The health of retail in the UK saw marginal signs of improvement in Q1
The health of retail in the UK saw marginal signs of improvement in Q1, but not at as strong a rate as other consumer services, according to the KPMG/Ipsos Retail Think Tank (RTT).
• The health of the UK retail market improved by one index point after a disappointing end to 2014, with consumer confidence rising in line with higher wages and greater economic stability.
• The uplift in retail health was tempered both by the impact that Black Friday had on the traditional January sales and also by price deflation.
• Consumers and retailers in Q1 were unaffected by the uncertainty surrounding the general election, a trend that will continue into Q2.
• Retail health in Q1 driven by higher levels of demand to continue in Q2.
• Although confidence is higher, savings from lower energy and petrol prices appear to be being spent on experiential services rather than on consumer goods.
• Hangover from Black Friday could spell the beginning of the end of traditional January sales.
The RTT's Retail Health Index has climbed by one point to 81 in Q1 of 2015, its highest standing in three and a half years. However, the quarter got off to a slow start, with the hangover of Black Friday leaving less to spend in the traditional January sales. As the quarter wore on, promising signs that demand is on the up became more evident, with sectors such as homewares and household appliances doing comparatively well, indicating that the market is on the mend. The shop price deflation, particularly in the food sector, meant retailers had to sell more to stand still and consumers had little incentive to rush to spend.
Of the three key drivers of retail health - demand, margin and cost - demand was the strongest factor. RTT members acknowledged that the increase in the RHI would perhaps be higher, however consumers appear to be choosing to spend any savings made on energy and petrol costs on experiential leisure services rather than goods.
A major talking point in the RTT’s quarterly meeting was the upcoming general election, though across the board it was agreed that the health of the market is unlikely to be affected in the short term. With unemployment falling and a general ‘feel better’ factor it is disposable income that has fuelled demand. The potential of ‘discount exhaustion’ in the run-up to the election was also cited as an influence on spending behaviour. With consumers feeling more relaxed, due to minimal economic policies being brought in ahead of the election campaign season, retailers have been keen to capitalise with increased discounting tactics. It is this strategy however that may have turned consumers off retail and on to leisure activities in Q1.
Margins as a driver of retail health did not have a significant impact, with the continued strength of the pound meaning savings have been passed on to consumers – any change in this is not expected to hit until Q3 when foreign currency hedging arrangements will begin to unwind. The RTT warns that the fashion sector will need to be smarter in the future to respond to unseasonal weather conditions to avoid early discounting of its seasonal collections.
Costs remained constant in Q1, with no significant change in the key driver - retail property markets. With just a handful of new projects in progress, there is minimal movement in locations outside of London. This may change in Q3 as forecasts are released in six months’ time. There is some momentum building around the difference between the Minimum Wage and the Living Wage and this may become a factor that puts more pressure on retailers to meet these demands.
Looking ahead to Q2, the RTT expects that the RHI will continue to be driven by demand, with consumer confidence remaining unaffected by political change in the short term. Consumers will continue to feel the benefits of lower costs throughout the quarter, and discounting is expected to continue in a bid to attract sales across the fashion and grocery sectors. The current strength of the economy is set to carry on until the start of Q3, when the value of the pound is likely to vary, impacting retailers’ costs. Operating costs are also expected to rise due to increased discussions on employers meeting the living wage going into Q3.
David McCorquodale, head of retail, KPMG, UK, said: "Increased demand was the driving force behind the improvement in retail's health in the last quarter, and this is reflected in the volume of sales. Despite the increase in demand, total retail spending has however been relatively flat due to price deflation and Black Friday appearing to impact the January sales. Consumers appear to be opting to spend a larger proportion of their extra disposable income on entertainment, and other experiential services, rather than consumer goods. A factor that may impact retail health in the coming months is increasing wage pressure, with more calls for pay to rise to meet the Living Wage. It remains to be seen when this will take hold."
Dr Tim Denison, head of retail intelligence at Ipsos Retail Performance, said "Footfall levels are on the rise, indicative that consumer demand is strengthening. What is interesting though is that people seem to be spending proportionately more of their new found cash on leisure and entertainment services rather than on goods in the shops. With all the key indicators showing that the economy has improved, we might have expected that retail sales would be stronger than they have actually been in quarter one.”
Martin Hayward, founder of Hayward Strategy and Futures, said "There is a real sense across various retail sectors that the sun is starting to shine a little brighter. Food continues to be an area for concern, and it will take a significant period of time before this improves. Real income is on the rise, and with consumer confidence the highest it has been since the economic crash, it is important that the industry grasps those shoots of recovery."
Maureen Hinton, group research director from Conlumino, said: "The general election is unlikely to have any impact on consumer confidence levels, particularly in the short term. Current high street prices are the result of buying that took place when the pound was particularly strong. These savings have filtered through making prices more affordable, and helping shoppers feel they are getting better value, especially in fashion. What we are continuing to see is the use of discounting by retailers in a bid to lure shoppers in, however this is a cycle that many are trying to break out of, with very mixed results. Shoppers want to feel that they can trust brands, and setting goods at a reasonable price in the first instance rather than entering a discount cycle, seems to be the most successful model in the current climate.”
Richard Lowe, Managing Director, head of retail & wholesale at Barclays, said: "One of the strongest indicators of an improving retail environment is the health of the homewares sector. Often the first to come under pressure, sensitive to fluctuations in the housing market, and the last to recover, it has enjoyed significant growth in recent months. Aside for this, the other significant issue retailers must grapple with is, undoubtedly, the impact of the living wage. It is set to become a far-reaching topic in the year ahead and for the retail sector it is a question of when, not if, this will have an impact on operating costs.”
Mark Teale, head of retail research at CBRE, said: “Outside London, occupational cost growth pressures remain weak because of sluggish expansion activity levels. A few major shopping centre schemes are now making their way through the pipeline but development activity levels generally still remain at recessionary level. The lack of new supply is storing up problems for the future because so little new high productivity shopping stock is coming on stream. With primary stock fairly fully occupied, sourcing decent shopping stock in high volume markets is becoming increasingly difficult.”
Martin Newman, founder and CEO of Practicology, said: “Margins will be largely unaffected in the coming three months, and it will be interesting to see how retailers respond, if at all to the general election. Online will continue to be a focal point for many brands, looking to reinforce their infrastructure ahead of 2015’s Black Friday. The phenomenon is likely to be even bigger than last year’s as retailers look to capitalise on consumer appetite for a bargain and it could be the death bell for January sales. Fashion retailers in particular will have to acknowledge the new rules of seasonality, with climate change playing a major role.”
Mike Watkins, head of retailer and business insight at Nielsen, said: “The outlook for retailing over the next few months is a little more positive but for sales growth to gain further momentum, we would still need any increase in real incomes to drop into shopping baskets, and not to be spent on leisure, entertainment or other out of home activities. Supermarkets are starting to see some volume sales growths but deflation is now taking the edge off top line value growths. On the upside, consumer confidence is back to an eight year high and this can only help non-food retailers.”
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Note to Editors: The RTT panelists rely on their depth of personal experience and 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 • Martin Hayward – Hayward Strategy and Futures • James Knightley – ING • Richard Lowe – Barclays Retail & Wholesale Sectors • David McCorquodale – KPMG • Maureen Hinton – Conlumino • Mark Teale – CB Richard Ellis • Mike Watkins – Nielsen • Martin Newman – Practicology 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 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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