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Retail Think Tank

Retail Think Tank predicts worst run of retail health for five years

The KPMG/Ipsos Retail Think Tank has stated that the health of the UK retail sector fell in Quarter 2 2017, and is predicted to drop even further in Quarter 3. This would represent three consecutive quarters of negative health performance, something that has not happened since 2012.

  • The overall health of the UK retail market fell one point in Quarter 2 2017.
  • The deterioration came from rising costs and squeezed margins.
  • The RTT predict that retail health will fall by another point in Quarter 3 when all three drivers – demand, cost and margins – would all suffer.
  • The Retail Health Index has now not improved since Quarter 4 2015.
  • Unstable financial and political climates are predicted to further impact on consumer confidence, as demand is expected to drop in Quarter 3.

Following its quarterly meeting on July 11th 2017, the KPMG/Ipsos Retail Think Tank (RTT) has released its latest findings, stating the health of UK retail fell in Quarter 2 2017. The RTT’s Retail Health Index (RHI) dropped one point to 81, following on from a drop of one point over the first three months of the year.

The RTT predict that following the weakening health in Quarter 2, the UK is set for a further drop in fortunes in Quarter 3, in what would be the third consecutive negative period for retailers. There has been no improvement in retail health since Quarter 4 2015, and if the Quarter 3 predictions come to fruition, it will be the first time there has been three quarters of negative health since 2012.

Demand is highlighted by the RTT as a key area of concern as they look ahead to Quarter 3. Continued negative headlines in the media are expected to further chip away at consumer confidence, and the spending power of the shopper will be squeezed as wages remain static, inflation raises everyday costs and an increased number of people rely on credit to make purchases.

Quarter 3 should also begin to expose retailers whose currency hedging has started to unwind. Proactive steps have already been taken to try to maintain margin and cost, but the RTT feel there was still ‘fat left to trim’ in many retailers’ operations. If consumer confidence continues to fall, and shoppers become tentative with their spending, it is expected that retailers will react with aggressive pricing to tempt consumers back to the tills.

The RTT agreed that of the three main drivers of retail health – demand, margin and cost, it was margin and costs that had the most detrimental impact on retailers’ performance in Quarter 2. Underlying costs were impacted by the rise in National Living Wage, the apprenticeship levy and increased business rates, while ongoing competitive pricing meant that retailers absorbed some of the rising cost of goods rather than passing it through to the consumer. Despite the good weather in June, when footfall on the high street and retailer performance improved significantly, it was deemed too little too late by the RTT to ‘save the quarter’.

The RTT warned that personal finances were becoming more of a concern for UK retailers, with much of the spending over the last 19 months being made on credit. Sluggish wage growth, dwindling savings and increased household debt will continue to restrict spending over the next quarter, with ongoing chatter regarding an interest rate rise and drop in house prices only adding to the strain on consumer confidence. The consensus was that demand would join cost and margin to weaken the health of retail still further in Quarter 3.

Dr Tim Denison, head of retail intelligence, Ipsos Retail Performance, said: “June worked hard for the quarter, with retailers benefiting from buoyant high street footfall and great seasonal weather. Retailers will hope that this continues into the summer months, as the sector is set to worsen as the unwinding of currency hedging takes it true toll and margins are squeezed, with the cost of items such as fresh food produce set to increase.”

Paul Martin, head of retail, KPMG, UK, said: “When looking at the retail sector over the past six months, the discounters and high end retailers have delivered the best performance, with the retailers sat in the middle struggling to keep up. Prolonged discounting and crumbling demand have contributed significantly to the RTT’s prediction that we are set for the worse run of retail health performance for five years.”

Nick Bubb, independent retail analyst, said: “The sharp recovery in food price inflation has helped the food retail sector deliver improved top-line sales growth in recent months, helped by fine weather for picnics and barbecues. But there is clear evidence that this has impacted on discretionary non-food retail spending, as consumers seek to make economies elsewhere in their household budgets.”

Maureen Hinton, group research director, GlobalData Retail, said: “The fortunes of retailers and the actions they take could largely be dictated by how consumer confidence holds up over the next quarter. Shoppers have been tentative at the tills, and the financial conditions in the UK have left many with a reduced disposable income, leading to a dependence on credit cards and loans. With pressure building on margins and costs, if the demand goes over the summer months then retailers will be in for a tough quarter.”

James Knightley, chief international economist, ING, said: “Household debt is very much on the rise, as any positive performance in the retail sector over the last 12 months has nearly entirely been funded by credit. With wage growth continuing to struggle, the uncertainly of Brexit negotiations and current unstable political climate, the spending power of the consumer and their ‘want’ to shop is diminishing and could spell trouble ahead for retailers in the UK.”

Martin Newman, CEO at Practicology, said: “Fashion very much told the story of Quarter 2, with a really poor performance in April and May propped up by a positive June. Discounting started early, and continued right throughout the quarter. The sunny weather in June did help, and the fashion retailers will be hoping that this continues throughout Quarter 3. In-store performance has improved, as operators continue to master the blurring of digital and physical retailing to create and seamless shopping experience.”

James Sawley, Head of Retail & Leisure, HSBC Corporate Bank, said: “Following what has been two disappointing quarters for the UK retail sector, the troubling news is that this may just be a precursor of what is set to come. Disruptive political and economic climates will present retailers with challenges that need tackling head on. There will be further price negotiations with suppliers, selected product price increases on the shop floor and the brave retailers should be making a conscious effort to wean off discounting.”

Jonathan De Mello, lead retail consultant, Harper Dennis Hobbs, said: “Costs were a big factor for retailers to work through at the start of the year, with the National Living Wage, increased business rates and challenging fuel and utility costs all hitting retailers’ pockets. Rental costs have not been too much of an issue, with many landlords prepared to take a cut in rent to ensure units are occupied. Shopping centres have performed well, and retailers in central London have benefited for an increase in international shoppers, as holidaymakers make the most of the weak pound.”

Martin Hayward, founder of Hayward Strategy and Futures, said: “The longer the negative headlines in the press continue, the more damaging effect it’s going to have on consumer confidence and demand. The real danger is that the political uncertainty and financial instability, along with news such as house prices falling is going to leave the consumer tentative to spend, and more conscious of their overdependence on credit. Not only will this impair demand, but it will force retailers into deeper discounting in order to tempt shoppers back.”

Mike Watkins, head of retailer and business insight, Nielsen, said: “With many shoppers now beginning to feel a squeeze on their spending power and consumer sentiment on the turn, retailers will need to keep a very close watch on the level of demand for their goods and services. Getting the balance right between keeping cost increases to a minimum, driving footfall with promotions, and looking for further productivity gains looks to be the order of the day. Decisions taken over the next few months will set the retail agenda for the rest of the year.”


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