The latest deliberations from the KPMG/SPSL Retail Think Tank (RTT), the body of leading industry figures set up to provide a non-partisan guide to the true state of UK retail, reveal that over Quarter 2 2007, as it had forecast, the state of the health of retailing, based on the three key signifiers of Demand, Margins and Costs, deteriorated and is set to decline further in the next quarter. The negative pressures, particularly on Demand and Margins, which were just beginning to be felt in Quarter 2 will amplify and hit retailers even harder in Quarter 3.
The panel judged Quarter 2 to have been a difficult and challenging quarter for retailers particularly in the last few weeks and for those in clothing,
Britain’s second largest retail sector after food and drink. Retailers finished the quarter by deploying widespread Sales to mitigate the effects of rising interest rates, falls in disposable income and the consistently poor weather.
The panel feels that this will have been enough in many cases to preserve retailers’ turnover growth at acceptable levels, as the quarter ended. It believes, however, that the pain will merely be shifted to Quarter 3, when the full impact of heavy discounting and promotions to clear the growing mountains of unsold summer stock will hit. It does not consider that the continuing strength of the pound versus the dollar will be enough to preserve Margins.
Demand is also likely to suffer as consumers are faced with yet another interest rate rise, the maturing of many fixed-rate mortgages, drops in disposable income and the diminution of liquid savings. The RTT felt though that some of the recent statistics related to consumer spending may not be a worrisome as portrayed. The fact that Britons are reportedly now saving the smallest slice of their pay packets in 47 years, is more a reflection of people switching their savings into property than into more traditional channels. Houses are now a form of “pseudo saving”, the RTT believes.
Costs continue to remain the most negative factor affecting the health of retailing. The RTT believes that notwithstanding slowing rental and energy price growth, the true like-for-like cost growth is now 3½- 4%, and that sales are struggling to keep up with this.
Definitions
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
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
Costs
- All other costs associated with the retail operations, including freight and logistics, marketing, property and people
What all of this tells us is that consumers are finally beginning to succumb to downward pressures and that moving into Quarter 3 retailers will be forced to sacrifice Margins to stimulate falling Demand, a dance for which many retailers, our panel fears, have not yet learnt all the steps. Continued Cost growth or a fall in the value of the pound versus the dollar to further affect Margins, will only serve to hasten the tempo and some retailers may yet trip and some will even fall.
The RTT expects that the state of health of the sector will therefore deteriorate in Quarter 3.
Commenting on the group’s assessment, RTT member Richard Hyman, of Verdict Consulting said; “This is a high risk time for retailing. The relationship between supply and demand has changed fundamentally and however intense the competition is now, it’s going to become more intense. Just look at the recent negative price inflation. The economics have changed – 25 years of relentless floor space growth has meant that the market is saturated with too many retailers and yet the next four to five years will see an acceleration of floor space growth and I’m absolutely certain there’s already too much stock out there now. Perhaps this is a good opportunity for retailers to take a long hard look at their strategies.” Mark Teale of CB Richard Ellis said; “Retail occupational costs in Great Britain are amongst the highest in the world, adding significantly to UK retailers’ Costs base. Many retailers seeking to expand are, in effect, priced-out of the market. There is, however, some potential for additional stock release over the next 2-3 years via higher than average lease expiry levels and new developments. Whether this will be sufficient to further dilute rental growth is unclear. Given the underlying supply constraints, and despite continuing efforts by retailers to increase the turnover from each square metre of store, retailer hopes of an actual reduction in occupational Costs look forlorn.”
Nick Bubb, of Pali International commented, “Quarter 2 was punctuated by extremes. A sunny April was a good month for retailers, with very little discounting. The prospects for retail through the summer, predicted to be more of the same, weather-wise, must have seemed very different to retailers then. But it’s as if May and April were flipped in terms of weather and another wet month in June meant that gradually the difficulties have multiplied.”
Tim Denison of SPSL added; “Yes, the bad weather has certainly had a big impact. Less obvious is whether the re-heightening of terrorist threats will leave their mark and contribute to British shoppers reassessing the vulnerability of their positions.”
Vicky Redwood of Capital Economics said; “It’s becoming clear that a good proportion of the public has now reached the point where they’re loath to borrow or run down their savings any more.”
Paul Clarke of Barclays Retail and Wholesale agreed: “Consumers will have less capacity to absorb any more interest rate rises.”
“And if interest rates rise to 6% in early September,” added Nick Bubb, “it will undermine the following quarter too, with knock-on effects on the key ‘back to school’ trading season and even food retailers could soon start to feel the pains of price deflation.”
“Quarter 3 will see more of the same in many respects, as we have seen this last month or two, summarised Helen Dickinson of KPMG, “though perhaps most ominously Demand growth looks set to fall significantly.”
Next meeting of the Retail Think Tank will be on 9th October 2007. The next output will be the quarterly Retail Think Tank White Paper, this time entitled: Retailers are not influenced by ethical consumers; it’s simply that a socially responsible retailer is more profitable.
Date Published: 10/1/2007 5:30 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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