Based on KPMG/SPSL Retail Think Tank – White Paper #9, September 2008
The latest White Paper, the ninth, from the KPMG/SPSL Retail Think Tank (RTT) -asks whether a downturn has to be all bad for the retail sector and its stakeholders. The full White Paper is available at www.retailthinktank.com, or on request.
White Paper highlights
Comparison to previous downturns:
1974/5 recession
- Fall in retail sales volumes between 1974 and 1977.
- Consumers ‘shopped around’ more, looking for lower prices, helped by rising car ownership.
- Consequent growth in discount food retailing in particular
- Retailers redefined relationships with their suppliers and took control of the supply chain to drive down costs and prices
- Retailers also looked to drive up their market shares, to benefit from economies of scale
- The inevitable increase in competitive pressures encouraged retailers to consider market demand in a different light, moving away from ‘mass consumerism’ to a more tailored approach, collecting information about customers through surveys etc, to get to ‘know’ them better. They began to view their role as marketer rather than intermediary and their stores as ‘the selling machine’ (Source: Gardner and Sheppard 1989), rather than the manufacturers’ channel gate
- The consequences to this marketing-orientation were different store formats and ranges and the launch of their own TV advertising campaigns, communicating directly with their shoppers for the first time.
The 1990’s recession
- Much shorter than in the 1970s with retail sales volumes only falling in ’91 while growing by less than 1% in ’90 and ’92
- Retailer reactions to the recession were similar in aim to the earlier recession, but different in solution;
- Cost and price reduction was tackled by focussing on ‘process re-engineering’ in the supply chain. Retailers looked at the end-to-end supply chain, identifying where they could refine their processes, or increase their buying powers to make efficiency gains and cost improvements.
- Building even closer relationships with customers stemmed from embracing new technologies. With EPoS (Electronic Point of Sale) systems they began to analyse transactional data and undertake qualitative research to better understand motivations and attitudes.
- Strategic emphasis lay on retaining customers and maximising basket sizes, rather than growing market share, which was already concentrated. In 1995, Tesco’s Club Card was launched. It was the first to computer-analyse individual customer details and spending patterns to gain insight into buying behaviour and ‘reward’ shoppers for continued patronage.
In summary, the first recession was characterised by price reductions and aggressive ‘front door’ price competition, whilst the second was more concerned with ‘back door’ cost reductions.
The current situation and evaluation by the RTT:
Policymakers today do not face the constraints of the ERM in the 1990s, yet inflationary pressures are preventing an independent MPC lowering interest rates. The RTT considered current economic conditions and reflected on their effect upon consumer spending:
- Savings – the household saving rate is now lower than it was prior to the downturns in the 1970s, 1980s and 1990s. Consumers face a tougher period ahead to get saving back up to more ‘normal’ levels;
- House prices – more overvalued relative to earnings than they were before, although the equilibrium house price to earnings ratio has risen over the past few years;
- Unsecured credit – even with the credit crunch, unsecured credit, whether or not this is considered a ‘good thing’, is far more accessible and widely available for consumers than in previous downturns.
The RTT agreed that a short, sharp shock is preferable to a prolonged, slow decline.
For a quick recovery, we need to see some or all of; a sharp fall in interest rates; a cut in taxes; a Government solution to the mortgage freeze and a sharp fall in oil/utilities prices.
Whatever the duration, the RTT believes that the UK will emerge with a more sustainable platform for future growth. The credit crunch will reduce the number of overstretched consumers as they will be less reliant on borrowing. However, for some time, consumers will be even more discerning in their buying as retailers compete for a share of consumer spending.
Based on the RTT’s analysis of the results of the last two recessions, the RTT believes that:-
- Consumers will now have more power than ever and retailers will have to be more market driven -more understanding of the needs of customers.
- Competition will become more intense creating ‘price wars’; genuine promotions will attract consumers; ranges will be enhanced; customer service is likely to improve; environment issues will offer differentiation of retailers’ offers, stores and websites. A ‘best of breed’ will emerge.
- Some sectors will be less affected than others; discounters will do well. DIY retailers will have scope for growth as people carry out their own improvements. Retailers which cater for ‘recession proof’ and less economy-sensitive sectors such as teens, high net worth individuals, wealthy tourists etc, will do well
- Retailers will become ‘truly multi channel’ as a recession tends to accelerate trends, such as online shopping. Rising fuel prices may also accelerate this trend.
- The need to find cost savings will move higher up the strategic agenda. Retailers will approach this in a number of ways, including refining ‘just-in-time’ stock systems to minimise dead stock; operating shared transport and warehouse facilities as Alliance Boots does; or signing up to the ‘speed-dating’ sessions that IGD runs on shared transport.
- There will be rent structure change. The British Retail Consortium, as well as industry figures like Arcadia’s Sir Philip Green, Next’s Simon Wolfson and Lord Harris, of Carpetright, are asking landlords to collect rents on a monthly rather than quarterly basis. Landlords are coming under pressure for change and Hermes has just agreed to this in certain cases.
- Retailers looking for investment will become more realistic, their business case more compelling in order to secure required funding in a ‘credit squeezed’ market and this could help to create more sustained, stable business development. The need for retailers to maintain good communication with their banks becomes even greater and helps to create a ‘no surprises’ culture.
- The new recessionary environment will lead to the acceleration of structural changes such as even greater economies of scale and new formats for different customer segments. The RTT agreed that we would see retailers focus their strategies around how to get the benefit of these. We are now also seeing the effects of convergence of information and communication technologies such as the internationalisation of operations and to extend them into new areas of retail services, such as financial services, health services and specialist leisure services. Retailers will be further encouraged to obtain and use information on individual consumer’s behaviour, as well as the items in the store.
- Good will get better and potentially bigger, whilst the weaker ones will not survive. Getting bigger brings the bonus of reduction in buying costs, energy costs and the ability to negotiate with property owners etc.
- The downturn will create the impetus to expand overseas, offsetting UK market pressures.
Conclusions
- It does not have to be all bad for all retailers, their stakeholders and customers.
- Since the early 1970s the market has been characterised by larger retailers in a concentrated market. Previous downturns have accelerated the rate of structural changes.
- These are the toughest trading times for UK retail since the early 1990s, or possibly the mid 1970s, and retail will emerge more competitive than ever. Innovation becomes more critical when the environment becomes uncertain.
The current downturn will lead to:
- A shift in power from retailers to consumers;
- An enhancement of the retail experience;
- Increased globalisation of retail;
- More efficient retailers;
- New, ground breaking strategies
Date Published: 9/1/2008 5:20 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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