make the difference between surviving and thriving over the coming months.

Martin Hayward, founder of Hayward Strategy and Futures, said: “Supermarkets have done a better job of addressing and promoting what they stand for, compared to their non-food counterparts. From a customer’s perspective, many non-food retailers have spread themselves too thin, trying to be everything for everyone. This could result in smaller, more agile operators taking share from the bigger players as they are able to deliver a specific, niche proposition to consumers.”  

Secondly, the RTT highlighted that retailers that have a tried and tested, true omni-channel shopping experience for customers will also be better prepared to take full advantage of the increase in demand that comes in the Golden Quarter. Dr Tim Denison said: “The skills required to build a successful omni-channel business model should not be dependent solely on traditional thinking and expertise. Digital dexterity and technological transmogrify are dependencies, no longer luxuries.”

Conclusion

The RTT concluded that this coming Golden Quarter will be of great importance to the whole retail sector, and given the external pressures being faced, they suggested that retailers will be looking closely at the Autumn Budget for any signs of relief from the Government.


Nick Bubb, independent retail analyst, said: “Any additional external pressures could be enough to tip some struggling chains over the edge, so, given the impact of continuing Brexit uncertainty on consumer confidence, many will be hoping that the Chancellor does something in the Autumn Budget to ‘level the playing field’, via his promised Business Rates review and Digital Sales Tax.”

 

Members added that for certain sectors it will likely be ‘make or break’, meaning the tag of it ‘being the most important trading period for a decade’ could certainly ring true. Those retailers that sit at the sharp end will be in the non-food sector, with the most high profile businesses at risk of being causalities of the Golden Quarter, being fashion retailers and department stores.

 

The RTT warned that even the slightest deviance away from delivering a well thought through, focused proposition, could be the difference in survival over the coming months. 

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

James Knightley, ING Chief International Economist

The UK economy was amongst the very hardest hit by the financial crisis with output contracting 6% peak to trough and unemployment rising by 1.1mn. However, the economy bounced back well relative to European peers, getting back to its pre-crisis level by 2Q13. This was led primarily by consumer spending which when adjusted for inflation, is up 10% on ten years ago. By way of comparison, Italy and Greece’s economies are still 6% and 24% below their pre-crisis levels

The household sector is in reasonable shape right now, supported by the strong jobs market and firm asset prices. The recovery has been even more impressive when we consider the painful hangover from the crisis that has included wage increases lagging behind cost of living for many years and credit availability being, unsurprisingly, more restricted. The key issue is whether this situation can gain more momentum.

Brexit is clearly an important issue that creates a lot of uncertainty for both business and households. For retailers, securing supply chains is critical along with clarity on migrant workers. For households there is concern over what a ‘hard’ or ‘economically damaging’ Brexit might mean for jobs and incomes.

My base case remains that a hard Brexit will be avoided and that a deal will be struck that can allow the UK to enter the ‘transitional phase’. Remember that the divorce payment (€39bn) and the terms of citizens’ rights have broadly been agreed while the situation regarding the backstop to preventing a hard Irish border is solvable – it is a general plan that hopefully will never need to be put into action.

There is the framework for the future trade deal, but that too is probably easier than much of the media portray – it isn’t about agreeing the “Chequers plan” – an actual trade deal (like the one it took Canada and the EU 7 years to agree). It is only an aspirational framework that both sides have to sign up to. The real conversations on the future trade situation are for the 21 month transitional period between March 2019 and December 2020.

It may not go very smoothly up to the March 29 deadline and this could be damaging for the UK economy in Q1 2019, but after the agreement is signed there is the potential for a relief bounce in sentiment and activity. Moreover it is important to remember that at this point the UK leaves the EU in name only. Everything else – the customs union, the single market access, the free movement of people will remain in place.

It is also important to remember that we will likely be in the same situation again in late 2020 as we face the deadline for when the transitional period ends and the UK truly leaves the functioning body of the EU. Given trade deals have a nasty habit of taking longer to agree than people initially think it could go right to the deadline again and a “hard” Brexit comes back firmly on the agenda – or we see the transitional period extended.

As such retailers will have no opportunity to rest on their laurels. Business will not have real clarity on the economic and political backdrop anytime soon. Securing a strong Christmas trading position in 2018 is critical to giving retailers a sound footing to face this prolonged period of turbulence – healthy revenues, a strong balance sheet, good supply lines and strong sense of consumer loyalty will be incredibly important.

 

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

A year is a long time in retailing, let alone a decade. The golden quarter of 2008 saw the RTT’s Retail Health Index crash 6 points – more than any time since – as the financial crisis broke, discounting became the norm and Woolworths collapsed. And yet it was not the nadir for British retailing, as measured by the Retail Health Index. That came in Q4 2012 at the time of the reported double-dip recession, when economic gloom and despondency caused consumers to retrench, austerity to set in and price wars to rage.

How will Q4 2018 compare to these former dark times? My answer would be ‘different’ rather than ‘worse’. The challenges certainly are there: whether to participate in and what strategy to adopt for Black Friday; whether to order ‘big’ on the back of a modest improvement in demand; whether to load the top-end ranges in the belief that consumers will throw caution to the wind and indulge in a carte blanche Christmas. At least there have been more ‘knowns’ to work with to plan the peak campaign, than there are when faced with the future of the Brexit lottery. Technology has been making the headlines in retail innovation for a number of years now, and store associates have become somewhat of a forgotten asset. Passionate staff, who have intimate knowledge of the product and take an interest in their customers, can really help drive engagement on the shop floor. One thing I do expect to see over the course of the peak season is retailers investing in their store teams to deliver customer service excellence.

No one would argue though, that it has been anything other than another difficult trading year in which demand has been modest and cost management tight. Any room for emotions to play a part in decision-making has been expunged over the last twelve months; it has been a year for being hard-nosed. With all the uncertainties building around Brexit, and the UK’s trade agreements, the months ahead will be defining times for the industry, challenging the acumen of even the very best leadership teams in retailing. Getting it wrong at a time when margins are thin and being eroded further would lead inevitably to boardroom carnage. Arguably, retailers do need a shake-up. Retail 2018 is a very different beast to Retail 2008; the skills required to build a successful omni-channel business model should not be dependent solely on traditional thinking and expertise. Digital dexterity and technological transmogrify are dependencies, no longer luxuries, and new blood coursing through its arteries and veins would help rejuvenate and re-energise the sector.

 

Paul Martin, UK Head of Retail – KPMG

2018 has not been an easy year for a large part of the UK retail sector, and we have already experienced a multitude of high profile business failures. The latest BRC – KPMG Retail Sales Monitor has further reinforced this in September, with like-for-like sales declining 0.2% on last year – suggesting that the market is at best flat-lining. It is however, important to emphasise that this is a tale of two halves: the grocery sector continues to deliver acceptable growth rates; whilst large parts of the non-food sector are underperforming, especially the physical stores channel in contrast to online.

Against this backdrop, success in Q4 – the so called ‘Golden Quarter’ – is going to be of paramount importance for many retailers. Trading during this time may even determine a retailer’s ability to survive, especially given that some retailers generate 80%+ of their annual profits in that quarter alone.

It is very likely that demand will remain similar to previous years. British shoppers will continue to embrace the Christmas trading period and loosen their purse strings to treat themselves and their loved ones. One caveat to this however, remains the continued political uncertainty. The ongoing failure of the UK government to deliver an economically favourable Brexit deal will impact consumer confidence, leading to reduced expenditure. In addition, this uncertainty is driving increased costs across the sector, as retail businesses are having to prepare for multiple scenarios to ensure they are safe-guarding their supply-chain, flow of products and labour force to name just a few aspects. 

The two most important factors that will determine success or failure will be how the Black Friday and Cyber Monday weekend are delivered, as well as managing a tight margin strategy over the course of the quarter.

The Black Friday trading weekend has established itself as the largest single shopping event in the UK and has overtaken Boxing Day sales. Having said that, the importance of this event varies across different categories and getting it right is crucial. We have previously seen too many examples where businesses have not optimised the Black Friday opportunity, including businesses amending their delivery prices in relation to demand; distorting their pricing architecture or overloading their supply chain and infrastructure. These failings have had severe knock-on effects for the entirety of their trading period. A further key point is getting the marketing and promotional strategies right, as previous year’s demand has been suffocated in the run-up to the event, resulting in excess product in the wrong places leading to further margin dilution through excessive markdowns.

Even in the context of a low growth market there will be businesses that experience a successful Golden Quarter. These businesses are generally those that understand their customer and provide an outstanding and differentiated product and service proposition. Those businesses that have already struggled over the course of the year, and have not faced up to the realities of a changing market, are likely to face a disappointing final quarter of 2018. Only time will tell but failure in this quarter could be the final straw for many businesses, especially as business Darwinism within the UK retail sector continues.

 

Martin Hayward, Founder – Hayward Strategy and Futures

Whilst Brexit will undoubtedly contribute to some short term uncertainty amongst shoppers and possibly some temporary disruption to retail trade, its impact is likely to be minor compared to a much bigger elephant in the room.

The biggest and most urgent issue that will determine the health and longevity of the UK high street this quarter and beyond will be the levelling or not of the playing field between responsible retailers and seemingly untouchable international online businesses.

As high street stores are undercut by online retailers with lower cost bases and sophisticated tax avoidance skills, the regulatory and fiscal systems in place are hideously outdated. New figures released this week show that John Lewis pay one and a half times more in rates on just their Oxford Street store than Amazon pay in corporation tax in a year.

There are many further unintended and unexpected consequences of the rapid shift to online that also need to be addressed by government once the financials are sorted.

  • A tsunami of white van deliveries contributing to traffic congestion and pollution
  • A new army of ‘Gig economy’ drivers  on piece-work rates frequently driving irresponsibly and without employment protection
  • The replacement of in-store positions with badly paid, automaton jobs in darkened warehouses.
  • Despite the real benefits for some, the as yet unquantified social cost of consumers shopping alone from home without exercise or human interaction. (In a similar way to what has happened with social media not being very social for children)

There is growing pressure from within the industry for a reassessment and slowing of increases in property rates to ease the pressure, but also a rapidly growing body of thought that some kind of fiscal action needs to be taken quickly to catch up with changes in the market. Most of this debate is about taxing turnover in the country of source although more interesting models may be to dis-incentivise home delivery through a delivery tax to re-balance the appeal of shopping in person and reflect the many costs of home delivery on congestion, the environment and quality of life.

Dave Lewis, the CEO of Tesco has gone so far as to suggest a 2% charge on goods sold online to ‘release retailers from the ‘stranglehold of competition from…aggressive online firms’ and use it to provide a tax break for retailers.

The cost of any further procrastination could be the loss of further high street names but the noises from our government and their counterparts around the world do appear to suggest that action is near.

 

Maureen Hinton, GlobalData

While there is no doubt this has been a tough year for retailers I do not believe it will be any more critical than others over the past decade. We will witness a continuing trend of substantial price competition, more sales going online, non-food retailers suffering the most, and consumers coming out as the winners.

The UK retail market, along with many other major economies in the west, is suffering from maturity of demand and overcapacity of supply.  Brexit is yet to have its full impact on the UK economy and while consumer confidence is low, consumers are still spending, and Q4 will continue to be the peak period.

That said retailers’ growth, particularly in non-food, is being boosted from casualties in the market. The survivors are picking up the spend that would have gone to these weaker competitors.

For instance, since January of this year there have been several major casualties and if you just take three of them, Maplin, Toys R Us, and Poundworld, around £1.4billion of consumer spending has been freed up for competitors to grab.  This is not a new trend, it has been in place for over a decade, but is lessening as more retailers are shed from the market.

We are likely to see some of the 2018 survivors deliver stronger sales growth in Q4, but the overall market is unlikely to grow much at all in non-food. And the sector still has to contend with stock being cleared using heavy discounts which is hitting everyone’s margins. Furthermore, this is not helped by Black Friday – despite far better planning by retailers now it is set in the retail calendar.

As ever the winners will be the supermarkets and food retailers, with the discounters outperforming. In non-food general merchandisers such as B&M and Poundland (which will have picked up from Poundworld’s demise and its shift of Pep&Co into its stores) will be winners, along with beauty specialists and sports retailers, benefitting from current consumer trends for health and wellness, and online young fashion retailers.

The ones that will find it toughest are the mass middle market fashion retailers and department stores that have little unique to offer, and the home related specialists which will continue to suffer from the stagnant housing market.  And of course, the obvious winner will be Amazon, which offers what we all want at Christmas, convenience, value and choice.

 

Martin Newman, CEO – Practicology

I would heartily agree that this year’s seasonal peak trade period will be critical for the health of the retail industry.

Brexit on the horizon brings its own challenges, but irrespective of what deal is done with the EU, the changes in the ways that consumers shop is coming to a head for an increasing number of businesses. Retail sales have held up despite the political and economic uncertainty, but sales continue to migrate online and away from traditional retail businesses.

House of Fraser and the other department stores are particularly feeling this. HOF was held up as an example of a successful multichannel retailer just a few years ago, and even John Lewis has seen its profits wiped out this year as it invests to secure its future.

In the past decade, high street retailers in the UK have been relatively successful at capturing shoppers as they headed online, and the majority have developed online channels. However, disruption from online-only retailers and new online business models isn’t slowing; and those multichannel retailers selling third-party brands are struggling to redefine their value propositions to consumers.

Meanwhile, Amazon’s increasing product range and Prime subscription offer is changing UK consumers’ online shopping behaviour in a similar way as has been seen in the USA.

Amazon is becoming the first place that consumers search for products and it’s where they benchmark the price and delivery options for branded goods. It’s trained UK consumers to expect deals around Black Friday, changing the whole promotional and discounting strategy that other retailers are forced to adopt at a key time of year.

Success in the golden quarter for retailers will be at least partially defined by how well they can compete with (or sell through) Amazon. A relentless focus on trading will be required in the next three months by retailers who want to go into the unknown of Brexit in the New Year with businesses that are strong enough to survive further upheaval.

 

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

The UK economy remains strong despite slowing GDP growth and when it comes to grocery shopping, consumers remain confident but cautious; they’re willing to economize but not compromise. Many are safeguarding spend at supermarkets by making savings elsewhere, for example in discretionary out of home consumption, clothing and non-food.

The uncertainty surrounding Brexit and the rise of energy and fuel costs have not yet impacted grocery retail spend. There is more good news. Despite 12 months of inflation, volume growth in food retail has turned positive with a 1.1% growth so far in 2018 (Nielsen Growth Reporter). This has been helped by the early summer heatwave and shop price inflation continuing to lag the Consumer Price Index.

But beneath the veneer of inflationary growth, many food retailers are now becoming anxious about Q4 with business models stretched more than ever by the continued loss of market share to Discounters, the cannibalisation of the sales at their large stores to online (expected to hit a new high of 8% of fmcg sales in early December) and sluggish demand during September; perhaps a hangover from the festivities during the meteorological summer of 2018.

This is compounded by many retailers running stores this year with lower costs by editing ranges, tightening supply chains and having less staff, to help rebuild operating margins. Some have diversified into new channels, a few are repositioning their brand to look different and one or two have opened new formats to help future proof their share of wallet. Meanwhile, all are absorbing supply chain increases when shopping behaviour is even more digital, disloyal and unpredictable.

Q4 2018 in food retailing is going to be set apart from previous years by being `less big and more late`. The sun is setting on the tactics that seek to gain new shoppers in October and then encourage them back 3 or 4 times for the mammoth Christmas shop using voucher give ways. What supermarket shoppers say they want is to reduce the cost and to spread the cost of Christmas, and to do this they expect retailers to offer convenience of shop, choice (this means mission based ranges and `the best` aswell as `better` in private label) and good prices – in that order.

Arguably this is even more important during the golden quarter when shoppers spend over £45b (which equates to over 27% of annual sales) at Superstores, Supermarkets, Convenience stores, Discounters and Online retailers.

 

Nick Bubb, Retail Consultant

In the Food Retail sector there is no real sign of problems ahead of the key Christmas period. The sector had a slightly soggy Q3 on the stockmarket, but that was more to do with the overblown Ocado share price selling off than anything in terms of the fundamentals. Despite the relentless growth of Aldi and Lidl, there is enough food price inflation in the system to keep everyone reasonably happy and the share prices of the “Big 3” have been all doing well in their own way. Tesco clearly has its problems in Thailand and Poland, but margin recovery is still on track in the core UK business. Morrisons continues to make a virtue of its in-house manufacturing and has successfully moved into Wholesaling. And, despite some hard-line noises from the CMA, the City still thinks that Sainsbury will prevail with its plan to takeover Asda and that it is understating the likely merger synergies.

The Non-Food Retail sector is a different story and the City is distinctly nervous about the Christmas prospects for the department store and fashion retail sectors. And this nervousness is shared by landlords and suppliers, after the collapse of House of Fraser and a number of profit warnings on the back of the unhelpfully warm September weather. These areas of High Street retailing are already feeling the brunt of the structural squeeze caused by the growth of Online shopping and the overcapacity in “bricks and mortar”. And any additional external pressures could be enough to tip some struggling chains over the edge, so, given the impact of continuing Brexit uncertainty on consumer confidence, many will be hoping that the Chancellor does something in the Autumn Budget to “level the playing field”, via his promised Business Rates review and Digital Sales Tax.

But although the Fashion sector has had more than its fair share of stockmarket disasters this year, via Mothercare, Debenhams, Moss Bros, N Brown, Footasylum and QUIZ, there are still several well-managed companies that are performing well. The best example is Next (where over half the business is now Online), but investors in JD Sports and Boohoo are also sitting pretty so far this year.

And, despite all the gloom and doom, several retailers in the Household goods and furnishings sector have actually reported improved trading in recent weeks. This is probably driven by the release of some pent-up demand that was suppressed by the summer heatwave, so it would be unwise to extrapolate it too far, but at least it shows that the consumer is not completely dead.

 

James Sawley, Head of Retail & Leisure, HSBC

From a banker’s perspective this Christmas is critical, I believe it will be make or break for dozens of retailers. We are undergoing a once in a generation correction in the supply base of physical retail stores driven by short term cyclical, and long term structural and social factors. Unfortunately we are probably only 1 year into a 3 year period of significant disruption, CVAs and administrations where only the fittest, leanest and most relevant to today’s consumer will survive. While this transformation of the high street ensues, discounting will remain rife and I see limited relief for costs, and the need to continue to invest. Operationally, the last of the low hanging fruits were picked back in 2017. As a result, we are seeing financial engineering on a scale few in the industry remember. Aggressive cost cutting; CVAs; debt restructuring; divestments are all sensible ways to help trade through tough periods but I fear many are simply kicking the can down the road.

Black Friday/Christmas

Black Friday 2017 was a dud. Retailers need to learn from their mistakes, otherwise they’ll undoubtedly have another failed Black Friday. Being too clever with pricing strategies – raising prices prior to, then discounting during, fails to give consumers any kind of intellectual credit. Whilst a clear strategy is a must, success will be achieved by offering consumers a true sense of value which will in turn loosen purse-strings. We’ve seen how disposable/discretionary spend was diverted during the World Cup, from non-food retail to food-retail and leisure spend (predominantly pub/bar based). The consumer spending pie hasn’t changed size, it’s only changed shape and retailers can grab this back by getting their strategy on point. With that in mind, I hope that the majority of retailers (both physical & online) will have learned this lesson from last year and will have a moderately successful 2018 Black Friday. Retailers who are cash strapped and burdened by hefty cost bases/overheads can’t afford to mismanage this key period, ambiguous prolonged promotional periods, unclear, vague campaigns will be met with lukewarm sales that will carry on into the Christmas period, compounding issues and could ultimately prove terminal. A snippet of good news that retailers can thank the retail gods for, Black Friday falls on the last day of the month (pay day) giving them the best possible opportunity to ply consumers from their hard earned cash.

Winners and losers

Department stores will need to fight tooth and nail for market share this quarter. Debs and John Lewis are in the midst of rebranding exercises which leaves the race wide open. Self-purchasing will be another familiar theme but certain areas will benefit more than others. Consumer electronics are a steadfast stable of standout Black Friday deals, but with England’s success and World Cup fever, big screen TV’s flew off the shelf during the summer which will inevitably take away a proportion of consumer demand in this specific area. We’re also 5 years into a c7 year gaming console cycle, suggesting these provider(s) will be invariably subdued during the period. Toy spend will most likely be flat year on year and at best experience a modest uptick, but with one of the largest retailers resigned to the history books, remaining Toy retailers inevitably benefit.

Brexit

The political effect on markets and volatility over the past 18 months is almost unprecedented – Tusk or Barnier sneezes and the pound takes a tumble, May edges forward in negotiations and the pound gains momentum and consumer confidence indices tick up. All of this uncertainty is cause for concern, but thankfully most retailers learned from mistakes of old and have mitigated at least when it comes to currency volatility, hedging in larger quantum’s and for longer periods. This will hopefully see retailers secure until we all understand what the new normal is.

 

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

After an extremely challenging 2018, retailers are now moving to the ‘business end’ of the year, where – for most – their highest sales volumes and margins are delivered. Given a particularly inauspicious start to the year, this quarter is very much make or break for many brands, and it is likely that it will be the most promotional Q4 we have seen foryears, with retailers locked into a fierce downward spiral of discounting, which will start a few days before Black Friday and continue throughout the run up to Christmas. This will clearly serve to erode margins – which is the opposite of what retailers need right now – but if they don’t discount then the alternative could be much worse. The farcical way the government has handled Brexit to date is certainly partly responsible for this, with consumer demand for retail – and consequently footfall – falling, due to continued uncertainty on the outcome of Brexit. A general election – and as a result more decisiveness around Brexit – is the only way to mitigate this uncertainty, and nurture growth in consumer demand for retail.

On a more positive note, from a property perspective, it has never been a better time to expand, for retailers that have the capital and wherewithal to do so – given the administrations/CVA’s of a plethora of retailers in 2018 to date, such as East, Maplin, Toys R Us, Carpetright, Mothercare, New Look and House of Fraser. These business failures – added to a host of smaller/independent retailers that have also failed in 2018  – has created substantial retail vacancy in a number of centres across the UK. A sizeable proportion of these vacancies are in successful/prominent centres too, and this higher level of availability has served to lower rents in many markets. This is perhaps why Revo – the industry body that represents shopping centre owners in the UK – have been so vehemently fighting against CVA’s of late – including challenging House of Fraser’s planned CVA prior to Mike Ashley buying them – as ultimately if more CVA’s happen in Q4 or beyond then rents will continue to fall – damaging the valuations of the assets they own.

Finally, it will be interesting to see how Tesco’s new discount concept Jack’s fares in Q4, and whether shoppers take to it or not. My view on Jack’s is that Tesco’s plans to only open 10-15 stores a year is a bit like bringing a ‘knife to a gunfight’ vs Aldi and Lidl, as such a conservative expansion plan will not deliver the brand equity or critical mass from a buying perspective to viably compete with them. Either Tesco push it hard – building the critical mass and brand equity a national chain should be seeking to garner – or dont do it at all.

 

 

 

Members of the RTT are:

  • Nick Bubb – Retail Consultant
  • Tim Denison – Ipsos Retail Performance
  • Jonathan De Mello – Harper Dennis Hobbs
  • Martin Hayward – Hayward Strategy and Futures
  • Maureen Hinton – GlobalData
  • James Knightley – ING
  • Paul Martin – KPMG
  • Martin Newman – Practicology
  • James Sawley – HSBC
  • Mike Watkins – Nielsen UK

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:

Simon Wilson, KPMG Corporate Communications
Tel: 0207 311 6651
Mobile: 07785373397
Email: simon.wilson@kpmg.co.uk

Max Bevis, Tank PR
Tel: +44 (0)1159 589 840
Email: max@tankpr.co.uk

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