Following its January meeting, the KPMG/Ipsos Retail Think Tank (RTT) concluded that:
- The deterioration in retail health seen throughout 2011 continued in quarter 4.
- The Retail Health Index (RHI) dropped a further two points to 80 in the quarter, the fourth quarter in a row that the RHI has fallen.
- Retail health is now considered to be poorer than it was in the depths of the 2008 banking crisis and recession.
- In order to stimulate demand retailers cut prices and increased unplanned promotions in the quarter, which did stimulate demand, but at some costs to margins and profits.
- For the first time since quarter 3 2008, costs are beginning to have a negative impact on retail health, reflecting the exceptional Christmas period investment associated with servicing multi-channel operations.
- The majority of RTT Members predict that the rate of decline in retail health will accelerate in quarter 1 2012, plunging the RHI downwards by three points to 77, putting the state of retail health at its worst point since the RTT was formed in 2006 and generating a downward momentum not seen since the start of 2009.
- Poor demand will impact health more than margins in the next quarter.
- The RTT believes, however, that there will be little opportunity to re-build margins and hence they will continue to be detrimental to retail health.
Helen Dickinson, KPMG, comments: “As we predicted three months ago Christmas was not experienced at full price. Retailers fought hard to get ‘their share’ by matching or exceeding competitors’ offers. This of course impacted margins significantly although it did drive a late uplift in demand in December, with some retailers doing significantly better than others. However, there were many other austerity factors acting to hold it down across October and November. These included a depressing Autumn Statement from the Chancellor; high petrol, diesel and home energy costs; rising unemployment; public-sector strikes over pension changes; the Euro crisis and even the unseasonably mild weather at the start of the quarter.”
Vicky Redwood, Capital Economics said: “Whilst the economy may arguably be in a slightly better place than it has been in recent times, retail health is still falling and will continue to fall at an accelerated pace in quarter 1. With lending easing slightly and many making efforts to pay off debt, it is discretionary spending that is taking much of the pain. Inflation in virtually everything is also having an impact.”
Demand was less detrimental to health in quarter 4 than in quarter 3, as predicted, but was bought at the expense of margins. Demand is expected to be more detrimental to health in quarter 1 as consumers retrench after Christmas spending and continue to react to gloomy headlines, the Euro crisis, stubbornly high petrol prices, rising unemployment and noticeably less money in their pockets.
- Petrol/diesel prices serve to dissuade some from shopping so often and travelling so far afield to retail parks/megamalls (albeit the lack of snow in December, compared to the previous year, was a help), but expect no compensatory uplift in high street shopping any time soon.
- Early discounts and promotions in December will have brought forward some New Year sales and hence done nothing to stimulate the January sales period, which is expected to be severely depressed this year.
- With inflation likely to slow gradually, confidence and job security will take up the running as a key restraint on demand.
- Demand will be the key driver of the accelerating deterioration in health (as opposed to margins) in quarter 1.
Neil Saunders, Conlumino said: “While household finances are under pressure, many consumers did come out and spend at Christmas, if only because they were keen to forget austerity for a while. However, come the New Year and a doormat full of bills, spending is likely to retrench again. The question is how retailers will react to this. It is unlikely that many will be keen to further erode margins and while discounting will still be prevalent it is likely to be shallower than over the Christmas period. As such, the equation will be one of higher prices balanced by lower demand.”
The RTT on Margins:
Margins suffered in quarter 4 at the hands of aggressive price cutting, so necessary to stimulate demand. Retailers will struggle to re-build margin in the short term and this will continue to act as a drain on retail health in quarter 1.
- Last year’s VAT rate increase has now worked its way through the year, giving year-on-year comparisons some relief.
Retail analyst Nick Bubb commented: “Retailers who undertook reactive and unplanned discounting in quarter 4 effectively saved Christmas - so far as their balance sheets are concerned. But once you train consumers to expect deep discounts you make a rod for your own back when you attempt to increase margins again. Sadly, many of the best-performing retailers of the 80’s, 90’s and 00’s have continually downgraded their brands; losing brand equity as well as market share. Right now very nearly the only thing propping up demand is the illusion created by food price inflation, and that’s no comfort at all to margins.”
John Dawson, Universities of Edinburgh and Stirling added: “In quarter 4 many retailers found themselves in a very difficult place; in fact in retail Catch 22. A decline in demand would have been very detrimental to their performance in the busiest quarter of the year if they had not cut margins. Having done so, however, they’ve now realised that they cannot keep stimulating demand with discounts and yet they cannot easily rebuild margins. That’s why we will see the fall in retail health accelerate in quarter 1.”
The RTT on Costs:
The pressures of rising costs negatively impacted retail health in quarter 4 2011, for the first time since quarter 3 2008. Whilst retailers continue to make cost savings where they can, they also need to invest in parts of the business, particularly multi-channel operations and at a busy time of year where both fixed and variable costs impact trading.
- Many retailers are still putting pressure on suppliers to reduce costs and extend payment terms, with some success.
- Property market rents are still soaring in super premium sites in Central London and rising in premium locations elsewhere. Large premiums are being paid for some key units in London’s West End.
- Multi-channel continues to be of increasing value to many retailers but it is also adding considerable cost, requiring ongoing investment.
- The weakness of the Euro and the US dollar is having a small, positive effect on costs. Sterling is finding favour as a trading currency providing savings on hedging and conversion charges.
- The key to cost cutting in quarter 1 for most retailers will be the shedding of temporary, seasonal jobs.
According to John Dawson, Universities of Edinburgh and Stirling: “Now that the Christmas rush is over and with lower demand and the steady switch to on-line sales, we will see retailers review store staffing levels to below those before the Christmas period. This will inevitably affect the ability of some retailers to prevent a loss of sales through lower customer service levels and may also affect footfall levels as shoppers readjust.”
In summary, Tim Denison, Ipsos Retail Performance concluded: “The health of the retail industry is now the lowest it’s been since we launched the RTT in 2006 and it is heading downwards further and faster as we enter quarter 1. Looking forward, it’s difficult to see exactly where any significant relief will come from. Just as the start of 2011 looked bleak, so it does this year. We must expect some more casualties on the high street, but with multiple retailers now leaner and more efficient than probably ever before, hopefully their number will be limited.”
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.
Nick Bubb, retail analyst
Prof. John Dawson, Universities of Edinburgh and Stirling
Dr. Tim Denison, Ipsos Retail Performance
Helen Dickinson, KPMG
Neil Saunders, Conlumino
Richard Lowe, Barclays Retail & Wholesale Sectors
Vicky Redwood, Capital Economics
Mark Teale, CBRE
The intellectual property within the RTT is jointly owned by KPMG (www.kpmg.co.uk) and Ipsos (www.ipsos.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 by KPMG and Ipsos (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 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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