The inaugural meeting of the KPMG / SPSL Retail Think Tank (RTT) has concluded that the UK retail sector is in a fragile and nervous state, with demand growth slowing and with options for further cost cutting rapidly declining.
The first meeting of the RTT – a collection of nine leading retail experts from across the sector – took place on 11 July and was tasked with providing the definitive thought leadership on the state of UK retailing, both for the past three months and the three ahead.
In the view of the RTT: “While consumer demand grew in the previous three months, we expect growth rate to slow in the next three. Gross margins are remaining roughly stable – something which is an achievement in itself on the retailers’ part. While we do not expect costs to increase at the rate they did this past quarter, they will increase nonetheless. This means that all the retailers’ best efforts in the past year or so have left them in a roughly neutral position. However, with demand growing at a slower rate and costs still rising – and with the National Minimum Wage increase still to come on 1st October – retailers are fast running out of ways of maintaining the status quo let alone improving upon it.”
For the purposes of their deliberations, the RTT members considered the three key aspects of retailing – demand, margin and cost. When combined, the three currently give a roughly neutral vision of retail’s immediate prospects; with demand growing but slowing, gross margins being held steady and costs rising, albeit at a slower rate.
However, the picture is a bit more complex than that as RTT member Professor John Dawson, of the Universities of Edinburgh and Stirling, explains: “With changes in demand and costs roughly cancelling each other out, retailers are looking to gross margins to make the difference. The fact that they are managing to achieve those margins is testament to the hard work put in over the past year and a sure sign that measures put in place earlier in the year to control cost increases are now bearing fruit. However, this is a fine line which the sector is treading. As the growth in demand slows and costs increase, it may well only need one incident – an interest rate rise, a fall in consumer confidence or house prices – to provide the tipping point after which retail health takes a turn for the worse.”
As the RTT is tasked with only looking ahead three months, the implementation of the latest rise in the National Minimum Wage – due to come into effect on 1st October (increasing from £5.05 to £5.35 per hour for workers aged 22 or over) – only really affects the very end of the period. However, the members still felt that this would be a major factor in the following quarter, adding further cost into what is already a very finely balanced equation.
Concern was also voiced over retailers’ own view of the situation, with less expansive property plans being seen as a sure indicator of under-pressure retailers themselves reining in their own ambitions in favour of stabilisation. The RTT also noted that some leading ‘bomb-proof’ brands are beginning to accept reductions in their selling prices in order to help retailers; a sure sign of mounting pressure on the retail sector.
The RTT’s summary of its three focus areas was as follows:
Demand certainly increased during the April to July period, particularly driven by strong demand in the food sector. However, with the usual consumer cost pressures returning after the brief, largely neutral, World Cup effect, there is no reason to expect the consumer market to strengthen. In fact, an ongoing hot summer could yet depress demand.
After a very tough 2005, retailers should be commended for being able to hold gross margins steady. Margins are now seen as being so important for retailers that it is felt that some are even happy to lose market share if this results in maintaining or improving their gross margins.
After the recent hike in energy rates, costs will continue to rise in the next three months, albeit at a slower rate. The increase in the National Minimum Wage looms large on the horizon for many retailers. With so many central costs already cut, retailers may soon run out of options when it comes to further cost-cutting measures. If that happens, the sector will surely start to suffer.
The next meeting of the RTT will take place on Tuesday 10th October, 2006. Minutes of the July 11th meeting will be published shortly. The RTT will also publish a quarterly White Paper. The first Paper – on the subject of what constitutes retail health – will be published in three weeks’ time.
Date Published: 8/1/2006 5:35 PM
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
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