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Retail Think Tank

Retail health hurt by falling demand and margins in quarter 1 says Retail Think Tank; further but less severe downturn in quarter 2 expected

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

  • The state of retail health, as measured by the Retail Health Index (RHI), fell in quarter 1, sinking two points to 85, one point further than predicted during the RTT’s January sitting.
  • The quarter marked the reversal of the mini recovery in retail health which had started in quarter 4, 2009.
  • The worse than expected decline was attributed largely to the softening of demand, brought about by consumers reining in spending in response to unforeseen increases in petrol prices on top of the drop in disposable incomes, as the gap between living costs and wage inflation grows.
  • The RTT was cognisant that the key Mother’s Day and Easter spending periods this year are 3 weeks later than last year (Easter Sunday on April 24th is the latest for 11 years) and that this will have had some negative impact on March retail spending relative to April.
  • Retail margins as expected also suffered in quarter 1, as retailers extended winter sales, absorbed the VAT increase and promoted more heavily.
  • RTT Members agreed that things are going to get worse before they get better and predict that the RHI will deteriorate a further point to 84 in quarter 2.
  • Concern was expressed that the end of quarter 2 might signal a turning point for the impact of costs on retail health, threatening to become negative after nine quarters of positive or neutral impact.
  • The members discussed the increasing pressures on retail, in particular the effects of inflation, much of it in the supply chain and the rising cost of raw materials such as cotton and crude oil, which is effectively beyond the control of the Bank of England. This will be the subject of the upcoming White Paper (register here: www.retailthinktank.co.uk to receive it upon release).

retail-health-index-2010

Retail Health Index

Summary comment:

Nick Bubb, Arden Partners: comments: “The first week of January was undoubtedly good for most retailers, but then the year’s traditionally quietest quarter took a downturn as the new realities hit home. We shouldn’t be too judgemental yet, as there is a timing effect due to the late Easter. I expect April to be a better month, but overall quarter 2 will be tough, with serious pressure on disposable income hitting much discretionary purchasing and consumers making different lifestyle choices for essentials, too.

Tim Denison, Synovate said: “This is crunch time. Footfall is down, consumer confidence is waning, disposable income is declining as high inflation bites and talk of interest rates going up jangles the nerves further. Retailers will need to be on their mettle to read and respond to shopper idiosyncrasies in the months ahead.”

The RTT on Demand:

More detrimental to health in quarter 1 than anticipated; downward trend likely to continue, but less steeply, in quarter 2

  • Volume demand wasn’t strong in quarter 1, particularly in food, causing leading supermarkets to react quickly by increasing their promotional activity to avoid market share loss to the discounters.
  • Better weather towards the end of the quarter saw an improvement in some non food sectors, particularly womenswear as Spring/Summer ranges hit the high streets.
  • The fear is that shoppers haven’t adjusted their behaviour fully yet and the rise in NI and tax changes on pay packets could have a further negative impact on retail sales in the second half of quarter two, after a stronger April, lifted by the combined impact of Easter, the Royal Wedding festivities and national holidays

Neil Saunders, Verdict Research said: “The impact of rising water rates, utility bills and vehicle fuel all coupled with job lay-offs, short-time working and the threat of more to follow have come home to roost for many. Demand is down and it took an unexpectedly big hit in quarter 1. Often in the past we’ve seen shoppers ignore bad news and carry on ‘saving the economy’, but this time they’ve actually retrenched somewhat and that’s bad news for retail.”

Vicky Redwood, Capital Economics added: “Retailers have been running heavy promotional campaigns to stimulate demand throughout quarter 1. However their hands are tied by inflationary pressures and hence this can hurt their own profitability. A small amount of inflation reflecting robust demand is good for retailers, but the high inflation at the moment instead reflects strong cost pressures.”

The RTT on Margins:

As anticipated margins were squeezed in quarter 1; trend likely to continue in quarter 2

  • Promotional activity was heavy in quarter 1, with a record 40% of food sales on promotion.
  • The level of unplanned marketing activity should be lower in April, but for the rest of the quarter much will depend on the buoyancy of demand.

Helen Dickinson, KPMG said: “Lower volumes remove much wriggle room for retailers when it comes to margins. This is particularly true for non-essentials and big ticket items such as furniture, electronics and DIY. However some food retailers are reporting slightly increased margins as they pass on cost uplifts. And this time around the big supermarkets have responded quickly to the heavy discounters by refining their product ranges and special offers long before they lost customers.”

Mark Teale, CB Richard Ellis said: “A late Easter and the royal wedding will undoubtedly provide a short term fillip  to margins in Q2 but is unlikely to result in a significant improvement over the quarter as a whole. On the property cost side, the polarisation between primary shopping on one side – predominantly the stock viable for chain retailing – and poor secondary/tertiary on the other seems, if anything, to be becoming even more pronounced. Stock shortages at the primary end continue to grow, particularly in relation to large units (a harbinger of occupational cost inflation to come). The steady migration of chain traders to higher productivity modern stock is however resulting in a growing tail of obsolescent shopping emerging at the tertiary end, hence the endemic vacancy problem in low productivity small-unit shop property.

The RTT on Costs:

Neutral to health in quarter 1 and forecast to remain neutral in quarter 2 though pressure is building.

  • Pressure on costs is ongoing, and while there is a lot of risk in minority areas, the core drivers of cost (labour and property) remain under control.

Prof. John Dawson, Universities of Edinburgh and Stirling, said: “Scale benefits kick in when the economy is under pressure so expect bigger retailers to handle costs better than the smaller, specialist chains. However, every retailer has the opportunity and incentive to renegotiate costs aggressively when trade is this tough which is why we feel that the impact of costs will be muted in both quarter 1 and quarter 2.”

Richard Lowe, Head of Retail & Wholesale Barclays Corporate, said: “With increased postal and vehicle fuel charges we can expect costs for online-only retailers to increase slightly more than for bricks and mortar retailers where they’re largely neutral to health. However ‘click and collect’ is working well for those with both platforms. It won’t surprise many that the three most searched terms in relation to retail enquiries through search engines during the last quarter were; ‘discount’, ‘offers’ and ‘coupons’.”

Looking forward, Richard Lowe added: “The upcoming second quarter will benefit from a later Easter this year than last, as well as the Royal Wedding. We expect the uplift this will create from UK-based shoppers, as well as from the expected flood of tourists, to be very welcome to retailers, but short lived. There’s no World or European Cup this year, and the Olympics are next, so it will be a long hard slog for many retailers into the summer.

“That said there will be opportunities for new and existing retail entrepreneurs to ‘seize the day’ and with proper finance, a well chosen and carefully sourced product range and a clear vision of what customers want, will thrive and prosper. They will create a new retail paradigm, one that is fit for these times of retrenchment.”

-Ends- 

 

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:

 

red_light Retail Sales

Total retail sales across the quarter as measured by the BRC-KPMG Retail Sales Monitor rose by an average 0.9%, down from 2.2% in quarter four 2010.  Like-for-Like sales fell by 0.8% across the quarter; down from an increase of 0.4% in quarter four.  Non-food outperformed food in January but has seen a deteriorating downward trend since then ending the quarter with a fall of 1.1% on a like for like basis.  Food was also down by 0.3% but this was largely driven by the timing of Easter purchasing falling into the quarter in 2010.  Across the industry volumes fell in the quarter.  Non-food, non store sales rose 7.5% on a year ago in March, giving a weighted average for the last 12 months of 15.3%.

red_light Inflation

The headline consumer price inflation measure continued to rise, reaching 4.4% in February before falling to 4.0% in March.  The index of shop prices measured by the BRC-Neilson index reported a 2.4% rise in shop prices in March, with food prices up by 4.5% on a year earlier (up from December’s rate of 4.0%).  Non-food shop price inflation has risen from 1.1% in December to 1.5% in March.  Rises of 3-4.5% in the shop prices of DIY, gardening and health and beauty products being offset by falling prices of clothing and electricals according to the SPI.

amber_light Consumer confidence

The GFK composite consumer confidence index has ended the quarter at -28, having started 2011 at -21.  This measure has continued not to prove a particularly useful indicator of future demand levels, although it’s interesting that this level is similar to that in March 2009 – one of the lowest points of the recession.

amber_light Borrowings/Savings

Credit card borrowing continues to rise but at a slower rate of about 3%. This is no longer being offset by a marginal fall in borrowing on personal loans/overdrafts. The level of unsecured debt at around 22% of income continues to remain 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 edged down from 7.1% in quarter three to 7.0% in quarter four, well below its peak of 11.1% in the first quarter of 2008. (sources: Bank of England, National Statistics and Capital Economics).  Real disposable incomes rose by 0.5% q/q in quarter 4, and the annual growth rate of incomes was negative at -1.1%. The household saving rate (the proportion of disposable income being diverted into savings or reducing debt rather than being spent) was broadly unchanged at about 5.5%, and was still below its long-run average.

amber_light House prices

House prices continue to show marginal year on year increases (source: Nationwide) but early 2010 was the lowest point for prices since the beginning of the financial crisis.  Mortgage approvals were broadly unchanged at about 47,000 between December and February.

 

amber_light Unemployment

The labour market trod water over the quarter. The claimant count ended the quarter about 4,000 lower than at the end of the fourth quarter, a marginal change. The claimant count now stands at 1.45m. Employment rose by 143,000 in the three months to February, but this only just offset strong growth in the workforce (i.e. people in or looking for work). 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
green_light Exchange rates

The pound ended the quarter at approximately $1.60 and €1.13 to the dollar and euro respectively.  This compares to rate of $1.52 to the £ and €1.12 to the euro at the end of the same quarter of 2010.

 

red_light Producer price inflation

Inflation in producer output prices (source ONS) continued to rise across the quarter from 4.2% in December to 5.4% in March.  This was driven primarily by food products up 7.4% and petroleum products up 17.9% in March. Input price inflation rose to 14.6% in March up from 13.1% in December.  This was driven by crude oil up 34.3% and imported metals up 22.4%.

 

Costs  
green_light Rent

Based on CBRE’s monthly index, market rents continued to decline across all retail formats by about 2%.  Prime space continues to be in demand despite vacancy rates continuing to increase.

 

green_light Utilities

Gas prices rose compared to a year ago in February for the first time since August 2009. Electricity price inflation over January and February averaged 2.4%. The oil price ended the first quarter at $117pb, some way above the $96pb level at the end of quarter four. Wholesale gas prices were broadly unchanged over the quarter, though.

green_light People costs

Average earnings in the retail, wholesale, hotels and restaurants sector rose at an average rate of just 0.2% in the three months to February, compared to 1.1% in the three months to November and a bit weaker than the 2.1% growth rate in the overall economy.

 

 

Date Published: 4/1/2011 4:45 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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Max Bevis, Tank PR

Tel: +44 (0)1159 589 840

Email: max@tankpr.co.uk

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