For immediate use Wednesday, 19th October 2011.
Following its October sitting, the KPMG/Synovate Retail Think Tank (RTT) concluded that:
- The state of retail health dipped again in quarter three returning to the same downward trajectory seen in quarter one.
- The Retail Health Index (RHI) dropped two points to 82 in the quarter, returning it to the level recorded during the depths of the original banking crisis and recession, in quarters 2 and 3 2009,
- Falling demand hit retail health the hardest last quarter, with shrinking margins also having a negative impact.
- Most significantly, RTT Members expect the downward trend in retail health to continue at the same rate in quarter 4, plunging the RHI to 80, its lowest value since the RTT first sat in quarter one 2006 (see graph below).
- Declining margins is the RTT’s main cause for concern to retail health in the coming quarter. Demand will still be in trouble, it believes, but it is not the RTT’s key anxiety in quarter 4.
- During their intensive deliberations, Members of the RTT emphasised that the abnormally high number of destabilising factors at play are creating a lot of uncertainty as to the rate of decline in quarter 4.
Nick Bubb, Arden Partners: comments: “The debate as to the relative strengths of food retail versus non-food retail intensified in quarter 3. We had previously seen some significant differences between the relative health of those retailers selling ‘must buy’ items such as food and those selling ‘might buy’ items such as fashion and household goods etc. However, there is now very clear evidence that food demand is falling, margins are weakening and weekly shopping patterns are changing as consumers buy little and often to cut waste, shop more locally to save vehicle fuel and shop around more to compare prices and offers. Looking forward, my key messages to all retailers would be; Don’t Panic; but Christmas will not be experienced at full price!”
Tim Denison, Synovate said: “We are very conscious that our analysis of retail health is gloomy and the last thing we want to do is talk the sector into a further state of decline. Our fundamental concern about quarter 4 rests on the fact that there are a lot more moving parts to the current scenario than of late, which inevitably heightens the level of risk to the sector at its most critical time of the year.”
Neil Saunders, Decipher Retail said: “The good news is that weaker retailers are not likely to fail before Christmas. They will have already struck deals with landlords, suppliers and bankers and will look to benefit from the usual massive Christmas uplift to sales. However, come early January/the last 2011 quarterly rent day, there is little doubt that some weaker retailers will very quickly find themselves in Carey Street. The face of retail in Britain is undoubtedly changing, and faster than we’ve seen for a generation. In quarter 4 we’ll see lower stock levels than for years and consequently it’s likely that most retailers will resist going to promotion or Sale for as long as possible. However, as one weakens others will surely follow. Widespread Sales across entire ranges are unlikely, except in those most deferrable of purchases; furniture and other big ticket items such as electronics, where many bargains will be available.”
The RTT on Demand:
Demand was more detrimental to health in quarter 3 than in quarter 2, as spending sentiment seems attacked on all fronts, led principally by the progressive squeeze on disposable income and travel costs rather than the broader macro-economic issues. Demand is expected to continue to have a negative bearing on retail health in quarter 4, though not to the same degree as this quarter.
- Falling demand continues to hurt the once immune food sector and shopping patterns are changing in response to pressures. Smaller weekly shops supplemented by top-ups during the week are reducing wastage levels and saving money.
- Reduced petrol/diesel sales point to fewer trips to out-of-town retail parks/megamalls.
- Looking to the next quarter, more temporary jobs and overtime in the run up to Christmas may help stimulate demand somewhat by adding some extra spending capacity. There is a sense that Christmas will provide some consumers with an excuse to spend a bit more than they have done of late.
- Those members of the younger generation, in work but frozen out of house buying by hard-to-get mortgages, are the group most likely to increase personal spending at Christmas this year
- The new i-Phone 4S, keyboard-less Kindle, tablet computers and much publicised role-playing games will help stimulate demand.
- Set against this, the weather was very favourable in October and November last year with a sustained cold snap encouraging seasonal sales. This makes for some testing year-on-year comparisons; albeit everyone just remembers the debilitating effect of the snow storms at the start of December instead. For more on the effects of weather on retailers please see the forthcoming RTT White Paper, “Is the weather just another excuse for poor performance?” here:
- People will be tempted to leave their shopping to the last minute this year, fuelled by anticipation of blanket pre-Christmas Sales and by Christmas Day falling on a Sunday.
Helen Dickinson, KPMG said: “There does seem to be an inverse historical correlation between yearly retail success or failure and Christmas activity. Since this has been a decidedly poor year for retail health, we might surmise that this will be an OK Christmas for retailers. This explains the RTT’s belief that the fall in demand will be somewhat ameliorated albeit this may well come at the expense of margins. However, once Christmas is done, the downturn will likely accelerate again.”
The RTT on Margins:
- Margins continued to be squeezed in quarter 3. Significant pressure on margins is now being seen throughout the supply chain from field to store. Even retail stars like John Lewis are reporting pressures on their margins, fuelled by their price matching promise. In quarter 4 margins become the RTT’s main cause of concern. In quarter 3 discounting was largely on plan and therefore already built in to retailers’ financials. In quarter 4 the rate of discounting is likely to grow and more of it will be reactive and unplanned.
- The effects of product engineering, e.g. putting less content into the same size packaging in order to offer the product at the same price, have largely worked through the system now leaving little opportunity for more of the same.
- The pressure on prices of some commodities, the weak pound and the higher VAT rate continue to have impact.
- Seeking out promotions and special prices has become part of the shopper’s everyday psyche. According to Nielsen approximately 40 per cent of all groceries going through the tills are now on some sort of promotion or special offer.
- The RTT considers the so-called price wars amongst leading grocers to be little more than skirmishes, playing a marketing game to win over and reassure regular shoppers. It does, however, expect them to sharpen their pencils further in the next quarter, putting market share above margin.
- Christmas campaigns will again be promotion-driven, but more conservative stock piling may militate against offloading at giveaway prices.
The RTT on Costs:
Well contained and so neutral to health in quarter 3 and forecast to remain largely neutral in quarter 4
- On the positive side corporate taxes are falling.
- This is somewhat offset by rises in the minimum wage.
- Many retailers are appealing to their suppliers to reduce costs and this is set to continue.
- Property market rents are still flying high in super premium sites. This is not the case elsewhere where more and more retailers are renegotiating the terms of their leases and switching due dates for rental payments from quarterly to monthly.
- The consolidation costs of becoming multi-channel continue to work their way through operations.
Mark Teale, CB Richard Ellis said: “Rents in super prime stock and London’s West End are still remarkably strong. Many larger centres, particularly the big out-of-town regionals and major city centre schemes, have very low vacancy rates. It is no accident in this respect that Westfield Stratford recently opened 95% let. Due to the sharp downturn in speculative development activity in 2007, there is now only a trickle of modern high-productivity shopping space coming through. What little there is gets snapped up very quickly. The high vacancy rates reported in the press are largely concentrated in smaller secondary/tertiary trading locations, many of which are suffering more from trade diversion to out-of-town shopping facilities, and other town centres, than weakening consumer demand per se. Much of the underlying vacancy problem is stock obsolescence or trade diversion related.”
Richard Lowe, Head of Retail & Wholesale Barclays Corporate, said: ““The last three months of the year are retail’s golden quarter and management teams will be working very hard to make sure consumers get into the Christmas spirit early and spend. The banks remain supportive of the high street, even in these challenging times. The fundamentals of the sector are strong – retail is and will remain an important part of the British economy.”
In summary, Helen Dickinson added: “The health of the retail industry is now heading below its lowest point since the RTT first started its deliberations in January 2006. Consumer sentiment is heading downwards too. However there will be those consumers, and let’s hope it’s a sizeable percentage, who will decide that it is worth enjoying Christmas properly after such a tough year, and temporarily put aside the pressures on spending. It is to those whom the retail industry must appeal and tailor their offers this year. Yes there will be losers as well as winners amongst retailers, but even the losers should be able to hold on until the Christmas decorations are put away and the cold reality of January makes itself felt. Those who survive will be keener and meaner.”
Date Published: 10/1/2011 4:35 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
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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