The health of retail in the UK saw continued improvement in Quarter two, a trend that is predicted to carry on into the next three months according to the KPMG/Ipsos Retail Think Tank (RTT).
- The health of the UK retail market improved by one index point for the third consecutive quarter.
- Strong economic and employment indicators helped to bolster consumer confidence in Q2.
- Retailers have yet to feel the full benefit of the improving economy, with expenditure on leisure services and pursuits proving popular with consumers and many homeowners choosing to pay off debt on their mortgage.
- The RTT agreed that growing demand would drive continued improvement to the Retail Health Index in Q3, although costs would play a more prominent role and pressurise retail health during the quarter.
Following its quarterly meeting on July 14th 2015, the KPMG/Ipsos Retail Think Tank (RTT) has released its latest findings that state that the health of UK retail improved in Quarter 2 2015. The RTT’s Retail Health Index (RHI) has climbed by one point to 82, the third consecutive quarter that it has risen. The RHI now stands at its highest level since Quarter 3 2011. This is expected to again improve in the coming quarter although the RTT cautioned retailers to anticipate a rise in costs, specifically in terms of wages and the costs of offering omni-channel services, which would begin to affect retail health detrimentally.
Of the three key drivers of retail health – demand, margin and cost – it was demand that had the biggest impact on retailers in Quarter 2. With real wages growing through low inflation, higher pay awards and increased employment levels, together with economic indicators pointing in the right direction, has left consumers feeling more confident in the last three months, resulting in an increase in spend with retailers.
Whilst the weather in Quarter 2 was not decisive in driving demand, it did have a positive impact on many areas of the retail market at the very end of the period. The fashion sector was a big winner from the heat wave at the end of June, with the high temperatures leading to more consumers paying full ticket price on seasonal lines. Food and outdoor furniture stores also reaped the rewards of the hot weather, helping to form a positive narrative for the quarter.
The RTT was keen to stress that although the outlook is improving for retailers, many factors have, and will continue to, constrain growth. Not all of the financial benefits of recent pay rises have made their way into the retailers’ tills, with many individuals electing to pay off mortgage debt. There has also been growth in the leisure sector, with consumers spending more of their spare cash dining out, holidaying and on experiential pursuits. The RTT advised retailers that they will continue to have to work hard to win a greater share of the growing disposable income among UK consumers. It pointed out, however, that the picture is very different across the country, with households in London and the South East, West Midlands and the North West in the strongest position
Margins amongst food retailers have continued to be squeezed, with the big four still discounting heavily in a competitive segment and deflationary pressures continuing. Price cuts, rather than multi-buy offerings, have become the preferred mechanic of the supermarket. This should help to stabilise margins, but a more lean business machine will be needed in order to improve profits. Whilst concerns with the exchange rate against the dollar have eased, margins did impact negatively on retailers as a whole in Quarter 2. With wages and petrol prices rising and utility bills falling, costs remained balanced and generally consistent in Quarter 2, although the RTT stressed that they would play a bigger part in the make of the remainder of 2015.
Looking ahead to Quarter 3, the RTT expects the RHI to again improve one index point to 83. Much the same as the last quarter, it was thought that the growth would be largely driven by consumer demand. Sales of big-ticket items and homeware have risen considerably in recent months, an early indicator that consumers are feeling more confident in spending rather than saving.
The RTT warned that retailers’ costs are going to become more problematic in Quarter 3, and are expected to play a big part in holding back the potential growth that the increase in demand could deliver. Wages are continuing to rise across the country, and with the living wage announcement in the Chancellor’s emergency budget, retailers will have to start integrating these additional costs into their future strategies.
A major talking point for the RTT was the recent announcement that John Lewis, soon to be followed by other major retailers, will start charging customers for using click and collect. It was agreed that this was an indicator that margins are now approaching a level whereby retailers will look at methods of disaggregating pricing in order to build back margin. This has some way to run as the increased costs of giving the consumer what they want need to be factored in.
David McCorquodale, head of retail, KPMG, UK, said: “There is much to be optimistic about as we head into Q3. Economic indicators are positive, real wages are growing, the grocery sector could be on the turn and spending on big-ticket items is increasing. However, there is still plenty of work to be done and retailers will have to ensure that the increased costs of employment from the new living wage are factored into future plans, as costs will play a key part in reeling in future growth.”
Dr Tim Denison, head of retail intelligence at Ipsos Retail Performance, said: “Quarter 2 added another constructive building block in the slow road to recovery in the sector. The quarter ended well with strong sales performance reported in June, but paradoxically, with a reduced number of shoppers on the high street. Retailers benefitted from a significant upturn in online transactions, as although the hot weather drove sales of seasonal items, it also deterred shoppers from the physical store themselves. Investment in omnichannel solutions, personalised to the individual customer, will need to increase to ensure retailers have a powerful tool for driving people back onto the high street.”
Nick Bubb, independent retail analyst, said: “The surprise announcement regarding the Living Wage in the Chancellor’s Summer Budget will have had retailers putting plans in motion to accommodate the added costs within their wage bills. This coupled with wages rising in general will mean that cost increases will loom heavy over retailers in the coming months.”
Martin Hayward, founder of Hayward Strategy and Futures, said: “Retailers have had the last four or five years to figure out how to make money in these tough trading conditions. It’s now possible that margins have been squeezed as far as they will go. What this will mean for the retailers is that as soon as shoppers head back to the high street in force, the floodgates should be open for retailers to start making money very quickly. This coupled with improving consumer confidence and real wage growth, make for real reason to be optimistic going forward to the second half of the year.”
Maureen Hinton, group research director from Conlumino, said: “Consumer confidence has been improving over the past 12 months and this is being reflected in the home sectors where the recovery is producing some strong performances for retailers. However confidence is still fragile and retailers cannot depend on rising demand to offset future cost increases.”
James Knightley, senior global economist at ING, said: “The challenge for retailers in the coming months will be to take full advantage of the improving economic conditions that are driving up consumer confidence. Average earnings are up, VAT receipts are climbing and employment in retail has improved, especially across London, the West Midlands and North West. Retailers need to ensure that they are getting their ‘fair share’ as consumers loosen the purse strings.”
Richard Lowe, head of retail & purchase at Barclays, said: “Retailers will have been largely encouraged by the weather in Q2, as seasonal shifts in temperature happened as predicted, meaning summer lines proved popular without the need for sales and promotions. As we head into Q3, shoppers have more money in their pocket and growing confidence in the economy. Car and homeware sales have picked up, both early indicators that people are happy to spend.”
Martin Newman, founder and CEO of Practicology, said: “As retailers look ahead to the remainder of the year and beyond, many will have to assess their omni-channel strategies to take full advantage of the ever-changing consumer market. Currently the focus of many has been the channels themselves, and not customers. This will need to shift to a more consumer-centric focus in order to reap the rewards of the improving economy. Consumer demand is driving the recovery, and as such it will be important to put those with the spending power first.”
Date Published: 7/28/2015 7:00 AM
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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