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Retail Think Tank

Retail health edges upwards in quarter 1, but Retail Think Tank remains cautious over the outlook

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

  • The state of retail health in quarter 1, as predicted, improved for the second quarter in a row. However unlike quarter 4 2009, not all drivers of retail health showed improvement over the previous quarter.
  • The Retail Health Index (RHI) edged upwards by 1 point to 85;
  • The positive trend of quarter 1 is expected to continue into the next quarter, reflected in a forecast 1 point rise in the RHI to 86, although the second half of the year remains a cause of concern to the RTT;
  • It is believed that stronger demand will be the key driver of improved health in quarter 2. The effects of both Costs and Margins are forecast to be neutral.

Helen Dickinson, KPMG, summarises the thoughts of the RTT: “Retailers somehow managed to navigate their way successfully through the wintry weather, the VAT rise and the economic uncertainties in quarter 1. The big issue is whether pre-election jitters will trigger a downturn. The RTT believes there is no reason for this to happen, but it will be only a matter of time thereafter when the tough decisions on the public deficit will begin to take their toll. For example, given that none of the political parties have ruled out a rise in VAT this could impact the sector before the autumn.

A measure of the health of UK retail: The RTT’s Retail Health Index

RTT members comment on the latest Retail Health Index findings:

The RTT on Demand: Moderately positive in quarter 1, continuing into quarter 2

  • Tim Denison, Synovate: “We shouldn’t underestimate how bad January was; because of poor weather, low stocks of sale goods and the VAT increase. Since then, trading figures have become stronger, albeit quite disparate, turning the quarter around. Shoppers haven’t simply sat on their hands, but have shopped strongly into spring.”
  • Nick Bubb, Arden Partners: The strength of food sales continues to decelerate reflecting a slowdown in price inflation. Interest rates remain low, and house prices stable. The key determinant of consumer retrenchment will be any future uplift in interest rates. Public sector cuts won’t impact in quarter 2 but, looking ahead, we remain concerned about demand in the second half, in particular quarter 4.”
  • Professor John Dawson, Universities of Edinburgh and Stirling: “Employment levels remain at risk, but won’t upset performance in quarter 2. Though confidence might drop in the quarter, it won’t impact on spending. That will only come when people feel it in their pockets. The World Cup will boost demand towards the end of the quarter, particularly for food, beverages and televisions.”

The RTT on Margins: Neutral impact on health in both quarters 1 and 2

  • Richard Lowe, Barclays: “Retailers have ‘played a blinder’ forcing much of the pain of exchange rates upstream to suppliers and higher prices downstream to buyers. Many retailers pre-planned the VAT rise thus neutralising its impact. Despite many retailers’ reliance on the Far East, the impact of the weak pound has largely worked its way through now and the hit has been absorbed.”
  • Vicky Redwood, Capital Economics: “In quarter 2 we may see retailers building in a buffer for the likely rise in VAT, realising a possible ‘sweet spot’ before the higher rate hits. If there is a hung Parliament, the pound could drop sharply, but this may have been taken it into account already by the markets. And a decisive victory by either party could even prompt a significant bounce in the pound. So while there are many uncertainties, they run in both directions.

The RTT on Costs: Positive impact on health in quarter 1, but neutral in quarter 2

  • Mark Teale, CB Richard Ellis: “Retailers are still taking costs out; shedding jobs in particular. Despite a harsh winter, higher utilities and distribution costs were absorbed without impacting significantly on retail health. Rents are still falling, but the rate of decline has bottomed out. We expect them to remain weak, and expansion sluggish. Rate revaluations this month will be a matter of swings and roundabouts with the hardest hits in the South East. Going forward, we acknowledge that opportunities are becoming more limited to make more cost efficiencies although retailers are still looking!”

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:

Demand
Retail Sales

Total retail sales across the quarter as measured by the BRC-KPMG Retail Sales Monitor rose by an average 4.2%, down from 5.4% in quarter four. Like-for-Like sales rose 2.1% across the quarter; down from the 3.3% seen in quarter four. Non food and food growth rates are now equalising after non-food outperforming food in quarter four. Non food grew by 4.1% and food by 4.3% in total sales terms. Non-food, non store sales rose 15.9% in March down from 26.5% in December.

Inflation

Headline consumer price inflation measure rose at the start of the year, increasing from 2.8% in December to 3.5% in January. But this primarily reflected the VAT rise. What’s more, inflation fell back to 3% in February. Food prices were up 0.9% in February as measured within the CPI, down from 1.4% in December. The index of shop prices measured by the BRC-Neilson index reported a 1.2% rise in shop prices in March, with food prices up by 1.2% (down from 3.7% in December). Non-food shop price inflation has slowed to 1.3% in March down from 1.9% in January.

Consumer confidence

The GFK composite consumer confidence index has improved across the quarter to -15 from -19 in December. This is marginal, and of late this measure has not proved a useful indicator of future demand levels.

 

Borrowings/Savings

Unsecured borrowing, both on credit cards and personal loans/overdrafts, rose in quarter. However, the rises were modest. The level of unsecured debt at around 25% of income remains high (although it has fallen significantly 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 6.7% in quarter four. (sources: Bank of England, National Statistics and Capital Economics). With interest rates continuing at historically low levels, disposal incomes are still up on a year ago although the latest figures for quarter four show real growth having fallen to 1.5%. The household saving rate (the proportion of disposable income being diverted into savings or reducing credit card debt rather than the spending) fell from 8.4% to 7% in quarter four, but remained broadly in line with its long-run average.

House prices

House prices were up 9% on a year earlier in March, significantly better than the annual rate of decline in February 2009 of 17.6% which was the largest drop in the history of the series (source: Nationwide). House prices in March are now 12% below their peak in summer 2007. Mortgage approvals fell again to 46,000 in February, but this was still a 17% increase on a year earlier.

 

Unemployment

Levels of unemployment have stabilised over the quarter. UK ILO unemployment fell marginally by 33,000 to 2.5 million between October and January. 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 rationalisation and spending cuts after the election.

Margins
Exchange rates

The pound ended the quarter at approximately $1.52 and €1.12 respectively. This compares to average rates of $1.44 to the £ and €1.10 to the euro in the same quarter of 2009. Currency movements over the past year as a whole have therefore been relatively small, although sterling remains about 25% below its peak on a trade-weighted basis. 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 across the quarter, reaching an annual rate of 5.0% in March again. Food PPI inflation was 1.2%, compared to 1.9% in December.

 

 

Producer price inflation – non food

Output prices for non-food are now rising at an annualised rate of 3.6%, up from a rise of 2.6% in December. Non food shop prices continue to rise by a lesser amount, reflecting the ongoing detrimental impact on margins.

 

 

Costs
Rent

Based on CBRE’s monthly index, the falling retail market rents across all retail have begun to bottom out compared to a year earlier, and are now around 7% below last year in the standard shops and shopping centre categories. Similar to the December falls. Standard shop rents are now seeing the highest falls.

 

Utilities

Annual gas and electricity price deflation rates bottomed out with annual price falls of 7.1% and 8% respectively in the quarter, compared to a fall of 5.9% (gas) and 8.2% (electricity) in the fourth quarter. The oil price continued to creep up to $81p.b by the end of quarter one, close to the $77 seen at the end of December but still remains well down from $140 p.b at the end of June 2008.

People costs

There are no current statistics available for retail average earnings – the latest figures from Thomson Datastream for January show an annual change of 2.8% including bonuses, above the 1.1% rate for the overall economy. The number of retailers announcing job cuts has fallen although we expect a number to continue to implement further rounds of redundancies during the course of 2010.

Date Published: 4/1/2010 5:00 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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