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Retail Think Tank

Retail Health Is Deteriorating But It’s Not In ‘Free Fall’ States Industry Think Tank

-Retail Think Tank predicts further pain on all fronts in second quarter but warns of dangers of ‘talking it down’-

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 it had predicted for the first quarter of 2008 were not quite as bad as it had forecast, but warns that the next quarter looks bleaker. The panel was keen to point out that whilst the future health trend is downwards, the depth and duration of the decline is far from clear and we should guard against talking ourselves into a worse state than it would otherwise be.

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 1, 2008, issued in January 2008, were largely correct, though not quite as bad as anticipated.  That had been the first time since the RTT was formed that movements in all three drivers were expected to have a negative impact on the overall state of retail health in the UK.
  • Demand was somewhat stronger than the RTT had predicted in January and February, predominantly driven by food sales holding up well.  March was weak, driven by the early Easter, poor weather and the worsening economic backdrop. This was borne out by the latest British Retail Consortium-KPMG report for March which showed the first like-for-like fall in retail sales for two years.  The health of the retail sector has therefore undoubtedly deteriorated, as predicted, in the first quarter.
  • For the next quarter, the RTT believes that the state of retail health will deteriorate further and at a faster rate but the rate is certainly not precipitous.  One member aptly commented that, “retail has caught ’flu, not pneumonia”.
  • The RTT blamed the projected worsening rate of decline on the impact of demand and margins , but added that costs were still having a negative bearing.  Consequently the RTT has produced its most pessimistic set of retail health predictions since it was formed in mid 2006.
  • Although all the RTT members agreed that demand would weaken further in quarter 2, they were divided as to how much and whether retail sales in value terms will grow or decline in the upcoming quarter.  However, even the more optimistic were clear that the rate of any possible sector-specific growth (most likely to be seen in food) will continue to decline.  The more pessimistic considered that the outlook was comparable to that seen in 1973/74 and the early 1990s.
  • In the coming months, the RTT believes that even those consumers who have, until now, ignored or shrugged off the effects on their shopping behaviour of job losses, falling disposable income; the credit crunch; falls in the housing market and lower bonuses, will start to take notice.  The recent cut in the Bank of England base interest rate to 5% will fail to stimulate demand in the short term.
  • The group expects that margins in the retail sector will continue to deteriorate.  In the last few months it has been the non-food margins which have been worst hit.  However, the RTT believes that food margins will also come under increasing pressure in the next quarter due to increasing commodity prices.
  • The RTT noted the many pressures on margins; including projected weakening of sterling against the euro and to a lesser extent the dollar, and local inflation in China. Consumers are also expected to become more promotionally driven and hence opportunities for retailers to raise prices will be virtually non-existent.  This, coupled with pressure on demand, leads to a double whammy for retail margins.
  • The RTT expects growth in costs will continue to exceed growth in demand in the next quarter.  The RTT noted the difficulties faced by retailers attempting to cut costs; the only easy way is to cut staff and that can seriously affect the business in other ways.  However, job losses in the sector are expected to amount to over 100,000 in 2008 and 2009, combined.

Vicky Redwood of Capital Economics summarised the thoughts of the RTT: “The fact that demand did not deteriorate quite as fast as we had predicted in quarter 1, with overall spending propped up by strong food sales in January and February, means we should take the clear lesson that consumer spending is like a supertanker; hard to slow down or change course, but when it does….”

Overall, the tough start to the year looks set to become even more entrenched as we go forward into the second quarter. The RTT is predicting increasingly difficult conditions ahead with a significant further weakening of demand growth, margins under ever greater pressures and no respite in sight from increasing cost pressures.  Demand is the most influential and this quarter’s strongest variable, so the RTT is keen to stress that although the situation is serious it’s certainly not yet critical and talking it down will help no-one, least of all retailers.”

Date Published: 5/1/2008 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.

For media enquiries please contact:

Max Bevis, Tank PR

Tel: +44 (0)1159 589 840

Email: max@tankpr.co.uk

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