The Christmas 2006 trading period will be as good as – if not slightly better than – last Christmas but even this will not deliver UK retail the economic respite it is looking for, according to the latest deliberations of the KPMG / SPSL Retail Think Tank (RTT).
In fact, the RTT believes that the overall prospects for the health of the UK retail sector in quarter 4 of 2006 are now poorer than they were for quarter 3.
In the view of the RTT: “Of the three areas which the RTT takes into consideration (demand, margin and cost), cost was the one which was dragging the overall health assessment down. Keeping the lid on costs is the key challenge facing retailers moving into Q4. The recent increase in the National Minimum Wage, coming as it does before the industry engages the 50,000 extra staff it takes on over the festive season, will inevitably add to the other cost pressures which the retail sector continues to face. This will have come as no surprise though. The poorer prospects we predict for the next quarter actually arise primarily from a slow down in the rate at which demand is growing – even once we have taken into account the usual Christmas surge.”
The RTT was keen to point out however that there is a divergence between the food and non-food sectors as prospects for the former in Q4 are considered to be much rosier. RTT member Richard Hyman of Verdict Research explained: “We believe that the food sector will continue to take the larger share of what growth in demand currently exists and that it will be much more confident in its ability to maintain its margins during this crucial trading period. Additionally, as this is the time when the food retailers’ exposure to the non-food sector is at its greatest, it was felt that margins would be left severely exposed and pressurised in the non-food sectors.”
The RTT’s summary of its three focus areas was as follows:
The rate of growth of demand is expected to slow down in Q4 vs Q3 but there is nothing to suggest that this Christmas will be any worse in trading terms than Christmas last year. It is simply that concerns remain for the underlying demand trend across the whole of the quarter.
A marginal majority of RTT members believes that there will be an interest rate rise (to 5%) before the end of the year. The 5% interest rate mark may prove to be a psychological tipping point – the final straw for many consumers and the point at which consumer confidence begins to wobble and affects their shopping behaviour.
As far as margins are concerned, it is a case of whether retailers can hold their nerve and avoid diving into sales too early, thereby giving up valuable margin. There will be nervousness across the sector on this point but as the trend of the larger players taking more market share continues, so does the chance of seeing price reductions from other businesses across the sector.
Overall, the rate of growth in margins in Q3 is expected to plateau in Q4. As reported in the previous RTT meeting, retailers are not wanting to concede any ground on the margins front, as this remains a key determinant of level of profitability.
The discussion on costs is quite a straightforward one as the increase in the National Minimum Wage (NMW) will have added more cost to an equation which already had retail costs growing at a faster rate than retail sales. The rate of growth in rents and other fixed costs is slowing but not sufficiently to make any difference to this equation in the short term. Returning to the NMW, it will be interesting to see whether companies maintain the differentials in their pay structures or choose to apply the increase across all of their lower paid positions.
The RTT will shortly publish its second White Paper, focusing this time on internet retailing. The next meeting of the RTT will take place on Tuesday 16th January, 2007.
Date Published: 12/1/2006 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
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.
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