- Retail Think Tank predicts health of the sector will fall by two points in Q4 22
- A hot summer saw consumer demand remain solid in Q3 22 despite rising energy costs and inflation
- Sustainability boost as consumers cut back on unnecessary spending
The Christmas shopping period will be challenging for retailers this year, with the health of the sector seeing its biggest golden quarter decline since 2011, according to the latest assessment by KPMG/Ipsos Retail Think Tank (RTT) members.
According to the latest Retail Health Index (RHI) the health of the retail sector is expected to decline by two points to 70 points in the final quarter of this year – a drop in Christmas trading not seen since 2011 where growing uncertainty in the European and global markets kept consumer confidence low.
With the arrival of the colder months, consumers are likely to feel the impact of rising energy bills more acutely and with interest rates rising, the RTT predict that pressure on margins, rising costs and shaky consumer demand will combine to produce a difficult trading environment in the final quarter of this year. Whilst October is expected to be particularly challenging for retailers, November and December look more positive with Black Friday sales and the World Cup expected to boost food sales alongside Christmas gift buying as consumers look for bargains to suit their budgets. However, sales value growth versus sales volume decline will continue to be an issue for the sector as consumers are buying fewer non-essential items to cover rising food costs.
The continued decline in retail health during the busiest quarter in the retail calendar, comes on the back of a steady summer period where hot weather saw retail health fall by two to 72 points in Q3 22 – as consumer demand for new clothes in particular, continued to drive sales. Demand and footfall started to fall towards the end of Q3 22 – a trend that is likely to continue to the end of the year.
As retailers prepare for the festive season, margins are expected to be squeezed with retailers choosing not to pass on increases to customers currently, in order to keep demand stable, whilst some will be looking to clear stock to encourage more sales. Costs will continue to be an issue, and whilst some costs such as commodities and freight have already started to improve, labour costs are expected to continue to put pressure on retailers, and many will be looking at pay rises and cost of living payments to avoid staff churn and help keep valued staff during this key time of the year.
Commenting on the latest health index Paul Martin, Head of Retail at KPMG in the UK said:
“The health of the retail sector continues to slowly deteriorate, and it has been over a decade since we have seen a two point drop in the health index during the vital golden quarter. It likely that that the usual festive boost won’t be enough this year to counteract the ongoing issues that retailers are facing with rising costs, squeezed margins and fall back in demand. Whilst economic and political uncertainty influence the health of the retail sector, it seems that this has yet to fully trickle down to the consumer who will still want to enjoy Christmas, with many choosing to spend on hospitality and enjoying time with friends and family. Many will be looking to trade down, search out bargains and purchase less – but Christmas is by no means cancelled – despite the mood music around an impending recession.”
Retail sales value continues to rise and volumes remain challenged
Whilst retail data has shown consistent sales growth in recent months, this has been driven by price rises, but in real terms volumes have been falling since Q2 22 as consumers buy less to make their budgets last. Significant price rises across most retail categories have contributed to a slowdown in the volume of spending and the gap between the two is expected to keep widening as the year goes on – with an acceleration in 2023 as economic conditions are expected to worsen.
Consumer behaviour has been changing as the cost-of-living crisis deepens, with shoppers purchasing more frequently but filling smaller baskets, and spend is shifting to food categories as people cut back on non-essentials to meet their weekly food bills. These new buying behaviours have triggered an unintended sustainability benefit for the sector, as consumers shop smarter – buying clothes that last longer and wasting less.
Martin Hayward, Founder – Hayward Strategy and Futures commented :
“The tills continue to ring on the high street but the baskets of goods going through them are considerably smaller as consumers prioritise essentials, and the biggest priority is food. Food and grocery’s share, already the largest share of spend, will increase further because of inflation rather than volumes and we can expect more of household spend to shift to the food sector as the cost-of-living crisis deepens.
“Retailers are selling fewer items for more money, and this could have a positive impact on consumerism and the sustainability agenda. With a growing focus on getting value for money, consumers are prepared to pay more for better quality, longer lasting items and buying only the food that they need, cutting down on waste. Ironically, the cost-of-living focus could be helping people to become more sustainable without them realising.”
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About the KPMG/Ipsos Retail Think Tank (RTT) and Retail Health Index:
The RTT panellists rely on their depth of personal experience and sector knowledge, and review a comprehensive bank of industry and government datasets and include the following:
Members of the RTT are:
- Nick Bubb – Independent Retail Analyst
- Joe Marshall – Managing Director, Customer Experience and Channel Performance, Ipsos Retail Performance
- Martin Hayward – Hayward Strategy and Futures
- Maureen Hinton – GlobalData Retail
- Paul Martin – KPMG
- James Sawley – HSBC
- Mike Watkins – NielsenIQ
- Ruth Gregory – Capital Economics
- Jonathan De Mello – Founder & CEO, JDM Retail Consulting LLP
- Martin Newman – The Consumer Champion
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 Channel Performance 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.
- 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.
- 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.
- 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.