-Worst ever figures since RTT founded-
After a full two years of outputs the KPMG/SPSL Retail Think Tank (RTT) – the group of leading industry figures which provides a non-partisan guide to retail sector health – has unveiled its new numerical metric, the Retail Health Index (RHI). RTT Members review a comprehensive bank of datasets before they meet, then after discussion during their quarterly meeting, produce the index rating for the quarter just ended.
The output chart below tracks the change in retail health quarter-on-quarter and shows that the health of UK retail has now slipped to its lowest level since the group started its deliberations in early 2006. The base period for the metric (when the index value equals 100) is quarter one 2006.
Retail Health Index 2006 to date
The key points to emerge from the latest meeting held on July 24th 2008 included:
- The overall state of health has slipped a further three index points to 95 in quarter two. As the chart shows, this not only represents the poorest state of health that the sector has been in since the RTT first sat in April 2006, but also the greatest single drop in any quarter since then. For the third quarter in a row, all three key drivers (demand, margin and costs) are contributing negatively on retail health.
- The RTT has produced its most pessimistic set of retail health predictions since it was formed in early 2006. It believes that the state of retail health will deteriorate in the next quarter (quarter three) to an RHI value of 91, representing an accelerated rate of decline over quarter two. Commenting on its assertion made in April that, “retail has caught ’flu, not pneumonia”, one member commented that these latest deliberations show that pneumonia is now on its way!
- The RTT blames the projected worsening rate of decline in health most specifically on a growing deterioration in demand, rather than in margins or costs.
- All the RTT members unanimously agree that demand will weaken further in quarter three, although some are considerably more pessimistic than others. The panel see a split between the fortunes of food and non-food retailers. However, even the more optimistic are clear that further growth even in food sales values in the next quarter is in doubt as volumes will continue on a downward trend. The size of the non-food market will contract further in the next quarter with, the RTT feels, the fear of unemployment as big an impactor as actual unemployment on consumer confidence and levels of demand. This, the RTT believes, in line with previous downturns, will kick in to the consumers’ purchasing mind-set two or three quarters after house prices have begun to fall.
- The group expects that margins in the retail sector will continue to have a negative impact on overall health, but that this would simply match that experienced in the previous quarter rather than show gathering pace. The weakening of the pound against the euro will affect retailers to a greater extent in the second half of the year, as much of this exposure has been hedged until now. Most affected will be clothing retailers.
- Inflation in the prices that retailers pay to manufacturers for their goods are expected to continue to rise at a faster rate than retailers are able to pass on to consumers. The panel notes that the trend of price deflation across the non-food sector is now at an end as these retailers have passed the ‘tipping point’ at which they have no choice but to pass on more of the price rises in their cost of sales. However, in an environment where demand is weak, this is unlikely to benefit margins. Food retailers who have, to date, been more successful in passing on increased costs will find this increasingly difficult going forward and are now being forced by customer ‘push back’ to absorb a greater proportion of additional costs. Inflation in China and other manufacturing bases, and the strength of the euro will all contribute to the pressure on margins.
- The RTT expects the growth in, and negative impact on health of, costs will be marginally greater in quarter three than in quarter two. The effect of oil price rises will continue to filter through into significantly higher freight and logistics costs in the second half of the year. However, rents are now rising at their lowest rate since 1996, particularly due to out-of-town rents remaining flat year-on-year.
- The RTT notes that although the impact on overall health of rent and labour costs is largely neutral and that there is a distant possibility that renegotiations with landlords in terms of monthly, as oppose to quarterly, rental payments might liberate some cash flow, cutting staff to maintain profitability may not be the answer. The panel felt better training of staff was more likely to lead to improved trading.
Helen Dickinson of KPMG summarises the thoughts of the RTT: “Quarter two saw increased negative impact of demand, margins and costs; all of which are expected to worsen in quarter three. The choices of retailers as to how they meet these challenges are beginning to seriously narrow and we cannot currently see any light at the end of the tunnel.”
The RTT panellists rely on their impressive depth of personal experience and sector knowledge and also considered the following:
Demand
| Retail sales grew by 2.5% year on year across the quarter based on the BRC-KPMG Retail Sales Monitor and fell by 0.5% on a like for like basis, the worst quarterly result since summer 2005. The Consumer Prices Index rose to a 3.8% increase over prices a year ago and up from 2.5% in March; food and transport costs being the largest contributors. However, the index of shop prices measured by the BRC-Nielsen index reported 2.5% in June and remains well below the official inflation rate. This highlights that although there is considerable debate about the actual amount of inflation that is impacting individual customers’ pockets, nevertheless there is a significant impact. | |
| The GFK composite consumer confidence index fell from -29 to -34 in June, just one point above its low in the early 1990s recession and has fallen further to -39 in July which is the lowest level ever recorded.People’s expectations for the overall economy over the next 12 months are already below the trough seen in the early 1990s. However the RTT recognises that there is a considerable gap between what the consumers say and what they do. They highlight caution in reading too much negativity into this indicator. | |
| Year on year growth of unsecured borrowings has risen in the last quarter to approximately 7%, but remains well below the long run average growth of 12-15%. However, the serviceability of this debt measured through household mortgages and unsecured interest payments as a percentage of income remains at over 10%, the highest since 1992 (sources: Bank of England and National Statistics). Thus consumers’ ability to fund future spending through debt remains limited. | |
| House prices have fallen by 6% over the year to June, the lowest annual inflation rate since November 1992. (source: Nationwide). Mortgage approvals fell to 42,000 in May, a 64% decrease on a year earlier and have fallen further in June. At this level, they are pointing to total house price falls of around 20% this year. | |
| Levels of unemployment have remained relatively steady over the quarter but are expected to rise given the recent announcements notably from the building and construction sector. The RTT believes that the fear of unemployment, irrespective of actual unemployment levels, is likely to have a detrimental impact on demand going forward. |
Margins
| Over the quarter the $ and the Euro remained relatively stable against the £ at approximately £1.9 and 1.25 respectively. This compares to average rates of similar levels for the $ but £1.45 to the Euro in the same quarter of 2007. The impact of the euro’s appreciation will impact clothing retailers most significantly. | |
| The producer price inflation (‘PPI’: the prices that retailers pay to manufacturers – source ONS) rose to 10% in June up from 7% at the end of the previous quarter and well above the long run trend rate approximately 2.5% and is the highest rate since these records began in 1982. For Food, the PPI rose by 11.8% reflecting the continuing increase in commodity prices – futures prices for corn, wheat, soya have each been increased by between 5 and 9% in the last month alone. However, retail prices for food were increasing at less than this rate, between 7% and 10%, highlighting the significant price competition and inability or retailers to pass on price increases to consumers and therefore the negative impact on their own margins. | |
| Output prices for non-food rose 6.4% up from 3.4% in March again the highest since 1982, although clothing and electricals were the lowest contributors. However, inflation in the prices that retailers pay for goods remains higher than the increase in shop prices, again highlighting the detrimental impact on margins. |
Costs
| Retail rents rose by 1.5% across the quarter compared to a year earlier based on CBRE’s monthly index, the slowest growth since 1996. This is down from the annual datum of 1.7% at the end of March. Although the rental increases in standard shops have remained relatively stable over the quarter at around 2.5%, the fall across all retail is being driven warehouse rents which are now the same as a year ago. Therefore, although wider property costs remain an issue, rents are now off the critical list. | |
| Annual gas and electricity price inflation rose to 10% by the end of the quarter, up from 5% (electricity) and -1.2% (gas) at the end of quarter one. This is combined with an oil price of $140pb at the end of June, twice has high as at the same time last year and 33% higher than it was at the end of March, thereby significantly increasing retailers’ freight and transport costs. | |
| There are no current statistics available for retail average earnings – the latest figures from Thomson Datastream for May show an annual change of 3% including bonuses, in line with 2007’s average of 3%. Therefore people-costs will be lower down the agenda of critical issues than it was last year. |
Date Published: 8/1/2008 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.
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