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Retail Think Tank

Life after the food contamination crisis – how closely should retailers vet their suppliers’ sourcing?  Where does the ultimate responsibility for consumer safety lie?

Introduction

The contamination of the beef supply chain with horse meat is a stark illustration of the risk of supply chain failure and should serve as a wakeup call for all retailers, not just those in the food sector.

The KPMG/Ipsos Retail Think Tank (‘the RTT’) met in April to consider the implications of the horse meat contamination scandal for the retail industry and to ask how closely should retailers vet their suppliers’ sourcing? Where does the ultimate responsibility for consumer safety lie?

The horsemeat scandal: This isn’t a safety issue, it’s one of trust

As Nick Bubb, Retail Analyst, notes, “It’s a funny kind of food “crisis” when nobody dies or is even reported unwell after eating the affected products”.  Despite the fact that testing has confirmed that the risk to consumers’ health is extremely low, the recent horsemeat contamination saga has captured the nation’s imagination through the media coverage and sparked widespread fears about the vulnerability of UK food supply chains.

Richard Lowe, Head of Retail and Wholesale at Barclays, says: “This is not only an emotional issue but one of trust too. Consumers rightly expect a certain standard, and when those retailers they choose to shop with fall short, there is a clear expectation that these businesses need to address the root causes of these issues as soon as possible. In this case, we saw many retailers respond quickly and provide their customers with updates, whether by email or in store, and they are working to restore that trust, particularly around the security of the supply chain.”

The RTT agree that retailers need to urgently rebuild consumer trust in their products and the security of their supply chains.

Neil Saunders, Managing Director at Conlumino, says: “This wasn’t really about safety.  The problem was people had been missold something, and felt misled.  The adulteration of meat left many consumers highly uncertain about what they are eating; if products contain extraneous horsemeat, they ask, what else might be hiding within?

“This erosion of confidence has serious implications for both the retail and food processing industries. Consumers have already reacted swiftly, ditching brands and products tainted by the scandal, with many rediscovering the local butchers they once abandoned in favour of the big supermarket chains. As new developments come to light, we should expect to see habits change still further.”

Cause and effect: The crisis is a consequence of behaviours within the industry

The RTT believes that the food contamination crisis is linked to the pressure on retailers to cut costs and deliver the cheapest possible product, leading to complex, opaque, supply chains.

The RTT notes that this move to slash costs has been partly driven by consumer demand and shopping behaviour.  As economic hardships hit consumers’ pockets, many sought to make savings in their weekly shop, choosing the cheapest possible product.  This led retailers to compete vigorously against each other on price.

Martin Hayward, Founder of Hayward Strategy and Futures, said: “There has been a relentless pressure to focus on price at the expense of quality at the lower end of the retailing market.   It is perhaps unrealistic for consumers to expect to be able to eat or dress themselves so cheaply, but they have been led to believe it is possible by purveyors of ‘value’ products in the food and clothing chains.    For these value propositions to be maintained, there is great pressure on the retailers to source cheaper ingredients and products, inevitably leading them to less controlled markets and suppliers around the world with concomitant cheaper labour costs.”

The RTT notes that improving the traceability of food could add exponentially to the overall cost of the product, and it was doubtful that this price would be swallowed by the consumer.

David McCorquodale, UK Head of Retail at KPMG, says: “The crisis won’t have a bearing on the cost of food.  Low cost food is here to stay.  However, it’s surprising how far food chains stretch across the globe, especially as these chains are for established products, so they really should be as short, and as efficient, as possible.”

However, the scandal has prompted a degree of switching behaviour.  Tim Denison of Ipsos notes that the value grocers like Tesco and Aldi have lost market share in the short term as consumers changed their buying habits and shopped at places like Morrisons and Marks and Spencer’s, who are seen as trusted sources.

In the long term it is unlikely that all consumers will stop buying low cost, processed food.  As Nick Bubb explains: “In the past, the impact of food scandals has always been short-lived, so it will be interesting to see how long this market share shift to quality operators will last, or whether it simply reflects the relative affluence of their customer demographic.”

The RTT also believes that the crisis could have been caused by a breakdown in relationships between retailers and suppliers.  The crisis has shifted the balance of power away from retailers to those companies that supply them, and highlights the importance of having better quality suppliers.  “If retailers squeeze their suppliers too far on input pricing then suppliers will find ways to get some money back by cutting quality”, explains Nick Bubb.  “The best supplier relationships are built on long-term partnerships and shared interests in a fair distribution of risk and reward.”

Finding a solution: Complex and opaque supply chains need to be tackled

The RTT says that for some retailers supply chain complexity has reached unprecedented levels. In recent years, financial pressures have driven many companies to cut costs as much as possible and take greater risks in their supply chains, often without undertaking a full assessment of what these risks really entail.  This drive to cut costs through the supply chain can have unintended consequences.  As buyers cut costs, suppliers are forced to reduce controls to protect margins, increasing the risk of supply chain failure.

The RTT believes retailers have a duty to assure their supply chain for their end consumers, place renewed focus on supplier risk management and ensure the necessary checks and controls are in place.

The Group advises retailers to shorten their supply chains to improve visibility of the end to end process.  “The food contamination crisis has shown how hard it can be to keep a close eye on every stage of the supply chain”, says Vicky Redwood of Capital Economics.  “This has arguably become more difficult with the proliferation of outsourcing to far-flung countries in order to take advantage of cheaper material and production costs overseas. This should prompt a wider rethink of supply chains and encourage retailers to reduce the length and complexity to increase provenance.”

Tim Denison of Ipsos adds: “A more elegant solution could actually introduce cost reductions. Simplifying chains to fewer players, building stronger end-to-end supply relationships and establishing shared responsibilities to deliver traceable food that ends up on the consumer’s table brings with it a sense of back to old fashioned basics; and what’s wrong with that? This can mean a return to local sourcing, for processed as well as primary foodstuffs, something in which shoppers have new found interest. Waitrose is already going down this path. Its ready meals are predominantly own-brand from authenticated direct sources and those that aren’t come from smaller UK suppliers, with simpler supply chains.”

The Group suggests that retailers try to take steps to develop stronger collaboration with suppliers in order to strengthen relationships with them and build trust.  This could take the form of putting in place long term contracts with suppliers.  Such a collaborative approach could ensure that risks are reduced and governance is better.

However, the RTT acknowledges that the elimination of risk is impossible, and external factors like natural disasters or being targeted by fraudsters will always be possibilities retailers must plan for.  Mark Teale of CBRE says: “With thousands and thousands of food lines, it is simply not possible to guarantee that the food chain will not be contaminated.  A bit like drugs testing in sports, spot checks as a deterrent are the best you can do. Much more than that and the process becomes so onerous that it becomes counter-productive. At the end of the day, as with so many other things, you have to rely largely on trust. There will always be rogue manufacturers.”

Some cross contamination will always exist – labelling isn’t the silver bullet

The RTT believes that labelling products with further disclaimers is not the answer to this crisis.

“Yes, retailers could simply make their product descriptions more vague’, says Vicky Redwood, Chief UK Economist at Capital Economics, “but obviously this would compromise consumers’ perceptions of the quality of the products and could dent consumer demand. Retailers may do better to appeal to consumers by improving – and advertising – the guaranteed provenance of their products.”

The RTT notes that eliminating cross contamination is nigh on impossible, because very few processing plants are dedicated to producing just one product, and may have different types of meat flowing down their lines and through their machines.  This means that from product to product, a minor level of contamination will always exist.  The RTT concludes that labelling should not list the other products being made in the same plant, nor attempt to detail the permutations of possible cross contamination.

“This would lead to longer and longer disclaimers, like medicines,” says Mark Teale, Head of Retail Research, at CBRE.   “It’s easy to overreact and label extensively and pass the buck onto your suppliers but in reality risk has to be solved with better trust between the retailer and the supply chain.”

The RTT believes that increased regulation would not increase safety, but would give consumers a false sense of security. David McCorquodale of KPMG says: “Retailers need to look at their own corporate governance and check their controls.  Their reputation is on the line and they will care more about protecting it than an inspector from a regulator. After all these scandals cost them money and hit their profitability.  Labelling should be about safety and warning people with allergies if the product might not be suitable for them.  Instead of increasing labelling, retailers should be encouraged to spend their time better assessing the risks in their supply chain and repairing any weaknesses.”

The RTT instead suggest that current regulation, such as the Trade Descriptions Act, should be vigorously, and publicly, enforced to deter fraudsters targeting food chains.

Conclusions: life after the horsemeat contamination crisis

It’s six weeks on from the scandal and it’s foot on the ball time.  The RTT concludes that while retailers have reacted swiftly to remove the products from the shelves and begin testing, a cohesive strategy outlining steps the industry needs to take to shore up the safety of the supply chains is needed.

The RTT agrees that retailers are ultimately responsible for what they stock on their shelves and sell to consumers.  While the horsemeat contamination was caused at a supply level, retailers still have a responsibility to assess the risks in their supply chain, and put appropriate controls in place.

There will be debate around how far the industry will push on the issue of controls and how far regulators will pull.

David McCorquodale of KPMG believes it is essential that the industry is on the front foot: “Retailers need to lead the debate and take decisive action as an industry on labelling and managing supply chain risk or they will be frogmarched down the wrong path by regulators.”

Neil Saunders of Conlumino adds that it is in retailers’ financial interests to tackle the problem head on:  “If retailers see the effect on their bottom line they will take action.  The market is self correcting.  They fear losing share and so they will look at solutions, including those retailers unaffected this time.”

Part II: In detail – Individual views of the RTT members

Nick Bubb, Retail Analyst:

“It’s a funny kind of food “crisis” when nobody dies or is even reported unwell after eating the affected products, but the recent horsemeat scandal has caused some interesting shifts in consumer perceptions of supermarkets and in the balance of power between suppliers and retailers.
One message from the recent scandal was that “you get what you pay for”, with the problems concentrated at the bottom/cheap end of the market for meat products. The better quality supermarkets like Sainsbury, Waitrose and M&S seem to have done well out of their focus on food provenance, as has Morrison’s, with its control of its own supply chain. In the past, the impact of food scandals has always been short-lived, so it will be interesting to see how long this market share shift to quality operators will last, or whether it simply reflects the relative affluence of their customer demographic.

Another message, however, from the recent horsemeat scandal was that if retailers squeeze their suppliers too far on input pricing then suppliers will find ways to get some money back by cutting quality, so supermarkets shouldn’t get too hypocritical and affect to be shocked at what some of their more shady suppliers have been up to. The best supplier relationships are built on long-term partnerships and shared interests in a fair distribution of risk and reward. In the same way, clothing retailers should be careful that the arbitrary imposition of retrospective discounts to payment terms doesn’t result in a similar lowering of quality standards by clothing suppliers…”

Richard Lowe, Head of Retail and Wholesale at Barclays:

Since the horse-meat scandal broke, I suspect many of us have shared the same niggling doubts as to whether we too are among the millions of unwitting victims of horse-gate. One thing which is in no doubt is the need for retailers to overhaul their supply chains in its wake and, to the industry’s credit; many have already made public pledges to do so.

As the final link in the supply chain, retailers should be vetting their supplier’s sourcing vigorously to ensure the provenance of all their products. Some have already taken steps to shorten their supply chains, or brought them closer to the UK so that in future they can confidently confirm the origin of the goods sold in their stores. The bond between the consumer and retailer is crucial and the horse-meat scandal has highlighted the damage which can be caused to retailers when supply chains aren’t rigorously managed.

As to where the responsibility for consumer safety lies – this has not been about consumer safety per se. To date there is no evidence to suggest eating horsemeat is unsafe. However, unlike many European countries, eating horse meat remains a taboo subject at British dining tables. Therefore, as the last link in the chain, retailers are ultimately responsible for what they stock on their shelves and for easing consumer concerns as to where it has come from.

This is not to say consumers are to be absolved of responsibility. With household budgets under significant pressure there is a natural inclination for shoppers to trim costs wherever possible. While food is not a luxury item it now accounts for more than 40 per cent of all retail spend according to the Office for National Statistics and is, therefore, an obvious target for thriftiness.  Consumers are rightly outraged at the horse meat scandal but, will they be willing to pay more at the checkout for their shopping in these straightened times – only time will tell.

Neil Saunders, Managing Director at Conlumino:

The essence of the horsemeat crisis is one of trust. The adulteration of meat has left many consumers highly uncertain about what they are eating; if products contain extraneous horsemeat, they ask, what else might be hiding within?

This erosion of confidence has serious implications for both the retail and food processing industries. Consumers have already reacted swiftly, ditching brands and products tainted by the scandal, with many rediscovering the local butchers they once abandoned in favour of the big supermarket chains. As new developments come to light, we should expect to see habits change still further.

Retailers will be thankful for the fact that the crisis is of such scope and scale that blame has been dispersed over a wide area with no one in particular in the crosshairs. However, this does not mean that it is a non-issue; consumers expect action to be taken and for someone to take responsibility to ensure that problems are remedied. As the final link in the supply chain, retailers must bear the ultimate responsibility for what is sold. Most have done just that; there has been very little ducking and diving within the industry.

However, this sense of responsibility must also extend to actions. The pressure retailers exert to trim every possible cost is enormous and the whole supply chain from farm to fork is now so tight that it was probably only a matter of time before a crisis arose. In other words, this is more than an accident; it is a direct consequence of the behaviours within the industry. That’s what needs to change.

However, there is arguably another actor who is also liable: the consumer. Buying food is not discretionary; it’s something we all need to do, and do regularly. As such, it accounts for a very large proportion of all that we spend on retail. If we can reduce the amount we spend during our weekly grocery shop then we have more scope to buy other more exciting consumer goods; so, many of us happily laden up our trolleys with value ready meals and cheap cuts of meat in order than we can shave a bit off our bill. How many of us, though, really thought about that 99p ready meal and asked “is this really too good to be true?” The answer is not nearly enough of us.

None of this is to excuse retailers or manufactures, but it does open up an important question about the current realism in terms of economics within the food industry. Part of solving this matter and guaranteeing, as far as possible, food which is free from contaminants has to be the acceptance of higher prices. Notably, when we talk about higher prices we are not talking about massive hikes but a few pence here and there. Certainly, that’s unwelcome in the current economic environment but it is a necessary price to pay.

Will consumers wear it? Their reaction to horsemeat suggests that they probably might. The fact that many are already buying more expensive foods or using butchers which charge a little more suggests there has been a subtle shift in attitude. Will retailers wear it? Arguably they should; being the cheapest at all costs may well bring some short term market share gains, but if it ultimately undermines long term confidence in the brand it becomes something of an own goal.

The bottom line is that when it comes to food prices the old farming adage is as true now as it ever was: you reap what you sow.

Vicky Redwood, Chief UK Economist at Capital Economics:

Of course no retailer would want to deceive consumers deliberately (we hope!). However, the food contamination crisis has shown how hard it can be to keep a close eye on every stage of the supply chain. This has arguably become more difficult with the proliferation of outsourcing to far-flung countries in order to take advantage of cheaper material and production costs overseas. Food contamination is just one example – the use of child labour is another recent example.

It is retailers’ responsibility to sell consumers the goods consumers are told they are buying. Of course, this is of most importance when questions of consumer safety are at stake. The food contamination crisis is slightly different in that horsemeat itself is not dangerous. But of course, the question is, if horsemeat can get into food products unknowingly, what else can? Indeed, one supermarket recently had to withdraw food for being contaminated with veterinary medicine.

So how will, and should retailers, respond? They could of course simply make their product descriptions more vague. Take peanuts. Rather than making 100% sure that peanuts are not included in products, retailers usually just write “may contain peanuts” on the packaging to shift the responsibility to the consumer. So maybe we will now see more “meat lasagne” rather than “beef lasagne”! But obviously this would compromise consumers’ perceptions of the quality of the products and could dent consumer demand. And appetite for ethical products has been growing, suggesting that retailers may do better to appeal to consumers by improving – and advertising – the guaranteed provenance of their products.

Accordingly, retailers will have no choice but to take more care in controlling the supply chain, and facing up to the fact that cheap outsourcing may not be the free lunch it may have appeared to be in the past – reducing costs without much extra expense. In the extreme, all of this could mean bringing back production to where it can be more closely supervised – which would involve higher costs for consumers.

Mark Teale, Head of Retail Research at CBRE:

The only obvious way of improving food vetting is to increase the level of third-party testing. In practice the range of packaged/processed mass-market food products is so large that across-the-board testing is simply a non-starter. At best, testing will continue to be limited to areas where there is a suspicion of adulteration or where adulteration has occurred in the past.

At the end of the day, as the retailer is the point of sale, it is the retailers’ responsibility to ensure consumer safety. In practice, with thousands and thousands of food lines, it is simply not possible to guarantee that the food chain will not be contaminated. The same is true in non-food markets. It is not possible to guarantee that all goods supplied meet the manufacturing/employment age/conditions criteria that we consider essential. A bit like drugs testing in sports, spot checks as a deterrent are the best you can do. Much more than that and the process becomes so onerous that it becomes counter-productive. At the end of the day, as with so many other things, you have to rely largely on trust. There will always be rogue manufacturers.

Scandals will continue to occur, like the horse-meat contamination (and salmonella in eggs incidentally: in the UK many years ago and much more recently in the US), but there is little evidence that contamination is a significant issue with processed food per se: health risks attaching to processed food generally (sugar, salt obesity etc) are clearly a much bigger issue than the periodic contamination found in individual food lines.

Martin Hayward, Founder of Hayward Strategy and Futures:

There is no doubt that consumers have been shocked to find that products they have been buying do not contain what the packet says they do.

At the heart of the matter lies the perceived relentless pressure to focus on price at the expense of quality at the lower end of the retailing market.

It is perhaps unrealistic for consumers to expect to be able to eat or dress themselves so cheaply, but they have been led to believe it is possible by purveyors of ‘Value’ products in the food and clothing chains.

For these value propositions to be maintained, there is great pressure on the retailers to source cheaper ingredients and products, inevitably leading them to less controlled markets and suppliers around the world with concomitant cheaper labour costs.

Food costs actually represent a small proportion of household expenditure compared to historically, and to continue to aim to reduce it further has led to the complex and hard to regulate sourcing policies uncovered by the recent contaminations. (The richest countries also spend the smallest percentage of income on food).

It has been rather bewildering, but certainly good news for UK farmers and consumers, to see some retailers suddenly discovering a passion for UK sourced product, not perhaps because they believe it is right because they would surely have done it years ago if that were true, but because they feel have to.

In a recessionary environment, it is harder than ever to put ethics and provenance ahead of price, but the performance of those food retailers who have adopted this position, goes some way to show that the consumer perhaps has a better understanding of the trade-offs involved than they are given credit for.

Tim Denison, Director of Retail Intelligence at Ipsos:

It’s easy to overplay the “horsemeat” scandal. The fact is we have a good track record on food quality matters in this country; certainly compared to the likes of China, for example, whence I have recently returned amidst reports of another break out of bird ‘flu in poultry and a boat of contaminated dead pigs found floating down the Yangtze.

Let’s be clear. The weakness that the recent saga exposes is not about the two ends of the supply chain – the farmer and retailer, it is all about the filling in the middle of the sandwich – the processors, food manufacturers and packagers.

Some argue that food quality standards became compromised when an EU directive scrapped daily abattoir inspections in 2006. I’m not interested in blame, but solutions. The current European legislation requires companies to have proven traceability of content and origin back to the previous stage in the food chain. This dictat is fallible, as some retailers have recently experienced to the detriment of their market share. The system neither provides end-to-end proof of authenticity and source origin, nor any requirement for physical inspection: it purely hangs on a paper-based trail of documentation.
In these times of austerity, when the financial strain on the chain is ever tightening, the quest for cheaper sources often leads companies to explore overseas supplies, involving passage through more pairs of hands, weakening traceability and risking product substitution.

The solution is less obvious. End-to-end traceability is technically possible, but it would involve significant cost to a market already under severe cost pressure. The expense would not be so much in the electronic tagging of the produce itself, but in the data management system and its integration into existing supply chain systems such as warehousing. A cheaper option, though still costly, is testing for product contamination, which, to its credit, Sainsbury introduced at its expense a decade ago with DNA sampling. It is testament to the solution that Sainsbury has emerged unscathed from recent events.

A more eloquent solution though could actually introduce cost reductions. Simplifying chains to fewer players, building stronger end-to-end supply relationships and establishing shared responsibilities to deliver traceable food that ends up on the consumer’s table brings with it a sense of back to old fashioned basics; and what’s wrong with that? This can mean a return to local sourcing, for processed as well as primary foodstuffs, something in which shoppers have new found interest. Waitrose is already going down this path. Its ready meals are predominantly own-brand from authenticated direct sources and those that aren’t come from smaller UK suppliers, with simpler supply chains.

End-to-end traceability in the food industry is inevitable one day, I’m sure. It works splendidly in the motor manufacturing industry, increasing safety through enabling targeting product recalls and reducing costs. But its time in the food sector is not yet. Some retailers are already showing perfectly well how to be responsible and responsive to quality management without introducing unjustifiable additional cost. It’s now down to the others to step up to the mark and strengthen their means of authentication of source of origin and so improve the appeal of their “sandwich filling”.

David McCorquodale, UK Head of Retail at KPMG:

At first it was headline grabbing, press inflamed horror.  How am I eating horsemeat?  What’s a Cypriot middle-man doing in the supply chain?  What else can there be in a beef lasagne?  Who can I trust anymore?  Not one of the retailers could stand tall in the immediate aftermath and say they were unaffected.  It was clear that something was amiss and, whilst fraudulent practices may have been around, the episode has exposed too many risks in long and complex global supply chains.  Change is needed.

The industry, retailers and manufacturers and regulators alike, coped well in the immediate aftermath, with good cooperation and swift testing, with the 1% threshold holding up adequately.  However, the retailer, being the main party at the apex of consumer trust and brand reputation, needs to drive that change.  It is the retailer after all who establishes the ‘deal’ with the consumer through the ‘contract’ on the label and who takes the consumer’s cash.

The complexity of the food supply chain came as a surprise to the public.  From farm to fork there has been a lack of consistency in the way produce has been monitored, creating black holes in the supply chain that enable unscrupulous or desperate parties to cut corners or sabotage products.  From conception to consumption there can be more than 450 critical steps as produce finds its way from field or sea via the abattoir, dairy and storage silo, through the processing plant to the packaging facility and the supermarket shelf.  Along this chain, managers have to assess and control risk.

Change is inevitable. Supply chains must be shortened to reduce risk, which may bring more processing back to the UK.  Greater collaboration and perhaps even longer term contracts between retailer, manufacturer and farmer may emerge to enable investment and guarantee availability. Regulation is inevitable and the food industry must participate in this.  The dairy industry has demonstrated the advantages of consolidation, and the meat industry may have to follow suit even if this clashes with the desire for smaller, identifiable local farmers.  Whilst costs associated with compliance and assurance will increase, I suspect this will not be passed to the consumer.  Efficiency and security will need to fund themselves.

Lessons can be learned from other industries.  The pharmaceutical and automotive industries are best in class for traceability and risk control.  Imagine the uproar if a brake pad had the rubber equivalent of horsemeat in it on a motor car!  Key for the consumer is trust and retailers need that to maintain reputation.

Date Published: 6/11/2013 11:55 AM

Part I: Executive Summary

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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