Skip to content

Retail Think Tank

After Flat Final Quarter of 2015, Retail Think Tank Gives Reason for Optimism at the Start of 2016

The health of the UK retail sector turned flat in Q4 2015 after three quarters of growth, as demand failed to hit its expected mark. The enormity of the Living Wage rollout is set to impact heavily on retailers in 2016, although pent-up demand and the improving performance of the grocers should provide a positive first quarter of the year for the retail sector.

 

  • The overall health of the UK retail market failed to improve in Quarter 4 for the first time in 2015, however the performance of retailers was not as bad as initially expected.
  • The disruption of Black Friday hit regular shopping hard in November and early December, although retailers did well to protect their margins during the sales period.
  • Improving results in the food sector and growing demand due to positive economic conditions should prove fruitful for the health of the retail sector at the start of 2016.
  • The RTT is concerned that the impending rollout of the Living Wage is certain to impact heavily on retailers’ costs across the board, however the worst of this will not be felt until Quarter 2.
  • In addition, the significant shift to the online channel in Quarter 4 will drive retailers to reconsider the role of the store going forward. Further investment is expected to be made in the continued rollout of multi-channel platforms and retailers’ ever-growing fulfillment needs.

 

Following its quarterly meeting on January 14th 2016, the KPMG/Ipsos Retail Think Tank (RTT) has released its latest findings that state that the health of UK retail failed to improve in Quarter 4 quarter-on-quarter for the first time in 2015. The RTT’s Retail Health Index (RHI) remained at 83, ending the year at the equivalent state of health as it stood mid-way through 2011.

 

The RTT predicted that retailers will benefit from a good start to 2016, with the RHI forecast to rise by one index point in Quarter 1. At its onset, the apparent growing demand after Christmas will benefit retailers, and an enhanced performance from the grocers should improve the health of the sector as a whole. Though demand is expected to continue to grow as the quarter progresses, rising costs will take over to subdue retail health as the year goes on, as retailers roll out plans for the National Living Wage programme.

 

Of the three key drivers of retail health – demand, margin and cost – it was the seasonal rise in demand over Christmas that had the most positive impact on retailers in Quarter 4, although it was not strong enough to improve what was deemed a flat period. Initially very low, retailers struggled to make sales in October and November as consumers held off purchases in anticipation of discounts on Black Friday. Whilst December trading figures improved, the uplift in demand was not enough to move the RHI up one point for the fourth quarter.

 

Digital shopping was the big winner in Quarter 4, with Black Friday boasting in the busiest online shopping day of the year. Whilst the purchases were still being made, the RTT acknowledged that the fulfillment needs of home delivery and click and collect will have driven retailers’ costs up, and impaired some of the positive impact of the sales. Retailers also suffered a drop in footfall on the high street following the terrorist attacks in Paris, which was thought could have been a contributing factor in the growing online sales.

 

The RTT agreed that retailers were far better prepared for Black Friday in 2015, which meant that they fared better financially than the previous year. It was noticeable that retailers started their sales earlier for both Black Friday and Christmas, which gave the impression that discounting was deeper than it actually was. In reality, with more conservative discounts apparent, margins could be better protected and the benefits of the UK’s busiest ever online shopping fully absorbed. Distribution was vastly improved over Black Friday this year and online technical issues notably reduced, with only Argos and John Lewis experiencing noteworthy website issues.

 

It was acknowledged that consumer fundamentals again improved throughout Quarter 4. The labour market continued to progress, private sector pay was on the rise and both oil and petrol prices fell – all contributing to both putting more money into the pocket of the public, and driving consumer confidence to near record highs. The RTT was keen to stress that although there was more money being spent, retailers had not been able to take full advantage of the additional disposable income, with consumers choosing to spend more money in the leisure, culture and entertainment sectors.

 

In Quarter 1, demand is expected to improve, with a better performance predicted from the grocery sector. Retailers should have reason to be optimistic with regards to consumer confidence and the public’s personal finances, as a strong labour market and falling petrol prices will continue to put money in people’s pockets. The challenge will lie in turning the tide and driving this money away from the leisure sector and into the retailers’ tills, this was predicted to be a reoccurring challenge in 2016.

 

While it is expected to be a positive period for retailers, the RTT was keen to stress that costs will have to be carefully considered in Quarter 1, with the rollout of the National Living Wage beginning to take centre stage. Whilst it will hit retailers hardest in Quarter 2, plans should be in place to soften the brunt of this, and time will tell as to whether product price rises, improved efficiency or a mix of both will be the strategy that pays off.

 

David McCorquodale, head of retail, KPMG, UK, said: “It has been apparent throughout 2015 that the spending habits of the public are changing. Despite wages increasing and consumer confidence scaling record heights, retailers are finding that their share of the wealth isn’t finding its way into the tills. Facing competition from both the experiential and leisure sectors, as well as homeowners taking advantage of low interest rates to pay off mortgages, retailers cannot take growth for granted and will have to work hard in 2016 to capitalise on what should be improving trading conditions.”

 

Dr Tim Denison, head of retail intelligence, Ipsos Retail Performance, said: “After three consecutive quarters of improvement to the health of retailing, Quarter 4 was a disappointment. 2015 was a highly competitive year for retailers, particularly in the food sector and demand fatigue finally caught up with shoppers as the year drew to a close. Looking forward into 2016, the Living Wage, concern regarding Britain’s membership of the EU and an impending interest rate rise could bring about a level of uncertainty that retailers could find creates uncomfortable trading conditions as the year goes on.”

 

Nick Bubb, independent retail analyst, said: “It seems that the ongoing story of food retailers dragging down the sectors’ performance may be beginning to come to an end. While the discount supermarkets continued to etch away at the big four’s market share in 2015, they will find it much harder this year, with the Christmas trading figures showing growth amongst the Big Four as a whole. January has started surprisingly well, with the expected hangover of Christmas failing to materialise. However, retailers should look to make hay when the sun shines, as the consumers increasingly rapid move to online shopping and the introduction of the National Living Wage will impact heavily on costs as the year progresses.”

 

Jonathan De Mello, head of retail consultancy, Harper Dennis Hobbs, said: “Whilst it seems that online shopping was the big winner over Black Friday and Christmas, retailers are still looking to invest in physical space on the high street. Aside from investment in multi-channel and meeting the requirements of the National Living Wage, retailers should not ignore the up coming changes to how business rates are calculated. There has been an apparent rise in the number of retailers opening stores in traditional market towns, and while they can specifically target high volumes of their target demographic, the high rents could see substantial increases in their business rates following a rate revaluation that is directly linked to rental costs.”

 

Martin Hayward, founder of Hayward Strategy and Futures, said: “To end what seems like an endless cycle of discounting to drive sales, retailers will have to focus on re-connecting with their customers on a more personal level. Weaning the public off a diet of ‘slashed prices’ will be pivotal if retailers are going to fend off the leisure industry and counteract the negative impact of rising wages in 2016.”

 

Maureen Hinton, group research director, Columino, said: “Quarter 4 2015 highlights the challenges for retailers; the massive shift online; widespread discounting; and the highly competitive environment. Retailers managed the Black Friday/Cyber Monday weekend peak much better this year with planned promotions and by lengthening the promotional period. This will have helped protect margins, though the increasingly demanding service levels are putting pressure on costs. This has been an online Christmas, but as online growth matures retailers will have to innovate in new areas to gain an advantage on competitors.”

 

James Knightley, senior global economist, ING, said: “On the face of it, retailers should be pretty happy with how consumers’ personal finances are shaping up as we start 2016. Low oil prices are saving people money at the petrol pump, private sector pay continues to rise and ever-growing employment are all working in favour of growing the public’s disposable income. The battle that retailers face is over where this money is spent, with many homeowners choosing to pay off mortgages before the looming interest rate rise, and increasing expenditure in the leisure sector.”

 

Richard Lowe, Barclays, said: “Christmas has shown that it has never been more important for retailers to get the omni-channel mix right. With website sales so prominent, many retailers would have struggled to cope without the additional sales from online, mobile and click and collect. Ensuring that the correct omni-channel strategy is rolled out and that customers are reached in new ways will be key, as investment must be made in the right places with the costs of this investment managed carefully in order to see a positive result in terms of sales and margin.”

Martin Newman, founder and CEO of Practicology, said: “The money seems to be there for consumers to spend, but as we stride further into 2016, retailers are going to have to find new routes to connecting with their customers. Fending off the encroaching leisure sector at the same time as absorbing rising salary costs will be a big challenge. The answer could lie in deploying effective multi-channel solutions, and whilst this is not a new concept, this year could prove to be a pivotal point at which retailers must find the right blend of sales channels that work for them.”

 

Mike Watkins, head of retailer and business insight, Nielsen, said: “Deflation in retailing looks set to remain for at least the first part of 2016, so whether price rises are introduced on the back of the new National Living Wage, or investments are made in improving productivity, it’s clear that even with careful planning and a clear strategy, it’s going to be a challenge. One saving grace for the grocers is that shoppers are now returning again to the top four and their comparatives will be weaker. The impact of lowering prices last year will also annualise and be less of a drag on performance. There is also a challenge for the discounters on the horizon as they open more stores, with the need to encourage shoppers to shop more often as they have limited headroom to grow in terms of basket size.”

 

Ends

 

Note to Editors:

The RTT panelists rely on their depth of personal experience and 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
  • 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
  • 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.

 

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 by KPMG and Ipsos Retail Performance (formerly Synovate) 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 judgments 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.

Leave a Reply

Your email address will not be published. Required fields are marked *