Retail Think Tank predicts tough times on all fronts in first quarter
The latest meeting of the KPMG/SPSL Retail Think Tank (RTT) – the group of leading industry figures which provides a non-partisan guide to retail sector health – revealed that the difficult trading conditions at the end of 2007 look set to worsen in the first quarter of 2008.
The RTT meets quarterly to discuss and report back on the three key drivers of health – demand, margin and costs – in order to form a view of the outlook for the sector.
Deliberations from the RTT’s latest meeting included:
- Acknowledgement that the RTT’s predictions for Quarter 4, issued in October 2007, were correct. This was the first time that movements in all three drivers had a negative impact on the overall state of retail health in the UK. This was borne out by the difficult Christmas trading conditions which have been widely reported and the subsequent downbeat trading statements from retailers. The health of the sector has undoubtedly deteriorated in the quarter;
- For the next quarter the state of health will deteriorate further and at a faster rate. RTT expectations have been downgraded further in two of the three drivers, margins and demand, with the impact on health of costs still being negative. Consequently the RTT produced its most pessimistic set of predictions since it was formed in mid 2006;
- The group reported that the most negative impact on health for Quarter 1 relates to demand. While retail sales in value terms will grow, the rate of growth will continue to decline. Like-for-like sales at market level are expected to be negative. In the year ahead, the RTT believes consumers will continue to be hit by falling disposable income; declining consumer confidence due to ongoing concerns about the credit crunch; uncertainty in the housing market and lower bonuses. An interest rate cut in Quarter 1 would not have a positive impact on short term demand growth.
- In discussing demand, the RTT noted the growing divergence between the food sector performing better than the non-food sectors and between destination locations performing better than less primary areas. It believes that this will continue as consumers make fewer, more focused shopping trips to rein in their spending and as supermarkets further improve their non-food ranges.
- The group expects that margins in the retail sector will worsen particularly in non-food. Non-food margins benefited from the strength of the pound against the dollar in 2007, but as the RTT expects this to continue to reverse, margins will follow suit. The food retailers continue to succeed in passing on food cost inflation to the consumer.
- The RTT expects that growth in costs will exceed growth in demand. Rental inflation will ease but not in destination locations and as retailers seek to create value by improving customer service, staff costs could rise as they attempt to attract the best staff.
Helen Dickinson of KPMG said: “The tough year in 2007 looks set to become even harder in 2008. The RTT is predicting difficult conditions ahead with a further weakening of demand growth, erosion in margins and cost inflation outstripping top line growth. Demand is the most influential variable, so with the RTT stating that this driver is experiencing the most pressure, the first quarter of 2008 looks set to be challenging, particularly in the non-food sector.”
Date Published: 1/2/2008 5:25 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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