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Retail Think Tank

Retail health is likely to deteriorate again given the uncertainties which lie ahead says Retail Think Tank

– although it finally started to improve at the end of 2009 –

Following its January sitting, the KPMG/Synovate Retail Think Tank (RTT) revealed the following:

  • The state of retail health in quarter 4 improved for the first time since quarter 1 2007, after nine consecutive quarters of decline, with all drivers of health having a positive impact for the first time since the RTT was formed;
  • The Retail Health Index ( RHI ) improved by 2 points to 84;
  • The improvement will continue into quarter 1,with the RHI expected to rise 1 point to 85, although the rate of improvement in health will slow from that in quarter 4;
  • The impact of demand will be less beneficial to health in quarter 1 & Costs will continue to be a positive influence, but the impact of margins will be neutral.

Richard Lowe, Barclays, summarises the thoughts of the RTT:

“Given the poor trading environment for most of 2009, the sector performed exceptionally well in quarter 4. There is a good case for some of this momentum to continue into quarter 1. However, there are several unknowns ahead which could destabilise or reverse the process. These include house prices possibly falling again, rises in or extension in the scope of VAT, higher interest rates, more direct taxes and the impact of the reversal of the £200 billion pumped into the economy via quantitative easing.”

A measure of the health of UK retail: Retail

Health Index

RHI Jan 2010

RTT members comment on the latest Retail Health Index findings:

The RTT on Demand: Strong in quarter 4, less beneficial in quarter 1

  • Helen Dickinson, KPMG: “After a lacklustre November, the quarter was driven by December, particularly the last post-Christmas week.  Non-food outperformed food across the quarter for the first time in 2009.  Having tightened their belts over the year, those still in employment took the opportunity to spend some of their higher disposable income.
  • Vicky Redwood, Capital Economics: “There was some pulling forward of spending due to the VAT increase but its importance is debatable.  The long election campaign will likely delay any significant detrimental impact on retail spending until after quarter 1 but sentiment could shift at any time.”
  • Prof. John Dawson, Universities of Edinburgh and Stirling: “Timing is the key question – to cause a shift in consumer sentiment from its current path needs a trigger. Exactly what this will be or when it will hit are the big unknowns.”

The RTT on Margins: Positive impact on health in quarter 4, neutral in quarter 1

  • Nick Bubb, Arden Partners: “Widespread and heavy discounting did not occur despite lurid headlines to the contrary – most retailers went into the final quarter of 2009 with tightly managed stock and an improved supply chain.”
  • Tim Denison, Synovate: “We will see ongoing better management of markdown and promotional activity, given the cleaner stock position at the beginning of the year.  However, input price inflation will continue to outpace price increases being passed on to the consumer and some retailers will absorb the VAT increase, others having already increased prices before the change took effect.”

The RTT on Costs: Ongoing positive impact on health

  • Mark Teale, CB Richard Ellis: “Strong sales in quarter 4 provided a benefit of higher productivity and many retailers are continuing cost reduction programmes into 2010 including an ongoing shift to part-time with people leaving not being replaced.  Market rents continue to fall marginally but predominantly in poor secondary and tertiary sites.”

 

Demand
Retail Sales

Total retail sales across the quarter as measured by the BRC-KPMG Retail Sales Monitor rose by an average 5.4%, up from 3.7% in quarter three.  Like-for-Like sales rose 3.3% across the quarter; up from 1.6% seen in quarter three.

Non food sales have outperformed food since September.  Non food grew by 6% in total sales terms and 3.8% on a like-for-like basis in the final quarter.  Quarter four was significantly stronger than any other quarter in 2009.

Non-food, non store sales rose 26.5% up from 11.9% in September.

Inflation

Headline consumer price inflation measure has started to rise again, reaching 2.9% in December, up from 1.1% in September and although it is widely expected to rise above 3% at the start of 2010, it should remain well below its high of 5.2% in September 2008.

Food prices were up 1.6% y/y in December as measured within the CPI, up from 1.1% in September.  However, the index of shop prices measured by the BRC-Neilson index reported a 2.2% rise in shop prices in December, with food prices up by 3.7% (well below the peak rise in food prices of 10% we saw in August 2008 but above the rates of recent months which have hovered around 2.5%).

The fall in shop prices in non-food has reversed and following a comparative with December 2008 when VAT was reduced, and were up 1.4% on a year earlier (compared to a fall of 2.4% in December 2008).

Consumer confidence

The GFK composite consumer confidence index has deteriorated across the quarter to -19 from -16 in September.  This deterioration in outlook does not bode well for 2010, although of late this measure has not proved a useful indicator of future demand levels.

 

Borrowings/Savings

Unsecured borrowings, excluding borrowing on credit cards, continued falling across the quarter, showing a completely different trend to the historic long run average of 11% growth.

The level of unsecured debt at around 26% of income remains high (although it has fallen far from its peak of 29%) and the serviceability of households’ overall debt measured through mortgage and unsecured interest payments as a percentage of income has continued to fall from its peak of 10.9% in the third quarter of 2007, to 6.9% in quarter three. (sources: Bank of England, National Statistics and Capital Economics).

With interest rates now at historically low levels, disposal incomes are still up on a year ago.  However, much of this additional disposable income is being diverted into savings or reducing credit card debt rather than the spending, with the saving rate increasing to 8.6% of income in quarter three, up from 7.6% in quarter two – it is now ahead of the long term average of 7.3%.

House prices

The decline in house price has reversed and prices were up 5.9% on a year earlier in December, significantly better than the annual rate of decline in February of 17.6% which was the largest drop in the history of the series (source: Nationwide).

Mortgage approvals edged up to 61,000 in November, an 88% increase on a year earlier.  House prices in December were still 12% below their peak in summer 2007.

 

Unemployment

Levels of unemployment have stabilised over the quarter.  UK ILO employment rose marginally by 21,000 to 2.5 million between September and November, the highest total since March 1995.  The number of people claiming jobseekers allowance hovered at 1.6 million across the quarter, according to the Office of National Statistics.

One of the major uncertainties for 2010 and the future government fiscal policy relates to the public sector employment following likely rationalisations and spending cuts after the election.

Margins
Exchange rates

The pound weakened slightly against the $ and euro ending the quarter at approximately $1.62 and €1.12 respectively.  This compares to average rates of $1.57 to the £ and €1.19 to the euro in the same quarter of 2008. Imports priced in $ are therefore around 6% more expensive than this time last year, whilst imports priced in euros are slightly cheaper.

The impact of sterling’s ongoing weakness will impact clothing retailers most significantly, and the need to manage currency exposure over 2010 will remain key.

Producer price inflation

Inflation in producer prices (‘PPI’: the prices that retailers pay to manufacturers – source ONS) rose towards the end of the quarter, reaching an annual rate of 3.5% in December, reflecting in part an inflationary input as the VAT increase annualised.

Food PPI inflation was 1.8%, similar to the September rate, after creeping up to 2.4% in November.  It remains lower than the increase in food shop prices.

 

Producer

Price inflation – non food:

Output prices for non-food are now rising at an annualised rate of 2.6%, up from a rise of 1.3% in September.  Non food shop prices are actually still rising by a lesser amount, reflecting the ongoing detrimental impact on margins.

 

Costs  
Rent

Based on CBRE’s monthly index, retail market rents across all retail have continued to fall when compared to a year earlier, and are now over 7% below last year in the standard shops and shopping centre categories.

Shopping centre rents are now seeing the highest falls.

 

Utilities

Annual gas and electricity price deflation rates bottomed out with annual price falls of 5.9% and 8.2% respectively in the quarter, compared to rises of 0.7% (gas) and 2.2% (electricity) in the third quarter.  The oil price crept back up to $80p.b at its high point by the end of quarter four, from $78 at the end of September but still remains well down from $140 p.b at the end of June 2008.

We expect this benefit to now begin to reverse as January 2009 represented the low point in the last cycle when the price was $36p.b.

People

Costs

There are no current statistics available for retail average earnings – the latest figures from Thomson Datastream for October show an annual change of 3.6% including bonuses, above the 1.6% rate for the overall economy.

The number of retailers announcing job cuts has fallen although we expect a number to implement further rounds of redundancies during the course of 2010.

Date Published: 1/1/2010 5:10 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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