- The downward trajectory that has plagued the health of UK retail since the start of 2011 finally turned around in quarter one of 2013
- This was instigated by a slight improvement in retail demand in the quarter and would have been better still if the cold weather had not affected footfall.
- Gross margins did not come under as much pressure as they had done in quarter four of 2012.
- Overall costs for the quarter remained flat again, with some multichannel elements increasing and others decreasing at the margin.
- The health of UK retail is expected to flat line in the second quarter of 2013 with market conditions expected to toughen.
Following its quarterly meeting in April, the KPMG/Ipsos Retail Think Tank (RTT) was able to report better news at last for the sector, although a significant increase in the health of UK retailing is unlikely to arrive any time soon. The RTT’s Retail Health Index improved one point to 77 points, thanks to a marginal lift in demand, which would have been better still had it not been for the prolonged extension of wintry weather throughout the whole quarter.
The RTT agreed that overall Christmas trading figures had been relatively good, and that there were very few new casualties coming through now – the consequence of better run businesses and an uplift in demand. Once again, the food sector was the star performer, with convenience formats trading particularly well in the inclement conditions. In non-foods, the decline in footfall over the quarter did not prevent a slight gain in overall demand, led by technology goods.
Retailers’ margins remained under pressure over the quarter. While food margins remained broadly flat, extra discounting was necessary to stimulate clothing sales in particular, and some major players remained heavily promotional led in the quarter (notably Debenhams and M&S). Smaller margins on technology products also meant that the change in sales mix was unhelpful to margins. Costs in the quarter remained static overall. Despite multichannel operations continuing to add to the cost base and fuel and energy price increases in the quarter, the RTT acknowledged that reductions in estate sizes and ever-more creative ways of taking costs out of their businesses are enabling retailers to keep their costs in check.
Looking forward, the RTT believes that the outlook for retail health in quarter two is set to stutter, flat lining in the quarter rather than continuing to gain momentum.
The panel conceded that the scene remains very mixed, with many influences on retail health ebbing and flowing. Consumer confidence is likely to remain weak, as the recent employment growth is expected to tail off, inflation is on the increase again, and with fuel and energy prices set to rise. However, there is some support on income tax thresholds and lending coming through, and if there is any movement in the housing market it will provide a boost to spending around the edges. All in all, the demand side still looks very soft. The RTT expects margins will continue to be squeezed in the fashion sector, where the need to promote will continue. On the cost front, retailers may still be able to offset some unhelpful external factors, such as the potential increases to pension costs impacting particularly small/medium size businesses, by looking to take out any further costs from the business that they can.
Quotes from RTT members
Commenting, David McCorquodale, Head of Retail, KPMG UK, said: “Overall the quarter was quite an even one for UK retailers as demand, margins and costs all remained relatively static and it looks like we’re at the bottom of the decline. The weather did affect demand in terms of footfall being down, but otherwise sales were largely ok. Retailers are trying not to bring their prices down and hold their margins and we are seeing businesses being better run as they look to take unnecessary costs out of the equation in a more sustainable way.”
Nick Bubb, independent retail analyst, said: “Retailers did surprisingly well in the food sector and in the non-food sector we saw a bit of a trade-off. If people can’t go out and buy items like barbecues and spring clothing, they tend to buy indoor goods instead.”
Commenting on the impact on retail of more positive signs in the house building sector, Neil Saunders, Managing Director of Retail Analysts, Conlumino, said: “There is still massive latent demand for housing, lending is growing and there appears to be more competition among the mortgage lenders. This could provide a helpful boost at the edges for retailers as consumers need to buy lots of new items for their homes.
Vicky Redwood, Chief UK Economist at Capital Economics, said: "It’s a mixed picture. We have seen more employment growth during the quarter, mainly part-time jobs and individuals setting up their own companies. Also, more people are looking for work as they come off benefits or come out of education. Consumers are more inclined to spend because it has become easier to borrow and at the moment there is less incentive to save. However, employment growth is tailing off a bit incomes will again be squeezed in the coming months so nothing is certain. Everything is stacked against the consumer, but they keep on spending.”
Mark Teale of CB Richard Ellis, said: “With the exception of London, shop rental growth nationally remains muted. Despite administrations, chain expansion activity is still in positive territory – just – but this net branch growth is not sufficiently strong to pose a broadly-based occupational cost inflation risk. The property demand picture remains very mixed with a handful of grocers, discounters and large store players generally making the running. Many small-unit niche players continue to retreat. Contracting networks, of which there are many, are continuing to gift market share to competitors: hence the very mixed trading reports with some retailers performing strongly and others struggling. With speculative development activity at a record low, availability in primary markets continues to dwindle. Any significant upturn in expansion activity will inevitably trigger a marked bout of rental inflation but that will not occur until economic growth strengthens so on the property side at the moment, we are looking at more of the same.”
Richard Lowe, Head of Retail & Wholesale at Barclays, said: “It’s difficult to make any comparison between retail in the early part of 2012 compared with 2013. Last year, Easter was our summer because of the good weather and then the rain came and washed the positive aspects away. This meant that retailers’ margins were under significant pressure, especially towards the end of the year, but they are now focusing on holding margin where they can.”
Summarising the RTT’s discussion over quarter two, Tim Denison, Head of Retail Intelligence at Ipsos Retail Performance, said: “A sense of uncertainty hangs over the health of retailing short term. Quarter one delivered some very welcome results, but whether we see any release of pent-up demand in the next quarter is open to conjecture. There are some positive signs for retailers and consumers, but the unknowns are just as prevalent. This is why the message coming out of the RTT is that, whilst the future looks a bit flat, at least we’re not talking about another decline.”
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
Vicky Redwood, Capital Economics
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.
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