the successful retailers of tomorrow will be those that embrace change and continue to engage shoppers interests over the coming weeks and months
Similarly challenging outlook for quarter one in 2013
• Retail health fell another point in quarter four, as it had done in all previous quarters of 2012.
• Retail demand in quarter four of 2012 was largely flat, but notably online retailing increased again over Christmas as more UK consumers than ever before decided to purchase goods over the Internet.
• Margins in quarter four suffered as retailers discounted their prices ahead of Christmas Day and competed aggressively with each other. However, because stock levels were kept to relatively low levels compared with recent years, margins were not hit quite as hard as they might have been.
• Costs for the quarter remained largely flat despite higher online distribution costs.
• The health of UK retail is expected to drop another point in the first quarter of 2013.
The health of retailing in the UK hit a new low in quarter four of 2012, despite customary spikes of increased Sale activity in December. Following its quarterly meeting in January 2013, the KPMG /Ipsos Retail Think Tank (RTT) pronounced that quarter four was largely flat, exacerbated by low levels of demand during October and November and margins coming under pressure as a consequence of widespread discounting in December. The RTT’s Retail Health Index (RHI) dropped a point, to 76, marking another consecutive decline in the Index - the eighth quarter in a row - and a difficult end to another difficult year for retailers. The fall had not been anticipated when the RTT last met in October, when conditions looked as if there were signs of improvement ahead.
Despite challenging economic conditions facing consumers and tough trading conditions affecting retailers, there were some good news stories, including the John Lewis chain that recorded positive sales of fashion items and electrical goods. Some sectors within the retail industry have also enjoyed success, including smartphones and Tablet PCs, as well as ‘pound shops’. However, there were also some major casualties as retailers like Comet entered into administration.
Although flooding in some parts of the UK made it difficult for some people to get out, weather wise the quarter was relatively kind to most UK retailers compared to the same period in previous years.
Consumer demand in the Christmas trading period in December always buoys the retail sector in quarter four, but margins came under some pressure, especially among food retailers as supermarket chains fought for their share of consumer spending. Although online trading in December in particular was higher than in previous years, higher logistics and distribution costs were also incurred, taking some of the shine off this growing aspect of retail health.
The outlook for quarter one of 2013 shows no signs of significant change for UK retailers. On the back of a flat quarter four, the RTT forecasts that demand will remain subdued because of continuing economic challenges facing consumers and retailers. With added financial pressure on consumers such as taxation on high earners claiming Child Benefit from January 7, disposable income will be further squeezed.
With the Christmas trading period out of the way and retailers keeping their stock levels low compared to previous years, there will be less pressure on stores to discount in the quarter, therefore protecting margins to a degree. However, the RTT expects there to be further casualties on the high street in the quarter as certain retailers that have underperformed, such as Jessops, face the prospect of administration.
Quotes from RTT members
Commenting on quarter four, David McCorquodale, Head of Retail, KPMG UK, said: “As far as demand is concerned, what we saw is a stand off between consumers and retailers through the quarter, pushing Christmas spending into the last two weeks. Consumers waited for retailers to discount whilst retailers were keen for consumers to buy at full margin, resorting to price discounting as late as possible. Evened out, the quarter has been relatively flat and if anything has been slightly worse than expected.
“It appears that the economic situation has led some people to have honest discussions with family members not to buy Christmas presents for each other, with the exception of getting gifts for children.”
Nick Bubb, independent retail analyst, said: “John Lewis was a shining light in the sector, achieving astonishing growth. This was partly attributable to its online sales for the five weeks to 29 December. Sales were up by 44% on last year and its online business now accounts for a quarter of all the firm's revenue.
“People want the convenience of ordering online and more are choosing to do so. This is good news for online retailers, but online and multichannel distribution costs – more van deliveries and more fuel, for example - also need to be factored into the equation.”
Neil Saunders, Managing Director of Retail Analysts, Conlumino, said: “Retailers have been under pressure to do more to grab share. They felt compelled to offer good discounts to customers, especially food retailers where competition over the holiday period is intense. There is always a knock on effect as retailers react to each other; and this often results in aggressive price wars and other promotional activities such as buying a certain amount to get a £10 off voucher. We also saw stores staying open for longer in a bid to achieve greater market share, even among retailers such as Waitrose and Marks and Spencer.
“There is no volume growth and overcapacity in terms of space in the food sector. It is going to become marginally less profitable over the longer term. If consumer spending power becomes even more squeezed, they will simply buy less, shop around or trade down.”
Vicky Redwood, Chief UK Economist at Capital Economics, said: "At one point the outlook for 2013 was looking more positive, but the inflation picture has deteriorated again and consumers' real pay is set to fall further. Utility price increases will have an impact on retailers and consumers and spending power will again be squeezed. There is more evidence that the country is heading towards a triple-dip recession.
"On a more positive note, the number of full time employees is rising and employment in the UK has grown in the past 2-3 months. However, employment growth seems to be easing."
Mark Teale of CB Richard Ellis, said: “Retailers commonly request rental concessions when they begin to get into trouble so vulnerable players are often known a long time before administrations occur. There will be more administrations in 2013, but there is currently something of a stasis. Most of the really weak players are already gone. Unless there is a really sharp deterioration in trading conditions, the number of administrations during 2013 looks set to be a lot less than 2012. “There are winners and losers; it’s that type of market right now. Some retailers will have mopped up custom and market share because others, like Comet, have gone out of business.”
Richard Lowe, Head of Retail & Wholesale at Barclays, said: “It was a lacklustre Christmas for retailers – not the worst, but certainly not the best either. Online retailing has seen an expected increase and people are also becoming more accustomed to initiatives such as click-and-collect. Retailers are understandably changing the way they do business to attract more custom, but they also need to balance this with managing their operations more efficiently.
“As for quarter one, demand will remain sluggish but margins will not be under as much pressure as stock levels are relatively low, and retailers will remain cautious about the future.”
Martin Hayward, HAYWARD Strategy and Futures, said: “Against an economic background of gloom and despondency, people have still found the capacity to justify some spending on retail goods. However, spikes of spending are short-lived as consumers retrench after the Christmas period. If consumers have parted with all of their money during the holiday period, then we can expect spending to fall off a cliff in January.”
Summarising the RTT’s quarterly discussion, Tim Denison, Head of Retail Intelligence at Ipsos Retail Performance, said: “The quarter has been a real mixed bag. On the back of a positive September, October was a difficult month for retailers, as was November with the exception of the last week. Christmas trading was not a complete washout and as ever there were winners and losers, demonstrating that there is always opportunity for those that know their customers well. It is notable however that our Health Index is at its lowest point and the next quarter looks like being another challenging one for the retail industry. The economy will continue to play its part, but the successful retailers of tomorrow will be those that embrace change and continue to engage shoppers interests over the coming weeks and months.”
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
Helen Dickinson, KPMG (resigned 30 October)
David McCorquodale, KPMG (appointed 30 October)
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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