Following its July sitting, the KPMG/Synovate Retail Think Tank (RTT) revealed that:
- The state of retail health in the UK in quarter 2 improved as predicted for the third quarter in a row. However the amelioration remains slow and only two out of three drivers of retail health showed improvement over the previous quarter;
- The RTT’s Retail Health Index (RHI) eased upwards; this time by 1 point to 86;
- The consensus among RTT Members is that the positive health trend is not expected to continue into quarter 3, but will flatten out with the RHI holding at 86. The ongoing volatility of market and economic conditions was reflected in a noteworthy spread of opinion about quarter 3 amongst Members.
- Quarter 2’s advance was driven by an unspectacular growth of demand and gains from the continued purge on business costs.
- Despite a slight improvement in margins to come, as retailers gear up for the VAT rise in January, the RTT expects demand and costs to be neutral to health in quarter 3.
The Retail Health Index compiled by the KPMG/Synovate Retail Think Tank
Tim Denison, Synovate, comments: “Retailers are a key bellwether of the consumer economy. Thus it is good news that the state of retail health has been recovering since the final quarter of 2009 and that retailers have, in the main, come through the recession remarkably well. However, retailers are not out of the woods yet, and the progress seen in the first half of 2010 will stall going into quarter 3, as retail demand enters a stasis period. On the upside, the future VAT rise will give retailers an opportunity to review their pricing strategy from now until the new year, which, in the short term, could benefit margins and also provide a smooth transition into 2011 when customers may be more fearful of step changes in prices.”
The RTT on Demand: Marginally positive to health quarter 2, slackening to neutral into quarter 3
Nick Bubb, Arden Partners: “Quarter 2 was a volatile period on the High Street and difficult to assess, not least because of the general election, World Cup and emergency budget. The football certainly boosted TV sales, but may simply have brought business forward from the autumn. Food sales appeared to pick up, but in Non-Food, with hot weather and sporting events keeping people out of the shops, it was often “one day up, one day down” – a zero sum gain. With many retailers just trundling along, there was more regional disparity, with Scotland and the North-East held back by public sector job fears, but with London and the South-East boosted by tourists and the recovery in the City. Consumer confidence levels have marginally deteriorated over the quarter, although such measures are often not a good guide to actual consumer spending levels.”
Neil Saunders, Verdict: “We expect to see a change in quarter 3. London is likely to continue to be stronger than elsewhere but how will consumers react to downward pressures on disposable income? Will they draw down savings before tightening belts; cut back on social spend before they cut back on shopping or reign in spending during quarter 3, perhaps in anticipation of a bigger spend pre the VAT rise in quarter 4? Flattening house prices and other vulnerabilities could prompt changes in mindset and behaviour, particularly by those dependent on the public sector.
Helen Dickinson, KPMG: “Comparatives are going to be tougher in quarter 3 and with so much going on, the media continues to play a key role to play in shaping consumer confidence. Looking ahead, we remain very concerned about the potential volatility of demand in quarter 3.”
The RTT on Margins: Neutral impact on health in quarter 2 with prospects of improvement in quarter 3, albeit as a spin off of the impending VAT rise
Richard Lowe, Barclays: “Shipping costs have risen significantly, as capacity has been taken out. The recent volatility in the Dollar and Euro has made margin management more difficult.”
John Dawson, University of Edinburgh: “Overall there was less promotional activity and some reported margins are showing improvement. However, various sectors are suffering pressures from every direction, and needing to push through price rises to the consumer.”
Vicky Redwood, Capital Economics: “Retailers will start quietly pumping up margins to finance the impending VAT increase, giving many a ‘sweet spot’ before the tax kicks in next year. Sectors will vary but fashion retail is likely to be the area with the biggest, most well disguised, price rises.”
The RTT on Costs: Costs slightly better than expected; positive impact on health in quarter 2, but will slump to neutral in quarter 3.
Mark Teale, CB Richard Ellis: “The decline in market rents has almost bottomed out now but with some marked regional differences. London continues to buck the trend with some modest growth in absolutely prime locations. There are winners and losers on the rating side following April’s reassessments, again with significant regional biases.Like for like costs are likely to remain flat but labour productivity gains are now harder to find and so there is little further relief to be had.”
| Demand | |
| Retail Sales | |
| Total retail sales across the quarter as measured by the BRC-KPMG Retail Sales Monitor rose by an average 2.2%, down from 4.2% in quarter one. Like-for-Like sales were flat across the quarter; down from the 2.1% seen in quarter one. Non food and food growth rates have now equalised after non-food outperforming food in quarter four. Non-food, non store sales rose 16.9% marginally up from 15.9% in March. | |
| Inflation | |
| Headline consumer price inflation measure rose at the start of the year, increasing from 2.8% in December to 3.5% in January, primarily reflecting the VAT rise. After falling back to 3% in February it rose to 3.7% in April and ended the second quarter at 3.2%. Food prices were up 1.9% in June as measured within the CPI. The index of shop prices measured by the BRC-Neilson index reported a 1.5% rise in shop prices in June, with food prices up by 1.7% (up from 1.2% in March). Non-food shop price inflation is 1.4% in June after rising to 2.0% in April. | |
| Consumer confidence | |
| The GFK composite consumer confidence index has marginally deteriorated across the quarter to -19 from -15 in March. This is marginal, and of late this measure has not proved a useful indicator of future demand levels, although it’s interesting that it has not moved out of the -15 to -19 range since last September. | |
| Borrowings/Savings | |
| Credit card borrowing rose marginally in April and May. Borrowing on personal loans/overdrafts fell in April and only partly recovered that fall in May. The level of unsecured debt at around 27% of income remains high (although it has fallen from its peak of 29%). 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 11.1% in the first quarter of 2008, to 6.4% in quarter one. (sources: Bank of England, National Statistics and Capital Economics). Real disposal incomes rose by 0.4% q/q in Q1, with the annual growth rate rising from -0.7% to 2.1%. The household saving rate (the proportion of disposable income being diverted into savings or reducing credit card debt rather than the spending) fell from 7.2% to 6.9% in quarter four, but remained broadly in line with its long-run average. | |
| House prices | |
| House prices were up 8.7% on a year earlier in June, significantly better than the annual rate of decline in June 2009 of 9.3%. (source: Nationwide). House prices in June are now 12% above their trough in February 2009. Mortgage approvals were broadly unchanged at about 50,000 between March and May. | |
| Unemployment | |
| The labour market continued to improve over the quarter. Employment posted a 160,000 rise in the three months to May, the biggest increase so far during this recovery. The number of people claiming jobseekers allowance fell by 84,000 over the second quarter, a bigger fall than the 57,000 drop seen in Q1. The claimant count now stands at 1.46m. The wider ILO measure of unemployment also fell during the quarter, but to a lesser extent. One of the major uncertainties for the next few years is the scale of public sector job losses and the ability of the private sector to compensate. | |
| Margins | |
| Exchange rates | |
| The pound ended the quarter at approximately $1.47 and €1.22 to the dollar and euro respectively. This compares to average rates of $1.55 to the £ and €1.14 to the euro in the same quarter of 2009. The euro-zone debt crisis has therefore benefited sterling against the euro, although the increase has reversed only a small part of the pound’s previous fall. The impact of sterling’s ongoing weakness will impact clothing retailers most significantly, and the need to manage currency exposure will remain key. | |
| Producer price inflation | |
| Inflation in producer prices (‘PPI’: the prices that retailers pay to manufacturers – source ONS) remained at earlier in the year levels of about 5% across the quarter. Food PPI inflation was 4.3%, compared to 0.7% in March.
Output prices for non-food are now rising at an annualised rate of 5.1%, up from a rise of 3.6% in March. |
|
| Costs | |
| Rent | |
| Based on CBRE’s monthly index, the falling retail market rents across all retail have bottomed 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 March falls. Standard shop rents are still seeing the highest falls. | |
| Utilities | |
| Annual gas and electricity prices continued to fall compared to a year ago, with deflation averaging 6.2% and 1.2% respectively in the quarter. But this compared to bigger falls of 6.2% (gas) and 7.8% (electricity) in the first quarter. The oil price ended the second quarter at $79pb, down from $83pb at the end of quarter one. It 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 April show an annual change of 4.5% including bonuses, above the 0.7% 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: 7/1/2010 4:55 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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