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Retail Think Tank

Post Spending Review: the impact on the retail sector?

KPMG/Synovate Retail Think Tank White Paper – #18

-Low growth environment set to remain – no death knell for the sector

-But the effects of the Review will exacerbate current regional trends

Part 1: Executive Summary

Introduction

The coalition government’s Comprehensive Spending Review (CSR) had been widely anticipated by consumers and retailers alike, given the potential effect that job losses or reductions in incomes would have on both the retail sector and household spending power.

Throughout 2010 retail spending has been “trundling along” with low growth – with sales momentum marginally deteriorating quarter-on-quarter as the year progressed and the uncertainty leading up to the Spending Review has contributed to this.

However, in the immediate aftermath of the Spending Review the stock market took the announcements in its stride with the shares in retail companies bouncing back, while there are early indications that retail trading has picked up well since the Chancellor announced the government’s spending plans.

So with the Spending Review announced, furnishing consumers with a greater amount of clarity – whether the news for their own circumstances was good, bad or neutral – what will the longer term impact be of these changes upon the sector? Is retail facing a new landscape?

The impact of the Spending Review on the retail sector

Meeting the week after the Spending Review, the KPMG/Synovate Retail Think Tank (RTT) debated its effect on the sector and agrees the impact will depend on a number of factors.

•The effect on consumer spending of welfare cuts and job losses not absorbed by take-up in the private sector

Given the bias of public sector jobs and proportion of people supported by benefits in some regions of the UK the RTT considered the effect of public sector job losses – estimated to be approximately 490,000 by 2014/2015 by the Office for Budget Responsibility – to be a threat to retailing if these losses are not replaced by the private sector.

There were indications of regional caution in the run up to the spending review, as Tim Denison of Synovate pointed out: “It comes as no surprise that the devolved administered regions of Scotland, Northern Ireland and Wales which currently have the highest share of public sector jobs have seen the sharpest declines in retail footfall.” Compared to a national decline in footfall of 2.9% in the year to date against the corresponding period in 2009, Synovate’s Retail Traffic Index for Scotland and Northern Ireland shows a deficit of almost double the magnitude, -5.4%. In stark contrast the comparison in London and South East England is twice as strong as the UK figure (see Part III: Appendix – Sales, rent and footfall for full details).

Similarly, according to the BRC-KPMG Retail Sales Monitor, sales performance in the regions is showing marked contrasts around the UK this year. Average year-on- year growth in like-for-like sales in London was 9.0 per cent in the period January to June 2010 compared with 0.9 percent like-for-like throughout the whole of the UK (from January to September). A gloomier comparison still is with Scotland, which has seen a 0.9 percent fall in like-for-like sales so far this year compared with 2009 (see Part III: Appendix – Sales, rent and footfall for full details).

John Dawson of the Universities of Edinburgh & Stirling said: “Although for the UK there is a sense of bumping along the bottom, the Scottish situation suggests few up- bumps and a steady downward drift. This seems to be evident in foods, department stores and specialist non-foods alike despite a solid summer for the tourist sector with the good deal on Sterling for visitors from the Euro-zone and Japan.”

However, the RTT agreed that the overall effect of job losses in the regions may have been over-stated. While any reduction in employment particularly in areas which are already struggling is negative, the total effect over a four year period applied across the whole of the UK will not cause a significant shift in spending, more a subtle enhancement of a trend already underway.

Mark Teale of CB Richard Ellis said: “Spread across the UK as a whole and over a number of years, spending losses attributable to a public sector jobs contraction of 100,000 annually over five years cannot have an appreciable impact on aggregate retail consumer spending trends, assuming the latter figure is exceeded by private sector employment growth. The somewhat larger public sector employment shakeout in the 1990s did not trigger a marked widening of per capita retail spending disparities between regions; whatever happens, regional-level per capita spending changes will occur very slowly.”

Therefore although it is too simplistic to define impacts regionally in terms of an opening up of a North v South retail divide there will be winners and losers in many different locations, with the smaller, secondary and tertiary locations which already have trading problems hit hardest. These tend to be in less prosperous areas with a lower level of investment in infrastructure and a higher dependence on consumers supported by welfare, who are less mobile.

Mark Teale added: “Tertiary or poor secondary trading locations, where shopping stock is effectively obsolete for pitch, configuration or unit size reasons, will continue to suffer regardless of the geographic incidence of job shedding, or any upturn.”

Therefore the RTT believes that the likely consequence of the CSR actions will be an acceleration or exacerbation of an existing trend, as demonstrated by footfall declining in some locations as consumers make fewer visits to smaller / less appealing local centres, and growing differentials in rents between primary and secondary locations. Central London has bucked national rental growth trends for many years. Regionally, rental performance has weakened with distance from the South and this pattern is likely to be sustained (see Part III: Appendix – Sales, rent and footfall). This provides a challenge for retailers, local councils and planners alike, so as not to allow a “downward spiral” to continue in some areas.

On a more positive note, the ongoing strength of retail in London, which has performed strongly, is due to a combination of factors. Nick Bubb of Arden Partners said: “The strength of London trading isn’t just due to tourists, a return to health of the financial sector and the spending power of wealthy Russians: it’s also linked to the huge investment in infrastructure projects such as Crossrail, the burgeoning array of ever taller City skyscrapers and all the developments associated with the 2012 Olympics.”

And it’s not just London: other regions will benefit from infrastructure developments announced by the Chancellor in the Spending Review. Tim Denison said: “Major transport infrastructure projects around the regions such as road improvements, rail electrification Midland Metro, Tyne & Wear Metro and Mersey Gateway are all positive news for the locations they serve but will increase the trend the RTT has identified of greater concentration into fewer trading locations.”

• The accuracy of GDP forecasts

The historically strong correlation between GDP and retail sales is hardly surprising, given that retail spending accounts for about 25 percent of GDP.

Helen Dickinson of KPMG said: “For the first time in years, government consumption and investment will subtract from GDP growth, by around ½ % each year, for the next five years. The Chancellor is banking on the private sector bouncing back to fill the hole but this makes some rather heroic assumptions. Businesses may remain reluctant to invest, export performance could suffer from a lacklustre global recovery and, most importantly for the retail sector, households may continue to save and pay down debt rather than spend.”

Therefore the RTT is sceptical about the ability of the private sector to “fill the gap” created by the public sector and does not expect that the Government’s projected private sector recovery will be as consumer-driven as it has it been in previous recessions. Retail spending has seen marginal growth for over three years and this is expected to continue, although the RTT is concerned that if GDP growth falls short of its forecasts, retails sales growth levels will be in danger of slipping into decline.

The recovery – when it comes – will need to be driven by exports, dependent on a global recovery and investment, and in turn, this could boost the performance of retail in some regions. Vicky Redwood of Capital Economics said: “Wales, in particular, has a relatively big manufacturing sector – and we think that manufacturing will be one of the strongest performing areas in the economy over the next few years.”

The latest figures published by the Chartered Institute of Purchasing and Supply show exports rising at their quickest rate since May, which signals a welcome move in the right direction.

• Levels of disposal income

Consumer confidence has spent the year to date in the doldrums within narrow a band of -15 to -20 according to the GfK Consumer Confidence Barometer, although the RTT considers that the correlation between retail sales and confidence is not as close as it was historically and it does not expect the ongoing trend of low consumer confidence to be reflected in weakening retail sales.

Despite trading being disappointing immediately before the Spending Review on 20thOctober, sales have picked up towards the end of the month. According to Nick Bubb: “The reason why High Street trade was sluggish in the first half of October is probably all the media focus on austerity, spooking consumers somewhat into holding off from major purchases. After the Spending Review, people now have clarity and the evidence is that trade has picked up well.”

Vicky Redwood adds: “Although widespread public sector job cuts are planned, public sector workers may keep spending until they know whether it is actually them losing their jobs. Similarly, even if people know that their income will be reduced in the future – for example, due to benefit cuts – they may not reduce their spending until their income actually falls.”

Falling disposable incomes have the smallest adverse impact on the food sector as the split between necessities and discretionary purchases shifts. Throughout 2009, sales of food in value terms rose more quickly than non-food. In 2010, performance has been more consistent but the gap has started to widen again as food inflation creeps back in, thus reducing income available for more discretionary non-food purchases. According to Neil Saunders of Verdict: “The sectors most adversely impacted will be big ticket ones related to the housing market. Furniture and flooring, for example, will shrink in real terms over the next year before returning to modest levels of growth. Likewise, DIY will be in for a rough ride with retail growth in negative territory for the next couple of years.”

Levels of disposable income depend on a wide variety of economic factors including interest rates, savings levels and tax increases. Although interest rates are expected to stay low for some time, the big unknown is how the relationship between the announced, and as yet unannounced, tax rises and savings levels plays out. Will people save less to maintain spending levels? The saving rate fell in the second quarter of 2010, but scope for further falls is more limited. However, the RTT does

not foresee any seismic shift in spending trends – food will continue to outperform and certain sectors will continue to struggle – it’s more of the same for some time to come.

How will retailers respond – what will change?

In the future, it is likely there will be continued low levels of expansion in retailing. According to Richard Lowe of Barclays Retail & Wholesale: “We expect retailers to remain prudent, borrow less, improve their working capital and increase their cash reserves as the whole economy continues to deleverage. Over the past 12 months the high street has not been drawing down the cash facilities available to it and has been postponing capital investments. “

Where there is expansion, retailers will be very careful about the location and strategy for any new stores given that trading locations will see further concentration. The lack of accurate, comprehensive data on retail performance and floor space at local level (as discussed in a previous RTT white paper ‘Planning in the dark: How does the severe lack of information regarding retail property in the UK affect the sector?’) affects the planning and provision of space, leading to sub optimal development decisions. This, combined with cautious expansion levels by the retailers, will increase the risk associated with new stores.

The RTT also expects to see more “flexing” of retailers’ offers according to different products, markets, with a greater emphasis on discount in some locations. Retailers will need to carefully consider the local market in which they operate to ensure demand is reflected in the choice of formats and brands. Tim Denison said: “A subtle shift of offer requires some good market research to ensure that retailers considering launching new formats of stores or tweaking their offer according to changing markets get it right – in a challenging market there’s too much at stake to leave it to chance.”

In summary, the RTT expects to see more polarisation in performance – again, an extension of a trend already in progress – which will see some retailers getting their strategy right while others struggle.

Conclusion

Despite the potential effect on employment and consumer spending power, the RTT does not consider that the recent Spending Review will create a significant shift in consumer behaviour – overall the current low growth environment is set to continue.

There is a differing picture across individual locations but the RTT doesn’t envisage this will create a more pronounced North/South divide: more a catalyst for ongoing change, with a more rapid concentration of retail into fewer trading locations, and accelerating the trend of creating “winners and losers”.

It will also crystallise the lower-growth environment seen over the past year. Helen Dickinson said: “Retail spending, as opposed to wider consumer spending, will continue along its current trajectory for some time to come. Low growth, but growth none the less, is here to stay – this is the new norm. Retailing has got tougher but as customers wants and needs continue to evolve, it’s all still to play for – the Spending Review will not send consumers into hibernation!”

Neil Saunders of Verdict Consulting adds: We’re not talking about retail sales falling off a cliff: what this does is create a more modest growth curve, albeit with a degree of pain over the medium term. The Spending Review won’t tip things off course – the effects will be much more subtle.”

Part II: In detail – RTT members’ views on the effects of the Spending Review

Helen Dickinson, KPMG: “Retail spending set to continue along current trajectory”

For the first time in years, government consumption and investment will subtract from GDP growth, by around ½ % each year, for the next five years. The Chancellor is banking on the private sector bouncing back to fill the hole. But the Chancellor is making some rather heroic assumptions. Businesses may remain reluctant to invest, export performance could suffer from a lacklustre global recovery and, most importantly for the retail sector, households may continue to save and pay down debt rather than spend.

The cuts will not take place until next financial year, but confidence is likely to be damaged by just the announcement of cuts and job losses. Further monetary easing may be necessary to compensate for the fiscal tightening.

The majority of the British public – 59% according to a post Spending Review poll undertaken by KPMG and Ipsos Mori – agree that cuts are needed; a remarkable result given the fact that we are facing expenditure reductions on a scale that none of us have seen before.

Confidence that the government’s policies will improve the state of the economy in the long term is the highest in over five years with almost half of those surveyed saying that in the long term the Government policies will improve the state of Britain’s economy. However, more than two thirds of those surveyed (68%) think that it would be better to cut spending more slowly. The coalition government now needs to persuade people that cuts need to be made quickly and their ability to do this will be the key determinant on the retail sector fairs over the near term. The nature of politics is that they will succeed in some areas and fail in others.

My view is that retail spending, as opposed to wider consumer spending, will continue along its current trajectory for some time to come. Low growth, but growth none the less, is here to stay – this is the new norm. It will continue to play out with wide variations in performance depending on location (primary v secondary), region (London and the South East v the North and Scotland), sector (big ticket v necessity)

and, of course, by individual retailer. Retailing has got tougher but as customers wants and needs continue to evolve, it’s all still to play for – the Spending Review will not send consumers into hibernation!

Vicky Redwood, Capital Economics: “Some regional spending subdued but private sector may fill gaps”

The Spending Review left the previous plans for sharp cuts in government spending broadly unchanged, with total spending in real terms set to fall by about 3.5% over the next five years. But with areas like health protected, and spending on social security and debt interest set to increase, real cuts in non-protected departments of 19% were announced.

The number of public sector job cuts is therefore likely to remain close to the Office for Budget Responsibility’s forecast in June and Scotland, Wales, the North East and Northern Ireland are the regions with the highest proportion of public sector employment.

Employment in the public sector (as a % of total employment in the region), 2010 Q2

Accordingly, these regions look most vulnerable to the public sector job cuts. Even the public sector workers who keep their jobs will be subject to the planned pay freeze for all but the lowest paid, thus keeping consumers’ incomes in those regions particularly subdued.

Note, too, that the Spending Review contained further cuts in welfare spending – and the same regions are at the top of the scale in terms of the share of the average household’s disposable income that comes from benefits (rather than earnings).

However, we also have to consider the scope for the private sector in these regions to plug the gap. Wales, in particular, has a relatively big manufacturing sector – and we think that manufacturing will be one of the strongest performing areas in the economy over the next few years. What’s more, the public sector cuts will be the dominant, but not the only, factor affecting consumer spending over the next five years. And regions such as Northern Ireland and Scotland are amongst the regions least vulnerable to further house price falls.

Tim Denison, Synovate: “Reduced footfall reflects regional concerns but perception of a North-South divide is too simplistic”

Whilst the details of the Government’s Spending Review have only recently been announced, we were aware that a significant number of public sector jobs would be shed on the back of the programme. Historically retail sales and footfall are closely linked to consumer confidence so it comes as no surprise that the devolved administered regions of Scotland, Northern Ireland and Wales that currently have the highest share of public sector jobs have seen the sharpest declines in retail footfall.

Over the last three months (July to September) retail footfall across the UK as a whole was 2.4% down on the same months of 2009. In Scotland and Northern Ireland the deficit was 5.7%, in Wales and South West England the decline was almost as bad, at -4.3%. In stark comparison, London and the South East showed a 0.2% increase on last year, the only region to show a rise.

From a jobs perspective therefore (including the knock-on effects to the local private sector) it appears that the results of the Spending Review will further disadvantage regions that are already suffering drops in retail demand.

The Spending Review is not the only programme planned to bring public sector net borrowing down. By the end of this Parliament 26% of the Government’s fiscal squeeze will come from tax increases. The announced cuts in welfare benefits, such as the changes to child benefits and tax credits, which have grabbed the headlines will also tend to affect the poorer regions such as Northern Ireland, South Wales and North East England, exasperating the regional polarisation still further. The remainder of the tax changes, including 12% of the 26% estimated to be generated from January’s VAT increase will hit consumers in the retail heartland in the South the hardest. These tax changes on spenders and the more affluent will go some way to restoring the balance.

So what will the retail landscape look like as a consequence of the Spending Review reforms? A first cut of the analysis would indicate that it will further re-enforce a North-South divide. It is, however, too simplistic a conclusion. The outcome will depend more on the composition of local communities rather than aggregated regions.

Neil Saunders, Verdict Consulting: “Medium-term spending more constrained”

Forecasting is dangerous game. This is especially so when it comes to consumer spending where the factors involved behave far from rationally and can produce outcomes that are contrary to established wisdom. That said, while it is hard to be certain on actual numbers, it is much easier to predict general directions. And the one clear trend over the medium term is that spending will be much more constrained that it was prior to the onset of recession.

To place this in context, in the ten years to 2007 real retail expenditure grew by an average of 4.2% each and every year. This was supported by a whole array of favourable conditions: easy credit, a rising housing market, low unemployment, and so the list goes on. Many of those conditions are no longer with us; others are, but will gradually fade as the full impact of the recent spending review takes hold. The net result will be that spending growth over the near term will be much lower than many in retail have become used to. Notwithstanding, the above comments on forecasting, taking into account the various economic and consumer trends, it is likely that real retail annual spending growth will average 1.3% over the next five years.

The slowdown will not, however, be an even one; some retail sectors will be more affected than others. The sectors most adversely impacted will be big ticket ones related to the housing market. Furniture and flooring, for example, will shrink in real terms over the next year before returning to modest levels of growth. Likewise, DIY will be in for a rough ride with retail growth in negative territory for the next couple of years. Products in these sectors require consumers to feel confident and affluent to buy them; and many are easily deferrable. Many are also stimulated by house moves, which are likely to remain suppressed over the medium term. However, it is not all bad news. Other sectors, like clothing and health and beauty will perform better than average. In the context of the household budget, the relatively small ticket price makes these products more affordable; while trends, such as an ageing population for health products and greater interest in trading up to more expensive designs in clothing, will provide favourable boosts to volumes.

In spite of these variations, the one thing that will colour all of retail for the medium term is that consumers will need to make choices about what they buy and where they buy from. The days when every retailer and every category could win are well and truly over.

Nick Bubb, Arden Partners: “London & South East leads the way”

The reason why High Street trade was sluggish in the first half of October is probably that all the media focus on austerity (on what the Government’s much-awaited “Spending Review” could bring) spooked consumers somewhat into holding off from major purchases. But nothing untoward emerged on “Axe Wednesday”, and the stockmarket took it all in its stride with the General Retail sector bouncing in relief. After all, surveys show that nearly 25% of all public sector employees had expected to lose their jobs, but in fact only 10% will…and the stockmarket has been nervous that unemployment and higher taxes/lower benefits would decimate consumer spending this Christmas.

But of course not every region of the country is faring the same or will fare the same in the future. By definition, the big national chains are too broadly based to escape from the average, but one can see in the trading strength of Sainsbury and Waitrose relative to Asda and Morrisons something of the regional bias of these food retail chains, with London and the South-East being more fruitful places to trade in than the North and Scotland. In the same way the weekly branch trading results of John Lewis Department Stores also show that the West End of London is more buoyant than the North of England and Scotland.

Clearly there are relatively more public sector jobs in the North and Scotland than in the South and the BRC-KPMG Scotland Retail Sales Monitor has been noting for some time that consumer confidence is weaker in Scotland for the very reason that there are greater concerns over public sector jobs. Whether unemployment will turn out to be as bad as expected in Scotland etc remains to be seen. The strength of London is often attributed to tourist spending and that is indeed still buoyant, at every level, from French day-trippers to Russian oligarchs, but there is more to London trading than that, with the revival of the City job and bonus market clearly also a major factor, given the importance of the financial services sector in London and the South-East. It’s also linked to the huge investment in infrastructure projects such as Crossrail, the burgeoning array of ever taller City skyscrapers and all the developments associated with the 2012 Olympics. The strength of lettings at the recently opened One New Change shopping centre near St Pauls is symptomatic of the untapped potential consumer spending in the City.

John Dawson, Universities of Edinburgh & Stirling: “North of the border feeling public sector pain”

Scotland has to wait for the detailed shape of the cuts to be spelt out and it is likely that there will be differences from the situation in England. Public spending patterns have emphasised different priorities in recent years but a tradition of high levels of public sector employment which was formerly a solid underpinning for retailing may be about to change.

Retail sales and footfall figures for Scotland have been down on English totals for several months. The long term trend for Scotland has been one of consistently entering economic slowdowns later and leaving later and often with a lower turning point. Although for the UK there is a sense of bumping along the bottom, the Scottish situation suggests few up-bumps and a steady downward drift. This seems to be evident in foods, department stores and specialist non-foods alike despite a solid summer for the tourist sector with the good deal on Sterling for visitors from the Euro-zone and Japan.

The relatively low level of mortgage debt on Scottish housing and the security of high levels of public sector employment traditionally have been a help in keeping retail spending at least on a par with England but the question mark over public sector job security is now acting as a drag on spending and lower interest rates have eroded the benefit of low total debt. Another aspect of the Scottish environment that has helped in the past, but is now no longer working to the same degree, is the nature of the town and city centre network. With few medium sized towns consumers made big shopping visits to the Scottish ‘big’ cities, sometimes travelling a considerable distance but often spending a lot on a visit. But with concerns over transport costs, not least petrol prices, such visits are now being thought about much more before they are made.

The malaise in Scotland may also be present in parts of the North East and North West, as suggested in Bank of England agents’ reports. Relatively low mortgage debt levels, high public sector employment and major cities but few mid-sized towns all draw comparison with Scotland. The future may be different, however, with decisions on the detail of public sector cuts in Scotland being made, by Scottish Parliament reflecting Scottish political priorities, after the situation in England is clearer.

The Scottish consumer penchant for big Christmases may be the last good time for Northern consumers and retailers for some time.

Mark Teale, CB Richard Ellis: “Spread of job losses means little impact on most major trading locations”

The likely geographic dispersion of net job losses – public sector and private – going forward is currently highly speculative. It is widely assumed that any retail consumer spending impacts will be more pronounced in parts of the country, and regions, where public sector and public sector-related employment is much higher than average. Spending impacts regionally will be acerbated if, as usual, economic recovery is Southern-led. Having said that, as the distribution of employment related to the provision of direct public services, particularly local authority services, is broadly determined by population distribution, public sector job-shedding should – with the exception of areas containing large government/ administration offices (predominantly regional CBDs) – be reasonably evenly spread regionally unless the balance of regional subsidies is significantly altered.

Spread across the UK as a whole and over a number of years, spending losses attributable to public sector jobs contraction of 100,000 annually over five years cannot have an appreciable impact on aggregate retail consumer spending trends assuming the latter figure is exceeded by private sector employment growth. The (somewhat larger) public sector employment shakeout in the 1990s did not

trigger a marked widening of per capita retail spending disparities between regions, so it is probably reasonable to suppose that any change this time around will also be relatively muted unless economic growth remains sluggish for many years (and regional grants are not adjusted to take account of higher rates of employment growth in the South). Whatever happens, regional-level per capita spending changes will occur very slowly.

There are two key issues with regard to the medium term incidence of job losses on retailing regionally: the size, distribution and quality of retail facilities and the market shares that individual trading locations achieve. Chain retailers (and some service operators) have been steadily retrenching into larger, high-productivity, trading locations for many years (throughout the country). Fewer than 100 trading locations (out of more than 3,000) now attract over half the population of Great Britain for comparison goods shopping purposes. This retrenchment into high volume markets has run in parallel with a marked demand shift in favour of modern purpose-built shopping stock. The dominant centres that have emerged are too large to be significantly impacted by the iterative job losses envisaged.

In percentage terms, the possible retail spending reduction attributable to a loss of approximately 500,000 public sector jobs over five years, broadly spread across regions, is – for larger centres – very small. The catchments of regional centres are far too large for these losses to have any significant impact on aggregate spending attracted (there are many other factors in play that will have much larger impacts over the period, not least competing development). Larger trading locations, at least those not affected by development impact, are not at significant risk. Many smaller secondary/tertiary trading locations serving less prosperous areas – including poorer areas in London and Southern parts of the country – are however likely to be adversely affected by localised spending reductions. The impact will be more directly felt at district/neighbourhood level and in small-scale traditional convenience markets – the trading locations that chain retailers have long been retrenching from.

The big question however remains: what will the knock-on impact of the public sector job losses be on private sector employment? The Chartered Institute of Personnel and Development has recently been reported as predicting that almost 1.6m jobs will be lost as a combined result of cuts in public spending and the VAT rise next year. In the absence of very rapid private sector jobs growth (currently an unlikely scenario), this level of job shedding (over three-times the OBR ‘General Government’ job loss predicted), would put significant pressures on consumer spending in many areas.

Richard Lowe, Barclays Retail & Wholesale: “Hopes of clarity and restoration of consumer confidence”

An election, two budgets, a pre-budget, a comprehensive spending review and continued talk of austerity has undermined consumer confidence during the past 12 months. It has also led to a prolonged period of heightened uncertainty for the retail sector.

Whilst a period of continued uncertainty lies ahead, as households and retailers digest the details of the Comprehensive Spending Review, both the Government and the high street are hoping it will provide clarity and restore consumer confidence in the medium to long term.

We expect retailers to remain prudent, borrow less, improve their working capital and increase their cash reserves as the whole economy continues to deleverage. Over the past 12 months the high street has not been drawing down the cash facilities available to them and has been postponing capital investments.

However, this will not continue indefinitely and we also expect to see some of the management teams spot opportunities created by the recession as the economy recovers and confidence increases. We are working very hard, as a bank, to make sure there is sufficient funding in the market for those retailers and wholesalers when that confidence returns.

Overall, retailers proved fairly resilient in a recession which saw other sectors take the brunt of the downturn in consumer spending. They are also hoping to benefit from the traditional seasonal uplift in spending and consumers bringing purchases forward ahead of the VAT increase – although there is little evidence of this as yet – as we head into the all important Christmas trading period.

Part III: Appendix – Sales, rent and footfall

BRC-KPMG Retail Sales Monitor – UK / Scotland / London

Like-for-like Total
UK Scotland London UK Scotland
2007 2.2 2.5 8.0 4.3 4.9
2008 -0.8 1.1 3.8 1.6 6.0
2009 1.5 1.1 5.2 3.4 4.7
2010 0.9* -0.7* 9.0† 3.0* 2.1*

Source: BRC-KPMG Retail Sales Monitors, Annual averages

*January to September

† January to June

CB Richard Ellis Rent Index – Average prime rents (September 2010)

Rental Value Growth (% per annum) Annualised Over:
1 Year 3 Years 5 Years 10 Years
All Shops 0.1 -3.4 -0.7 1.2
Central London 11.1 3.1 4.3 4.6
Suburban London -1.6 -1.2 1.1 3.1
South East -2.1 -2.3 0.6 2.1
Eastern -1.6 -3.5 -0.7 1.0
South West -7.5 -7.9 -2.7 -0.3
East Midlands -1.3 -4.3 -1.8 0.4
West Midlands -0.8 -4.9 -2.5 -0.2
Wales -4.3 -7.7 -3.3 -0.5
North West 0.8 -7.1 -4.2 -1.0
Yorkshire & Humberside -6.0 -8.5 -3.9 0.4
North East -12.7 -9.8 -5.8 -2.5
Scotland 4.2 -3.9 -1.7 -0.3

Source: CB Richard Ellis

At Current Prices

Synovate Retail Traffic Index – Year-on-Year figures

Northern Scotland Midlands South London & UK
England & West & South
Northern Wales East
Ireland
2007 -3.7% 0.0% 0.0% +3.5% +2.4% 0.0%
2008 -1.8% -5.2% -2.5% +2.0% -0.1% -1.5%
2009 -1.6% -1.7% +1.5% -2.5% -3.1% -1.4%
2010* -2.5% -5.4% -3.3% -3.2% -1.3% -2.9%

Source: Synovate Retail Performance

* Year to date (September 2010)

RTT White Paper November 2010-1.pdf

Date Published: 12/1/2010 5:15 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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