- The health of UK retail improved in Quarter 1 of 2014, thanks to stronger demand for retail goods, particularly in January.
- Recent pressure on gross margins eased a little over the quarter and is expected to ease further still in Q2 other than in the grocery sector.
- The impact of costs on retail health over the quarter were largely neutral and likely to remain so in Q2, even though the national minimum wage rose in March.
- The health of UK retail is again set to improve in Q2, as increased consumer confidence and changes to income tax thresholds will play their part in stimulating demand.
Following its recent quarterly meeting in April, the KPMG/Ipsos Retail Think Tank (RTT) has released its latest findings that state that the health of UK retail improved in Quarter 1 2014. The RTT’s Retail Heath Index rose by 1 point to 80, matching the RTT’s forecast made in December. The RTT also expects a similar rise in Q2. The results confirm that retail health is once more improving, slowly but surely after a disappointing end to 2013, where the health index remained flat in Q4.
Of the three key drivers of retail health – demand, margin and cost – margin and cost both remained flat in Q1. However, the RTT saw an increase in demand from the consumer driving strong sales in January, which tailed off slightly in February and, through Easter’s timing, in March, to still return an increased like-for-like in Q1 of 2013.
With UK unemployment falling and household wealth rising as a result of a rapidly improving housing market, confidence has once again returned to the UK consumer, driving the levels of demand. That said, the increases are subdued.
The RTT acknowledged that there is a dichotomy between food and non-food retailing. Food sales struggled in Q1, with year-on-year declines in sale value both in like-for-like and absolute terms, affected in part by the bad weather and floods across the south of the England and also by price deflation. However, competition between supermarkets has continued to be fierce. Those dominating the market have felt the squeeze by both high-end and discount players and plans of a “price war” in Q2 will only make matters worse. Investment in online offerings, delivery schemes and self-service tills are costs that continue to impact on the health of the sector.
In the non-food sector, clothing and footwear retailers had a better quarter than expected which helped boost the overall assessment. DIY on the other hand, failed to take off quite as expected but garden centres have benefited from better weather in March.
Going into Q2, there are signs that UK retail is set to continue delivering positive results. Consumer confidence is now at a seven-year high, based on the GFK consumer confidence index and the UK may well be the fastest growing developed market economy in 2014. Real growth in disposable income, coupled with a confident consumer market is a strong indicator that demand will not tail off in Q2, the RTT believes. A rise in demand is expected to take pressure off margins in Q2 together with the ongoing work that retailers are undertaking to improve their pricing architecture to further protect margins.
Overall, the RTT forecasts that the health of the retail sector will grow by another point to 81 in Q2, largely driven by a sustained period of improvement in consumer demand. The grocery sector will remain a focus during Q2.
Quotes from RTT members
Nick Bubb, retail consultant to Zeus Capital, said: “After Christmas, the next major trading event was the Easter holiday and the fact that this fell late this year didn’t help Q1, but Non-Food demand was still strong enough to compensate for weak Food trading, thanks to the warmer spring weather. The weather has continued to be broadly more helpful so far in Q2 and if the weather forecasters are right in predicting an early summer, seasonal demand in Q2 should be boosted”.
James Knightley, senior global economist at ING, said: “Throughout Q1 there has been a notable feeling that the UK economy is heading in the right direction. Strong employment gains and rising household wealth has pushed consumer confidence to a seven-year high. After many years of failing to keep pace with the cost of living there are also finally some encouraging signs on wage growth. With consumers feeling happier and with more money likely to be in their pockets, 2014 is shaping up to be a better year for retailers.”
Dr Tim Denison, head of retail intelligence at Ipsos Retail Performance, said: “Q1 has been a difficult quarter to assess, given the fairly turbulent sales figures, the stark differences in pressures between the food and non-food sector, and the absence of Easter in the quarter. Overall health appears to be edging upwards, but in truth it is difficult to call until we see performance figures from April. ”
Mark Teale, head of retail research at CBRE, said: “Discount trade continues to grow strongly: sales of luxury goods too. It is the mass-market middle that is suffering. The trend can be seen playing out in grocery markets. Aldi and Lidl have been gaining market share at one end with Sainsburys and Waitrose romping ahead at the other. Tesco and Morrisons meanwhile, caught in the income-squeezed middle, are losing out.”
David McCorquodale, head of retail, KPMG, UK, said: “Demand will continue to be on the rise in the second quarter of 2014. A late Easter alongside early good weather and wage rate inflation will drive demand. The strong showing of non-food sales in Q1 looks set to continue through spring into summer.”
Neil Saunders, managing director of, Conlumino, said: “Things are starting to get better for retail, especially as consumer confidence strengthens and spending power increases. However, the pace of progress remains painfully slow. What an upturn in the economy will not resolve, however, are the various structural issues – such as over capacity in food. Here we expect more pain for some players as the sector continues to adapt to the new trading realities.”
Richard Lowe, head of retail & wholesale at Barclays, said: “The retail market continues to see steady growth which is encouraging for the sector. Consumer confidence remains strong with expenditure now growing in the household goods sector, which is an area where growth has been difficult to find. Meanwhile, the food sector is seeing even greater levels of price discounting between the supermarkets, which is good news for the weekly food bills.”
Martin Hayward, founder of Hayward Strategy and Futures, said: “Against this ever more positive economic environment, it will be interesting to see the degree to which shoppers begin to migrate away from the relentless value-chasing activities they have adopted, or perhaps these behaviours have now become an engrained part of modern retail.”
Date Published: 5/14/2014 3:35 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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