The health of the UK retail sector improved for the fourth quarter in a row, a trend expected to continue through to the end of the year.
- The overall health of the UK retail market improved by one index point for the fourth consecutive quarter – the first time this has happened since 2010. This is all despite the continued problems in the food retail sector.
- Consumer confidence has continued to rise and helping to fuel demand in Quarter 3, however this is expected to plateau in the coming months.
- The RTT agreed that Black Friday would again be a key date for non-food retailers, however better margins were expected this year given the time they will have had to prepare and work with suppliers.
- The living wage will impact heavily on costs in Quarter 4, enough to detract away from the potential positives of Black Friday, however, the full brunt will not be felt until 2016.
Following its quarterly meeting on October 6th 2015, the KPMG/Ipsos Retail Think Tank (RTT) has released its latest findings that state that the health of UK retail improved in Quarter 3 2015. The RTT’s Retail Health Index (RHI) has climbed one point to 83. This makes four consecutive quarters of growth, the first time this has been achieved in five years, when in 2010 the RHI climbed from 82 to 87.
The RTT predicted that the state of retail health would again improve by one point in Quarter 4, with Black Friday and Christmas providing seasonal peaks in sales. Were this realised, it would bring the RHI up to a level last seen in Quarter 2 2011. However, the RTT believe that increased costs could restrict the benefits of this rise in demand, as retailers start to roll out their plans to introduce the national living wage.
Of the three key drivers of retail health – demand, margin and cost – it was demand, once again, that had the most positive impact on retailers in Quarter 3. Retailers benefitted from real wage growth, strong consumer confidence levels and rising employment levels, all of which encouraged customers to the tills. The quarter also seemed to buck a trend of recent times. Previously, it had been noted that a large proportion of disposable income had been spent in leisure sector, such as dining out, holidaying and experiential pursuits. This seemed to tilt back in the favour of the high street in Quarter 3, with retailers fighting hard for their share of the increasing amount of disposable income. This is a trend that the RTT sees as vital for the health of the sector in the foreseeable future.
Aside from the discounters, food retailers continued to struggle and it was the performance of the grocers as a whole that held back the RHI for their non-food counterparts. The RTT did note that they believed the grocers’ fortunes were showing signs of improvement and may start to turn for the better. Margins on food have started to stabilise, and gross margins as a whole do not seem to have been decimated in Quarter 3.
Looking ahead to Quarter 4, the fortunes of retailers will largely be dictated by demand and how Black Friday and Christmas play out. The RTT expects that Black Friday will again be a major event, with more retailers encouraged to take part following bumper sales in 2014. Where many missed out last year was in the size of their margins. However, 12 months on, having had time to build tactical plans and negotiate with suppliers, a slicker and more profitable day is expected to be the general outcome.
The RTT discussed at length the effect that the living wage would have on retailers in Quarter 4. It was agreed that whilst the cost implications would be significant, most of the impact would not be felt until well into 2016. There are however some retailers that will implement the pay rises in Quarter 4 in an effort to improve public perception of their businesses, and also to ensure the best seasonal staff can be attracted before Christmas. The cost implications of this will be enough to cancel out some of the gains that will be made by Black Friday and Christmas.
Grocers were expected to bear the biggest brunt of the wage rises, with a large proportion of staff at non-food retailers being under the age of 25. How retailers deal with the increased costs will be an ongoing story. In the short term, the imperative is for retailers to improve staff productivity before any price increases are seen, a process that is most likely to take place in 2016.
David McCorquodale, head of retail, KPMG, UK, said: “The optimism that many retailers felt in Quarter 2 has continued into the last three months. In comparison to retail health before the recession, the gains being made across the UK may seem slight, but the reality of our current retail landscape has changed. The progress that has been achieved over the last four quarters should be thought of as strong in the current conditions. A new benchmark of what good looks like has been set, and the signs are encouraging for the future.”
Dr Tim Denison, head of retail intelligence at Ipsos Retail Performance, said: “The narrative for Quarter 3 was a continuation of the progress made over the previous 12 months. Retailers have found their feet again, despite the enduring tough trading conditions and continue to move forward with omni-channel integration. Retail health in Quarter 4 will be a wrestling match between demand stimulation and cost management, as retailers prepare for the introduction of the first phase of the living wage legislation. Raising productivity in the sector will help make it affordable and how to achieve efficient staff scheduling is, inevitably, one of the hottest topics of the moment.”
Nick Bubb, independent retail analyst, said: “The biggest threat on most retailers’ horizon, and one that is creeping ever closer, is how and when to implement the living wage. We have seen some of the major players announce plans to rollout before Christmas, and they have clearly deduced that the additional cost will be worth it for the positive PR. By April of next year this is going to impact heavily on everyone, and with the additional costs comes strategies to counteract – whether that is to raise prices or invest in workforce optimisation – it’s a challenge that will play a big part on the retail health index in 2016.”
Martin Hayward, founder of Hayward Strategy and Futures, said: “It will be interesting to see how retailers take advantage of this year’s Black Friday. With the experience of last year to call on, their margins should be much healthier and implementation more efficient. Black Friday is now set to be a permanent fixture on the retailer’s calendar, demand should continue to grow as customers will seek out deals and discounts wherever they can. The process of purchases being brought forward from Christmas could again be prominent this year, if so, it will have changed the dynamic of how retailers look at their sales cycles at the end of the year.”
Martin Newman, founder and CEO of Practicology, said: “The fashion retailers had a tough time in Quarter 3, with the unseasonal weather throughout August heaping on the pressure. I am hopeful that this swings around for them in September, but how they fare in Quarter 4 may again be dictated by the British weather. A warm autumn and late cold snap may force the hand of many fashion retailers to take part in the Black Friday promotions. Those that were not planning to discount on the 27th November could well be forced to, in order to clear out unsold stock before Christmas.”
Mike Watkins, head of retailer and business insight at Nielsen, said: “Quarter 4 is set to be a balancing act between demand at Christmas and the cost of the living wage. The consumer will always find a reason to buy, especially online, and with special events such as Black Friday to pin sales on, and strong promotions across the sector, it’s a certainty that the demand will be there. What will set the tone for 2016 will be how much the benefits of these additional sales will be hindered and pegged back by additional costs related to promotions and the living wage. ”
Date Published: 10/22/2015 12:10 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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