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Retail Think Tank

Non-food retailers stumble, causing retail health to drop to lowest level since 2013

The KPMG/Ipsos Retail Think Tank has stated that retail health in the UK dropped in Quarter 1 2018 – delivering the second consecutive quarter of negative performance, and leaving retail health at its lowest level for nearly five years.

  • The overall health of UK retail dropped one point in Quarter 1 2018.
  • Non-food suffered significantly worse than the grocery sector, contributing heavily to the poor state of retail health.
  • Poor weather conditions and periods of heavy snow impacted on demand during February and the Easter weekend.
  • The RTT predicts that Quarter 2 will see retail health fall a further point for the third consecutive quarter.
  • Rising costs, including National Living Wage and automatic pension enrolment, will be key drivers for retail health falling.

Following its quarterly meeting in April 2018, the KPMG/Ipsos Retail Think (RTT) has released its latest findings, stating the health of UK retail fell back in Quarter 1. The Retail Health Index (RHI) now stands at 79, leaving the sector in its worst position since Quarter 4 2013. The RTT predicted that retail health was likely to deteriorate further as we head into the second quarter of the year, as stagnant demand and static margins fail to neutralise rising costs within the sector. 

The RTT stated that non-food retailers suffered a terrible time in the opening months of the year, with the bad weather, increasing levels of personal debt and the poorest year-on-year high street footfall results for a decade, contributing to a perfect storm to drag down performance. The snow and freezing weather meant access to many stores was limited and online sales failed to make up the sales shortfall, and poor weather over Easter Weekend dampened shoppers’ spirits further. The RTT discussed at length whether the sales lost during this period would move forward into Quarter 2, but it was agreed that the absence of pent-up demand would mean that these would now not be recovered.

The gulf in fortunes between food and non-food in 2017 continued to widen in the first quarter of the year, with the RTT describing it as a ‘tipping point’ in a wider, structural shift in consumer demand. Whilst growth in the grocery sector did prop up the failings of non-food retailers to an extent, the RTT was keen to stress that much of this growth was through inflation, with food volumes falling and prices rising after Christmas.

The number of retailers going into administration was a clear indicator of the poor health of the sector carrying through from last year into this, and whilst trading conditions are proving increasingly turbulent, the RTT pointed out that some retailers were bucking the trend and still trading well. The businesses that are struggling have been in a poor position for a number of years, and the fall in retail health is merely exaggerating their failings.

Squeezed margins also continued to dampen retail health, with retailers caught in a spiral of being forced to drive demand through promotional activity and discounting, in an effort to reduce what for many are huge holdings of stock following repeated periods of poor stock management and supply chains being too slow and in-efficient.

Looking ahead to Quarter 2 2018, rising costs will be the biggest single factor in reducing the health of the retail sector a further point. The scheduled increase to The National Living Wage and automatic pension enrolments, coupled with rising commodity prices and marketing costs to promote discounting and buy much needed sales, will all work against retailers in the coming months.

However, the RTT agreed there was little to suggest that demand would fall back any further, with improving economic indicators in terms of wage growth and employment helping to stem the flow, and stop demand ‘falling off a cliff’. It was highlighted, however, there are a building number of political and economic unknowns – including the local elections and a vote in Parliament on the UK leaving the EU Customs Union in May, which, could have a significant impact on demand and consumer confidence. Geopolitical uncertainty through likely increased Russian sanctions, the re-negotiation of international trade deals and turbulent currency rates are also hard to predict, and could equally provide retailers with a hammer blow at any moment in the coming months.

The RTT predicted that the trend of food retailers significantly outperforming their non-food counterparts should now be acknowledged as systematic, and therefore will become the ‘new norm’ into the foreseeable future. The RTT commented that the level of how well the grocers perform would likely set the tone for retail health in the coming quarter.

There are some signs of positivity that retailers can turn to their advantage, with the RTT keen to point out that a sunny spring, improving macroeconomic data and the FIFA World Cup in June could all bring benefits to retailers’ tills. It was also discussed how grocers are set to continue to benefit from a rise in the popularity of own label (private brand) products which are more profitable and help to improve margins.

Dr Tim Denison, head of retail intelligence, Ipsos Retail Performance, said: “The narrative of Quarter 1 was very much the same as the previous 12 months, with food retailers propping up the weak trading conditions facing their non-food counterparts. A ‘proper’ winter, weak footfall reflective of post-Christmas lethargy, rising credit debt and ongoing heavy discounting, all conspired against retailers, and despite a tidy performance from the grocers it failed to keep the RHI from dropping another point in the quarter.”

Paul Martin, head of retail at KPMG UK, said: “There are some major issues affecting retailers, and those that don’t have their houses in order, from the boardroom to the shop floor, will find it hard to survive throughout what are some of the toughest trading conditions for a number of years. There are multiple costs that will pile up in the coming months, including the implementation of the next stage of both The National Living Wage and automatic pension enrolment, last-minute compliance with GDPR regulations and additional marketing costs to help promote discounts and buy sales. Retailers are going to have to work incredibly hard, and smart, to entice customers and turn a profit in the coming months.”

Nick Bubb, independent retail analyst, said: “The grocers have delivered well in Quarter 1, going some way to offset the disastrous performance of the non-food sector. Those non-food retailers who are really struggling and ‘bunkering down’, to hold out for the moment that the health of the retail sector turns in their favour, will likely find themselves waiting well beyond Quarter 2 of 2018.”

James Knightley, chief international economist, ING, said: “Political and economic uncertainty has plagued the retail sector for a number of years, however, the month of May will likely bring with it the beginning of a hint of some answers that may help the industry build for the coming years. Local elections, a vote in Parliament on the United Kingdom’s future in the EU Customs Union, and a likely rise in interest rates may well bring disruption and turmoil, but they will provide the leaders of major retailers with some sense of direction to plan for in the coming months and years.”

James Sawley, head of retail & leisure, UK Corporate Banking at HSBC, said: “Whilst it is not possible to deny that retailers are finding it incredibly challenging, there are some operators that are seeing their business models flourish. The discounters, online fashion retailers, food retailers and small, niche retailers are posting strong results and maintaining their margins. The bigger, less agile retailers are the ones that are finding it tough, with most having to resort to heavy discounting and promotional activity to buy sales and prop-up demand.”

Jonathan De Mello, lead retail consultant, Harper Dennis Hobbs, said: “Business rates continue to be an issue for many retailers, and will further add to the pain of increased costs in the form of GDPR planning and wage bills throughout Quarter 2. Retailers are consequently trying to find cost savings wherever possible and are in particular focusing on property costs; with many operators working hard to re-negotiate rents down with landlords. However, many retailers are becoming increasingly aware they are suffering from a swollen portfolio of stores, and we are already beginning to see the start of a reduction in the number of physical stores retailers operate.”

Martin Hayward, founder of Hayward Strategy and Futures, said: “It’s clear that retail health is on a downward trend, and retailers are in need of a shot of good news and a turn in fortunes. However, there are some reasons for optimism; real income growth, historically low unemployment levels and record job vacancies should all put consumers in a strong position to spend. Coupled with Spring bringing with it good weather and people feeling the need to ‘feel good’ and spend after a long-drawn out winter, those retailers that seek out these areas of positivity and take advantage, will be the ones that come through the second quarter in a better position.”

Maureen Hinton, group research director, GlobalData, said: “The poor weather throughout Quarter 1 compounded the misery for retailers, who are already struggling in tough trading conditions where capacity is outstripping demand and competition is fierce. Many stores across the UK failed to open during periods of heavy snow, and the cold weather over Easter Bank Holiday weekend failed to spark any sort of revival. These missed sales will have to be written-off by retailers – hence the heavy discounting we have witnessed.  Retailers will now have to focus on the new season and doing their utmost to take advantage of any uplift in consumer demand following improving weather conditions throughout Spring and Summer, while at the same time managing their costs.”

Martin Newman, CEO at Practicology, said: “Disruptive brands such as Amazon and category specialists such as Missguided make it easier for customers to buy from a broader range of products, often delivered quicker than from anyone else. As retailers race to keep up, margins are being squeezed due to a combination of the increased cost to serve and price competitiveness as consumers chase value for money purchases. The old model of price, range and service is still relevant, however, more focus than ever has to be placed upon service. Simply transacting is not going to be enough to secure customer loyalty and lifetime value. Only those who can also become service providers will survive and prosper.”

Mike Watkins, head of retailer and business insight, Nielsen, said: “On the face of it, it looks like good news for the food retailers, and they have outperformed non-food retailers, with the grocers maintaining growth in the last few months. However, whilst volumes have returned to positive, much of the growth has come through price rises as the result of inflation. One area that the major Supermarkets have focused upon has been the further development of their own label ranges. These products continue to be popular with shoppers, with value sales growing at 3.5% over the last year ahead of brands (Nielsen Scantrack) and now account for over a half of all sales. These own-brand goods can also provide profit opportunities alongside brands, so if category strategies are implemented effectively and efficiently there is potential to widen margins as well as support the topline business growth.”

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