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Retail Think Tank

How can we define the health of the UK retail sector?

In the UK, the retail sector is rarely out of the news. Whether considering business confidence, consumer confidence, the impact of rising interest rates or house prices, it is rare for the fortunes of the retail sector to go unmentioned.

Retail represents 11% of the national workforce and is responsible for sales of £249 billion and 6% of GDP. As a barometer for our country’s economic well-being, the state of retailing is always a consideration.

Unfortunately, at any point in time, it is incredibly difficult to get a true view of the “health” of the UK retail sector. Never was the truism of lies, damn lies and statistics more applicable than when considering the UK retail sector. Every which way you turn; a different set of statistics could give you – potentially – a different story.

The sheer volume of that data, coupled with the large variations in how that data is generated and then interpreted, could lead industry leaders – let alone the bemused man on the street – to think that retailing is booming one day but on the brink of collapse the next.

Putting aside temporarily the fact that there are so many sets of data clamouring for attention, a more fundamental issue when deciding on what constitutes the health of the retail sector – and one which emerged from discussions within the Retail Think Tank (RTT) – is that people have multifarious views of what health actually means.

Retail health vs retail prospects

What many people – shoppers, businessmen and the media alike – think of as retailhealth should more realistically be thought of as retailing’s current status and prospects; a view on what today, the coming days, weeks or months may hold.

Life in the retail sector always moves at a rapid pace – more so than in most other business sectors. The dynamism results from the intensity of competition and potential for immediacy in competitive responses. The rapidity of change also results from the closeness of retailers to customers and consumers, who often act in economically irrational ways that create sudden, although maybe only small, changes in demand. For these reasons, it is unsurprising that the industry itself is always focused on the immediate prospects and how the next few months will pan out.

Surely however, retail health is so much more than just a consideration of the next few months. A more holistic view, taking into consideration issues such as the long term future of the sector, the stewardship skills and quality of management (particularly at the middle management level), brand dynamism, level of innovation, the quality and range of retail offer and UK retail’s position on the global scene brings you closer to a truer picture of retail health.

Factors such as these are far more influential on the long term health. However, such is the way that British industry is financed and run, commentators, analysts and the public tend to focus primarily on the short-term. They base their opinions on the state of retail on which piece of data they have seen most recently and contextualise that by considering how much money is in their pocket or what purchases they intend to make in the near future. Retail businesses themselves can suffer from a similar degree of tunnel vision.

The immediacy of that snap judgement is understandable but to pass this off as the definitive view of retail “health” is disingenuous. This is more than mere semantics. The health of retail is so much more than short-term indicators – but more of that later.

Retail prospects are just one contributory factor – but a key one

We cannot ignore the importance of having a correctly informed and considered view of retail prospects. It is a central factor in our overall assessment of retail health, though not the sole determining criterion.

It is easy to have your opinion swung by just one headline piece of information, hence why public perceptions and media commentary of retail prospects seem prone to such large swings.

Being able to cut through all the available data to provide the definitive view of UK retail prospects is no small task. It is however the challenge for which the RTT was formed.

With this in mind, the first official discussions of the RTT were illuminating. After synthesis of the many data sets that reflect the prospects of the sector (ranging from retail footfall to occupancy rates,  retail sales to unemployment within the sector and indicators of other softer measures), the conclusion reached by the RTT was that actual shifts in demand, costs and margins result in remarkably small, incremental changes to UK retail’s prospects. This is in marked contrast to the huge swings in fortunes so often reported.

The main reason why change of this type is apparent is simply the sheer scale of the sector. With average sales of around £5 billion per week, any large shift would be cataclysmic. Also the vast number of actual shops again means that any change is small in comparison with the whole. Similarly with the number and nature of customer transactions – whilst an individual or even group of customers may change their behaviour and spend more or less, their individual contribution is small within the total volume of activity.

However, changes at the margin can be substantial give the scale of the whole. Thus understanding the marginal changes and their direction and strength are central to any understanding of retail health. Marginal changes are very important. Competition and change in retailing takes place at the margin.

(For further information on the RTT’s first evaluation of retail prospects, please refer to the RTT news release of 13 July 2006.)

Price deflation – a sign of poor health?

With a consolidated view of the prospects for UK retail tucked away, let us return to the weightier consideration of the “health” of the UK retail sector.

By way of example, the issue of price deflation allows us to explore the difference between “health” and “prospects”. If you take the consumer’s viewpoint, falling retail prices are to be welcomed. Goods become more affordable and their acquisition leads to a sense of rising affluence.

The retailer’s perspective is less one sided. Whilst price deflation may encourage the consumer to “trade up” and so keep sales ticking along, unless retailers can continue to reduce their costs continuously, the positive impact on retailing is unsustainable. Ultimately, margins will be affected, having knock-on effects throughout retail businesses.

On a very basic level, this alternative assessment of the impact of price deflation alone could lead you to conclude that the UK retail sector is becoming unhealthier – as it remains committed to satisfying its customers today to the possible detriment of its long-term health tomorrow.

Ultimately, consumers may tire of ever cheaper products – most likely at the point when it becomes clear that deflation is directly linked to poorer quality, a loss of retail innovation and/or a down-grading of the retail experience. Basic economics will force this change on retailers if price deflation continues unchecked. This illustrates again the importance of marginal change with at some point a marginal change in deflation becoming important in being the catalyst for a much larger shift in consumer attitudes.

For the time being though, there are unlikely to be many consumers out there who are willing to altruistically pay more for their products now if it safeguards the quality of their shopping experience in the years to come.

Variety is the spice of life

“Health” is about more than just sales and margins. Consider the issue of range and variety. Consumers prefer to be given a choice of offer. The greater its variety (thinking in terms of product and retail outlet), the better, one might argue, stands the “health” of retailing. In a free market economy, choice is always a key benchmark criterion.

Even a recycling of retail brands may be seen as a good thing – when one brand fails, another steps into the gap – so long as variety and choice remains.

The replacement and re-invigoration of brands, whether by retailer or by manufacturer, is a symptom of the level of retail health. Consumers thrive on choice – but not totally unconstrained choice. For choice to be of value, there have to be indicators that help choices to be made. Brands are one of these indicators. Vast choice with no indicator signals to help decisions is very confusing to consumers.

Brands provide the extra information to enable choice. This is the case with brand of shop as well as with brand of product, and even brand of shopping centre or town centre. An important part of competition is based on improving the nature of these signals to consumers. As signals are changed, so the object being branded has to change and often quality (in effect, how well it meets the requirements of consumers), is increased. Lesser quality brands are replaced by better quality brands and this is a sign of retail health. Competition is the gym for building retail health and fitness.

Variety and choice exist on many levels. It is not the case, for example, that the growing concentration of ownership within retail need not necessarily be to the detriment of the sector’s overall offering. A retailer can successfully compile different formats of offer, and product ranges under separate fascias which appeal to different segments of society.

Variety – and the resultant ability to keep the consumer happy, interested and engaged – is key.

However, there is already a nagging suspicion that retail has to compete ever harder to maintain its share of the consumer’s time and purse. Work/life imbalance, less leisure time per se and a growing array of alternative recreational activities see to this. Being less competitive may be expressed by the notion that the UK consumer is getting notionally bored of shopping. Whether this is as a result of the consequences of issues, such as price deflation, starting to impact on innovation is not yet clear. There have been enough references to clone-town Britain though and our disappearing high streets to raise serious questions about the sector’s levels of variety and its vitality.

Certainly, if you look abroad to markets such as the US, the mix of retailers might be considered more vibrant and interesting. In the UK, the main innovative thrust in terms of format is coming from retail’s fringes, with new outlets such as farmers’ markets harnessing the power of the internet to tap into a disaffected section of the public which finds itself bored with the traditional UK retail mix.

Location, location, location

No discussion on the amount of variety in UK retail can avoid considering the role of the property companies. Landlords could take a much greater and more proactive role in working and shaping the retail mix, introducing new names and new formats. Many appear resistant to doing so.

To some extent, who can blame them? Tying up established retail names to large-scale premium property deals keeps the paymasters happy in a way that doing something purely to shake up the retail mix cannot. Not only do names attract other names but the financial risks associated with established retailers are far lower than with unproven entrepreneurs. The result though is shopping malls which may change tenants from time to time – but largely moving from one established name to another.

When you also factor in the consideration of how some prime retail space is being kept out of the pool of available property, then there is an argument for saying that property considerations are a key contributory factor to a hidebound UK retail sector, unable to move and therefore constrained in its ability to innovate.

The global context

Of course, the UK retail sector is far from on its deathbed. Considering the sector in a global context is always going to be an important determinant of health. While there are some countries which boast a vibrant and compelling retail sector, there are just as many – several of which are in “old” Europe – which are in a far more parlous state than the UK.

This begs the question as to why any foreign retailer would choose to come to the UK. If you want to become a waiter or a chef, you may well choose to train in France. If you want to learn all about retail, would you come to the UK? Possibly not. Yet the appeal still remains, as evidenced by the number of foreign retailers keen to establish a foothold in this country.

Despite the barriers to entry, they keep on coming. Is that because of the levels of consumer spending and the apparent British willingness to take on more debt? Is it the relatively high (though falling) margins to be made? Is it because they spy opportunities in market which is currently running low on innovation? Or is it – along with the US – the ultimate proving ground; make it over here and you can make it anywhere?

Whatever you deem the answer to be, the fact that they keep on coming tells you plenty about the long-standing appeal of this market, its ability to accommodate new entrants and its overall “health”.

No simple answer

So is the UK retail sector healthy or unhealthy? Is it becoming healthier or unhealthier? Some may feel that retailers themselves are currently not unhealthy. In fact, as the first RTT outputs showed, UK retailers are doing incredibly well to simply keep the ship afloat at a time when the squeeze is really on in terms of margin and demand, against a backdrop of steadily rising costs.

Perhaps though, the very structure of UK retail itself is unhealthy. Property constraints, price deflation, the squeeze on innovation – all of these could be seen as contributing to a retail sector which could leave itself with precious little room for manoeuvre in terms of future creativity and revitalisation..

Even this debate though does not touch on topics such as brand values, management quality, governmental policy – the list goes on.

The real point here is that taking into account every single contributory factor which determines “health” is a very demanding role for any single body. Despite this, many commentators claim to have the definitive view, even though these views are – all too often – based on limited, short-term considerations.

The RTT now exists to give a considered view on what the short-term prospects are for UK retail.

It also aims to highlight those issues which should be fed into the wider debate on the health of the sector, with future White Papers looking to investigate the big topics which will inform or lead the debate on just how healthy the sector really is.

There is plenty to celebrate within UK retail – and plenty to debate. It is worth bearing in mind that if the sector really was staring into an abyss and was devoid of creativity and variety, then the need to form the RTT would never have been felt.

The fact that we are here tells us that there is plenty to talk about.

Date Published: 4/5/2006 5:45 PM

Note to Editors:

The RTT panellists rely on their depth of personal experience, 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
  • Dr. 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 Retail & Wholesale Sectors
  • 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 (www.ipsos-retailperformance.com).

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 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 judgements 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.

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