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Retail Think Tank

Retail health to fall for two consecutive quarters for the first time since 2012

After six quarters of consolidation, the health of the UK retail sector fell back in Quarter 1 2017, weakening demand, squeezed margins and rising costs all contributed to the deterioration. The Retail Health Index was predicted to fall again in Quarter 2 – which would be the first time there has been consecutive drops since 2012.

  • The overall health of the UK retail market fell one point in Quarter 1 2017, following three consecutive quarters of holding flat.
  • At the start of the year, the RTT predicted +0.5% sales value growth in the retail sector throughout 2017 – a figure the RTT still believes is on track to be achieved.
  • A late Easter also impacted Quarter 1, but The RTT expected this to balance out in Quarter 2.
  • The RTT predicted that retail health would fall by another point in Quarter 2.
  • The snap general election and delayed Brexit negotiations could create further distraction for retailers in the coming months.
  • Rising costs will work heavily against retailers – as currency hedging unwinds, the next rise of the National Living Wage comes into effect, and retailers also have to deal with rising utility and fuel costs, increased business rates and the new apprenticeship levy.

Following its quarterly meeting on April 11th 2017, the KPMG/Ipsos Retail Think Tank (RTT) has released its latest findings, stating that the health of UK retail fell in Quarter 1 2017. The RTT’s Retail Health Index (RHI) dropped one point to 82, breaking the trend of three consecutive flat quarters. The RTT predicted that cost pressures would become the key drivers of the further deterioration of health in Quarter 2.

The RTT agreed that of the main drivers of retail health – demand, margin and cost – all factors conspired to work against retailers in Quarter 1. Retailers struggled with demand, as the spending power of the consumer was squeezed, and a late Easter failed to deliver a bump in sales in March. It was agreed by RTT members, that whilst it was not a disastrous quarter for the majority of retailers, the sector was still on a downward trend and retailers should be prepared for worse times ahead in 2017.

Discounting continued to be rife on the high street, especially in the non-food sector, with the clothing sector in particular having to rely heavily on offers and promotions to keep consumers spending at the tills. The RTT reserved praise for the big four supermarkets, who worked hard to protect their margins at the start of the year. Initiatives to create efficiency savings and increased productivity are allowing the major grocers to ‘hold the line’ in terms of margin at present – putting them in a better position than most to minimalise the impact of impending rises to costs.

Looking ahead to Quarter 2, the RTT stated that demand should improve in April – as the Bank Holiday Easter weekend and expected warm weather should provide a much-needed boost for retailers. It was agreed that that this would just be a temporary increase, as uncertainty surrounding the specifics of a Brexit deal and toughening economic conditions start to impact heavily on consumer confidence. The surprise announcement of a snap General Election on June 8th could cause further distraction for retailers over the next quarter. Meanwhile, rising fuel and utility bills will have a negative effect on retailers from two fronts, as consumers will have reduced disposable income and the retailer’s own running and fulfilment costs will increase.

Rising costs are set to be the central story and ongoing negative factor for retailers in Quarter 2 and beyond. The impact of currency hedging unwinding will begin to take effect in April, and the next rollout of the National Living Wage will add to growing wage bills. In many areas Business rates are also set to rise, and the apprenticeship levy will be introduced – all piling on costs that even though retailers are prepared for and have been expecting, will no doubt have a negative impact on the sector as a whole.

The RTT agreed that in terms of preparing for the rises in costs, the grocers at present are better prepared than their non-food counterparts. Efficiency and productivity drives have been in place for a while now, helping to keep costs under control. The grocers should also be set to benefit most from an increase in demand over Easter.

The late Easter weekend, and the effect it has on retailers was discussed at length. The RTT was keen to point out that a close eye should be kept on the DIY and garden sectors, and their performance over Bank Holiday weekend could act as a bellwether for wider retail performance.

Dr Tim Denison, head of retail intelligence, Ipsos Retail Performance, said: “It is apparent that much of the increase in sales throughout 2016 was sourced from savings and credit card expenditure, now we are seeing the household savings rate dip, and this will no doubt impact negatively on retailers as we head deeper into 2017. The RTT was unanimous in its assessment of the drivers of health in Quarter 1, but the guessing game begins now as we head into Quarter 2.”

Paul Martin, head of retail, KPMG, UK, said: “The fortunes of retailers are most certainly on a negative trend. There are a myriad of varying elements working against retailers currently, and it will be a combination of these, as opposed to one sudden event or market shift that really starts to put retailers in a precarious position.”

Maureen Hinton, group research director, GlobalData Retail, said: “The late Easter will help to boost sales in April, particularly for grocers, who not only benefit the most from the demand for food, but deliver a very broad seasonal offer of relevant gifts and garden and homewares.  While clothing retailers should benefit from warmer weather, competition in the sector is so strong, and discounting so prevalent, that profits will continue to be under pressure, putting a further strain on weaker operators.”

James Knightley, senior global economist, ING, said: “It’s difficult to pick out predictable trends in the economy at present. There are so many yet-to-be unanswered questions regarding Brexit that will directly impact on the UK economy, uncertainty is the only thing we can count on over the next 24 months. Job numbers are currently better than expected, but the consumers spending power is diminishing, something that will no doubt impact on retailers. It feels as if the retail sector has been on a downward trend for a number of months now, and as we head into Quarter 2, they only stand on the cusp of worse to come.”

Martin Newman, CEO at Practicology, said: “Retailers are heading into turbulent times, those that want to flourish rather than ‘just about manage’ will be those who have worked to build relationships with their customers. Strong brands that sell a ‘lifestyle’, and can deliver a personalised service that surprises and delights consumers will be the ones that don’t have to rely on discounting to make it through the impending troubles ahead.”

James Sawley, Head of Retail & Leisure at HSBC Corporate Bank, said: “Rising costs have long been on the horizon for retailers, but as we creep into April, now we really start to see them take hold and make their mark on the P&Ls of retailers across the UK. Those that hedged currency prior to the EU referendum will see that begin to unwind in Quarter 2, and alongside rising costs in terms of wages and business rates, retailers will have to work hard on operational efficiency and productivity if they are going to refrain from passing price rises onto an already fragile consumer.”

Mike Watkins, head of retailer and business insight, Nielsen, said: “The grocers have ridden out a tough period in recent years, but it seems that now they are starting to get their houses in order. Structural shifts to the way that people buy groceries has now started to work in the big four’s favour, with ‘little and often’ shopping trips becoming more commonplace. I am optimistic for grocery performance in April – with extra food sales over the Easter weekend and the expected sunny weather boosting alcohol and barbeque food sales.”

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