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Retail Think Tank

UK Retail is now firmly back in recession says Retail Think Tank; with stronger downturn in health expected in quarter 3

For immediate use Friday, 29th July 2011

Following its July 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 2, sinking a further point to 84, as predicted during the RTT’s April sitting.
  • This fall was less severe than the two point fall in quarter 1 salvaged to some extent by a late, sunny, Easter and the Royal wedding.
  • The mini revival in retail health across 2010 has now well and truly reversed.
  • The further decline in health in quarter 2 was attributed largely to yet further softening of demand as well as new, more vigorous pressures on margins as retailers struggled to shift stock with earlier than normal promotions and sales.
  • Once again the impact of costs on health, the third factor considered by the RTT, was largely neutral thanks to effective management by retailers.
  • When there is a reason to spend, consumers are prepared to oblige but without the benefit of extra bank holidays or national events to look forward to the RTT sees little sign of any recovery in retail health in the short to medium term.
  • RTT Members expect a downward acceleration in retail health of two points to 82 in quarter 3. This equates with the state of health of retail in the middle of 2009; the darkest days of the banking crisis.

Summary comment:

Neil Saunders, Verdict Research said: “The only good news for retailers in quarter 2 was a sunny late Easter (Easter Sunday on April 24th was the latest for 11 years) and the Royal wedding at Westminster Abbey on Friday 29th April. However, any expectation that they would boost trade for more than a couple of weeks was short-lived. May and June showed how weak the underlying trend remains. Pressure on disposable income with new, recently announced rises in utility bills has only hurt consumer confidence further and clearly many Britons are no longer regarding shopping as the pleasurable experience they once did.”


Retail Health Index

rhi-july-2011

Vicky Redwood, Capital Economics added: “CPI inflation fell slightly from 4.5% in May to 4.2% in June, as retailers brought forward their summer sales and ran heavy promotional campaigns to stimulate demand. Heavy discounting is likely to continue, damaging retailers’ profitability. That said, overall inflation is likely to start rising again, reflecting the forthcoming rises in utility prices and possible further increases in food prices. We expect headline inflation to peak at between 5% and 5.5%, before falling next year. This rise in overall inflation is likely to eat even further into consumers’ spending power. Accordingly, retailers will face a double low of weakening profitability and lower demand.”

Tim Denison, Synovate said: “Consumers are not in the position they were a few years ago to keep the economy buoyant. Footfall remains down by around 4% year on year, and it is difficult to see what will drive any immediate improvement now that the austerity measures are kicking in.  Of course, it is not all gloom and doom; some retailers are well on their game and will prosper against their weaker competitors. For others, including many smaller independents, the pressure remains firmly on.”

 

The RTT on Demand:

Slightly less detrimental to health in quarter 2 than quarter 1, mitigated only by a stronger April, but the pressures on demand are growing and May and June were both weak. The downward trend is likely to increase further in quarter 3

  • Food inflation has caused demand to falter in the food sector and non-essentials are suffering the effects of ongoing price increases.
  • Fewer foreign holidays may increase some regional demand slightly but the overall picture is not good.
  • The lack of ‘summer’ weather has merely added to the gloom for fashion retailers and all big ticket purchases remain under pressure. Many stores started their sales earlier in June, thinking perhaps that shoppers had a finite amount of money to spend and if they went to Sale early they were more likely to catch some of it.

 

Nick Bubb, Arden Partners: comments: “Demand is weak and May and June showed the underlying trend which will continue into quarter 3. It is likely that September; the back-to-school, end of the holidays, new ranges in the shops but not on Sale month, will be ‘kill or cure’. We will have to wait until then to see whether the austerity measures have permanently frightened shoppers.” 

 

The RTT on Margins:

As anticipated, margins were squeezed again in quarter 2; and the RTT does not expect the pressures to ease in quarter 3. Efforts to stimulate trade with early Summer Sales have impacted margins and even food retailers have been forced to increase the frequency and breadth of price cuts, planned promotions and sale offers.

  • Promotional activity was heavier than normal in quarter 2, with many going to Sale earlier in June. Headline inflation will have been reduced by June’s promotional activity.
  • Food retailers too are running multiple promotions and still have input cost increases to come through, though suppliers will burden much of the expense.
  • January’s VAT increase working through the year would ordinarily have been seen as ‘margin-enhancing’ but this effect has been mostly lost in the heavy discounting.

 

Helen Dickinson, KPMG said: “For retailers, particularly in non-food, the question has to be; where do we go next? After three years of falling retail health in 2007, 2008 and 2009 and one year of weak recovery in 2010, retailers are really running out of options as retail health plunges again. Whilst they can still adjust product, they are struggling to pass on increased prices and so margins are being sacrificed. Until now non-food has taken most of the pain, now the food retailers are being forced to join in.”

Prof. John Dawson, Universities of Edinburgh and Stirling, said: “Of course the pain is not just being felt by retailers, the suppliers are suffering too. They’re stuck between a rock and a hard place; subject to endless pressure from buyers and having their own margins squeezed by rocketing raw material costs and shipping charges.”

 

The RTT on Costs:

Neutral to health in quarter 2 and forecast to remain neutral in quarter 3

  • The main costs for retailers are human resources and property. They are both being controlled tightly by all, while stimulating demand and maintaining margin remain the main focus.
  • Pressure from utilities and fuel price increases continue to build and these costs will continue to affect many retailers as the year wears on.

 

Mark Teale, CB Richard Ellis said: “Occupational cost inflation remains sluggish. London remains a marked exception, but open-market shop rents in many secondary provincial trading locations are still weakening, albeit marginally. Rents in prime stock look reasonably firm however: a problem for chain traders on the expansion trail. Unlike the 1990s recession – and despite the recent administrations reported – there is currently no great overhang of high productivity space available for acquisitive retailers.  Vacancies remain heavily concentrated in the tertiary/poor secondary stock: symptomatic of broader stock obsolescence problems. Much of this space is no longer viable for chain trading purposes. Big-unit space in particular is in increasingly short supply.”

Richard Lowe, Head of Retail & Wholesale Barclays Corporate, said: “Costs are the sleeping giant and we’ve not really seen that monster stirring yet. In the meantime, whilst lending to retail businesses is still fairly healthy across all lenders and all sectors, it’s likely that business plans are now being viewed with far more consideration than was once the case. The rise in online sales and its many variants such as ‘click and collect’ is one positive development in an otherwise gloomy market. Cost benefits seem to be growing with economies of scale and as a result of retailer pressure on delivery companies and other essential third parties.”

 In summary, Helen Dickinson added: “The retail industry is now definitely in recession with retail health likely to fall back to the levels of the banking crisis by quarter 3. With further dark clouds on the horizon, such as threats to the stability of the Euro and the US dollar, none of the RTT members is feeling optimistic about retail in the short to medium term. It is however important to state that there are many very well-run British retailers for whom the current downturn will be just another test of their ability to survive and prosper and it is in them, and their incredible resourcefulness, that  we must place our trust for an eventual retail health recovery.  In the meantime, despite inflationary pressures and a higher VAT rate it is becoming even more a buyers’ market, for those with the spare cash to spend.”

Date Published: 7/1/2011 4:40 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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