UK retailers deserve a pat on the back for working so hard to protect their margins over the Christmas trading period, claims the KPMG / SPSL Retail Think Tank (RTT).
In their latest quarterly review of the health of UK retail, the RTT felt that the final quarter of 2006 had been better than expected, mainly because retailers were able to stave off the full impact of an increasing cost base by holding their nerve and not giving away margin through excessive discounting and promotional activity.
However, looking ahead, the picture is not so rosy with the RTT forecasting downwards movement on all three of its main indicators – demand, margin and cost – for the first quarter of 2007. In the RTT’s brief history, this is the first time that it has registered a negative outlook against all three of its indicators.
In the view of the RTT: “Our actual view on Q4 performance has been revised upwards from what we predicted three months ago, almost solely based on how well retailers in general have done to protect their margins. It was a case of treading a fine line between stimulating demand and discounting too heavily or too early but it looks like many were able to cope with this. By doing so, they softened the impact of the rising cost base which they were having to contend with. Looking ahead, we see the cost situation easing slightly. It will still remain in negative territory – in terms of the impact it has on retail health – but we don’t foresee that it will be as severe as in previous quarters. However, the fact that demand and margin have also fallen into negative territory suggests that Q1 could be a challenging three months.”
Commenting on the group’s deliberations, RTT member Helen Dickinson of KPMG said: “Margin was the key factor in our discussions, both for Q4 and Q1. Being able to protect margins was what tipped our overall assessment of retail health into positive territory for Q4. The challenge now will be for retailers to protect margins again in Q1, at a time when we see demand slowing, some production costs rising and continued pressures on other costs. It will be a real struggle, which is why we felt obliged to register a negative outlook for retail health in early 2007.”
The RTT’s summary of its three focus areas was as follows:
The RTT maintained its forecast position of seeing a marginal increase in the rate at which demand grew during Q4. Despite a strong December performance coming to the rescue of a poor November, there was no real evidence of a huge surge in extra spending and the majority of the growth which did transpire was driven by food and online retailing.
Looking ahead, demand is expected to decline in quarter 1 (the first time the RTT has predicted a downwards movement on demand), driven by the recent interest rate rises, the anticipated impact on consumer confidence and an increased public focus on debt. Although undecided about exactly how long it would take consumers to react and for spending to slow, the RTT felt that the recent jolt which the MPC gave consumers would have to result in slowing demand.
Retailers were commended for the way in which they held on to their pricing power, thereby protecting their margins. Having learned their lessons from previous Christmas campaigns, retailers seemed to act more smartly this time round, getting their purchasing right, not risking over-supply and sticking more closely to their core product areas. Discounting and promotional activity generated plenty of media attention but was felt to be no different in volume terms to any other Christmas trading period.
Retailers were also commended on how hard they had worked to find cost savings, particularly by managing their staff budgets so well. The net result was that rising costs – and especially the increase in the National Minimum Wage – had not affected retailers as badly as previously predicted.
With many of the big cost increases having now been absorbed, the cost situation will ease in the new year but will remain a negative factor, especially with a round of pay increases expected to come through in the next quarter and supply line inflation.
The RTT will shortly publish its third White Paper, focusing on the role of the supermarkets in UK retail. The next meeting of the RTT will take place in early April.
Date Published: 2/1/2007 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.
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