Quarter 4 could see strongest quarter-on-quarter improvement since 2009
- The health of UK retail showed signs of improvement in quarter three, particularly in July and August when people throughout the country were able to enjoy warm weather and demand rose as consumers decided to shop and spend.
- Gross margins were under less pressure than in previous quarters as retailers held less stock and were able to sell more through at less discounted prices, given the stronger demand. Food retailers enjoyed a favourable sales mix in the summer, given the boost to fresh food sales from the warm weather. Commodity prices have also remained less volatile.
- Cost factors over the quarter were largely neutral and are likely to remain neutral in quarter four, despite higher online fulfilment costs, as wage increases remain minimal and petrol prices remain stable.
- The health of UK retail is expected to improve further during quarter four as consumer confidence continues to rise, particularly as job security grows and interest rates are seen to be staying low, resulting in greater preparedness to spend more than save.
The health of UK retail has shown some signs of improvement over the past quarter and the outlook is looking more encouraging than it has done for some time, particularly as the nation heads into the Christmas season feeling better about itself. Following its quarterly meeting in October, the KPMG/Ipsos Retail Think Tank (RTT) upgraded its Retail Health Index to 79 and its panel of retail experts forecasted that this could improve to 81 in quarter four. This would not only mark the highest level since Quarter Three 2011, but the strongest quarter-on-quarter leap for four years. Two of the three key drivers of retail health – demand and margin - were more positive in quarter three than in the previous quarter, and cost factors over the period were largely neutral. It is the first time for three years that both demand and margins have contributed positively to the improvement of retail health.
Reflecting on a rosier picture of the UK retail sector in quarter three, particularly in July and August, the RTT pointed to the warm and welcome weather as a major factor as consumers headed to shopping centres and made the most of the summer months – buying seasonal clothing and eating outdoors. Unfortunately, September proved to be a damp squib as cooler and wetter weather reached UK shores and stores but were not so cold as to encourage replenishing winter wardrobes.
The RTT noted that many of the high street retailers left standing appear to have stabilised their businesses – with the threat of insolvencies nowhere near the levels experienced over the previous 18 months – and, significantly, several are now focusing on investment in their stores and staff as they look to improve their fortunes. By comparison, although online sales continue to show relatively strong growth, the incremental transport costs and logistical challenges of fulfilment remain a growing burden, with the likes of click-and-collect space requirements at stores over Christmas. The impact on overall costs will be mitigated in part by falling commodity prices.
The RTT predicts an even more promising outlook for UK retail over the next quarter, not only because it’s the Christmas trading period; consumer confidence appears to be on the increase, the housing market is more buoyant and economic conditions are generally improving. One important consequence, the RTT believes, is that as people become less nervous at losing their jobs and interest rates remain low, they are less intent on saving and becoming more comfortable to spend. And if people do start shopping more, they may be inclined to ‘trade up’ to premium goods, particularly over Christmas.
However, there is still some caution waiting in the wings as unwelcome rises in energy prices may once again put the brakes on some householders’ incomes, especially if the weather in winter months remains true to the season. And a pre-Election boom, based on artificially cheap credit, is unlikely to be sustained, unless real incomes start to grow again.
Quotes from RTT members
Dr Tim Denison, Head of Retail Intelligence at Ipsos Retail Performance, said: “Footfall and demand were stronger in quarter three than they had been in the two previous quarters, and certainly July and August were very good months for UK retailers. September spoiled the summer party a bit, largely because of changing weather conditions, but there are bound to be blips along the path to recovery. The key point is that we are now trending upwards again just in time for the most important time of the retail year.”
Nick Bubb, independent retail analyst, added: “Because July and August were so good for retailers, it’s possible that there was some retrenchment in September as consumers decided to hold onto their cash. It was also noticeable that there were two autumnal weeks and two warmer weeks in September, so there were some ‘fits and starts’ to trading at the end of the quarter. This summer there appears to have been a reverse of what happened in 2012. Last year Easter was summer and then all of the rain came. This year, Easter was slow and then what we saw was pent up demand being spent in July and August.”
David McCorquodale, Head of Retail, KPMG UK, said: “Margins have not been under as much pressure as in previous months. Retailers have become used to holding far less stock meaning there is less of a need to discount in order to shift goods. Going into quarter four and the Christmas period it will be intriguing to see how they handle this balance – to what extent will they hold their nerve or will one follow another like a pack of cards? There may be a real temptation by some retailers to offer price reductions and grab market share.”
Neil Saunders, Managing Director of Retail Analysts, Conlumino, said: “There has been a lot more interest in food this summer because of the good weather. Not only has this meant that people are out buying more, grocery margins are under less pressure because barbecue and other types of summer foods and drinks tend to be in the premium price bracket.
He added: “The season we’ve just been through has also been much better for clothing with some very good numbers posted by the fashion retailers. For a welcome change, clothing in the shops has actually corresponded with the season. It’s noticeable that most stock has been cleared so there has been no need for a mass of discounting as the summer season has reached its natural conclusion.”
Martin Hayward of HAYWARD Strategy and Futures, said: “This time last year it was all pretty doom and gloom in the retail sector, both for retailers and consumers alike. Now, consumer confidence is looking more robust than it has done for a long time and people are feeling more positive about their finances and their futures. Economic conditions are the most favourable they have been for some time and people are less concerned about losing their jobs. Last year they were worrying about redundancy - this time they are starting to believe the recovery is for real.”
Mark Teale, Head of Retail Research at CBRE said: “Consumer and business sentiment has improved markedly since the spring. The consumer economy remains too weak to stir any significant upturn in retailer expansion activity but the steady trickle of administrations that we have seen over the last 3-4 years has certainly eased. Rating value distortions, made worse by the Government decision to defer revaluation, continue to inhibit expansion activity and exacerbate vacancy problems in secondary trading locations. The market meanwhile remains as awash as ever with redundant small-unit tertiary shopping that is unviable for retail purposes, yet cannot clear because of rigid use controls and the tax disincentive to relax use controls resulting from empty rates. Shortages on the primary stock side are meanwhile as chronic as always. With development activity stuck at a recessionary low, expansion activity – particularly on the large store side – will remain sluggish by default: the old UK story of far too much of the wrong space in the wrong place and far too little of the right space in the right place. The current boom in London provides an implicit hint of what will happen to retail occupational costs in major shopping locations elsewhere in the UK if spending growth begins to tick-upward.”
Richard Lowe, Head of Retail & Wholesale at Barclays, said: “Richard Lowe, Head of Retail & Wholesale at Barclays, said: “Summer arrived in style, with the first heat wave in seven years boosting results for many retailers as consumers hit the high street for traditional summer wares throughout July and August. While September was more challenging with its very British mix of weather putting many consumers off compared with the previous two months, it did not take away from what was overall a good quarter for the industry. This will hold the high street in good stead as it heads into the golden quarter. With consumer confidence on the rise, and more encouraging economic news, there’s a sense that this positivity will continue and we will see a good, sustained level of activity in the run up to Christmas.”
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:
Nick Bubb, Independent Retail Analyst
Dr. Tim Denison, Ipsos Retail Performance
David McCorquodale, KPMG
Martin Hayward, HAYWARD Strategy and Futures
Neil Saunders, Conlumino
Richard Lowe, Barclays Retail & Wholesale Sectors
Mark Teale, CB Richard Ellis
The intellectual property within the RTT is jointly owned by KPMG (www.kpmg.co.uk) and Ipsos Retail Performance.
First mentions of the Retail Think Tank should be as follows: the KPMG/Ipsos Retail Think Tank. The abbreviations Retail Think Tank and RTT are acceptable thereafter.
The RTT was founded by KPMG and Ipsos Retail Performance (formerly Synovate) 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 that 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.