16 July 2014 - Following its quarterly meeting on July 8th 2014, the KPMG/Ipsos Retail Think Tank (RTT) has released its latest findings that state that the health of UK retail improved in Quarter 2 2014. The RTT’s Retail Heath Index climbed one point for the fifth consecutive quarter to 81, though the decision to raise the index value was far less clear cut than in previous quarters. Health is expected to flatline in Q3, reflecting growing concerns that the top four grocers will suffer further damage and hold back the overall health of the market.
Of the three key drivers of retail health – demand, margin and cost – demand for non-food goods was particularly buoyant in Q2, and largely responsible for the overall improvement. Sales in fashion and footwear led the way, assisted by the seasonal weather and strong new product collections. Strong consumer confidence and higher household disposable incomes encouraged more spend on discretionary products, though demand in some sectors, notably homeware and small electricals was surprisingly languid. The level of demand in non-food generally took pressure off margins in the quarter, allowing promotional campaigns to remain on plan and in budget.
By comparison, food sales struggled throughout Q2. Volumes were down and low price inflation hit sales values, making it a benign quarter. A poor showing by England at the FIFA World Cup and the early exit of Andy Murray from Wimbledon will have heaped further pressure on supermarkets, as the potential increased demand for alcohol and snacks was severely limited. The launch of price reduction programmes and the expansion of price matching strategies in favour of B.O.G.O.F campaigns, also impacted margins in the sector over the quarter.
The RTT acknowledged that Q2 really was a tale of two sectors, with the contrasting fortunes of food and non-food sales competing with one another to impact on the health of the UK retail market. Given that non-food makes up 55.1% of retail sales, and enjoys higher margins, its strong showing in Q2 outweighed the plight of supermarkets, to leave the overall retail market healthier than in Q1.
Going into Q3, there are signs that the health of the UK retail market is set to pause for breath and hold its current position. The RTT acknowledge concern for two of the three health drivers. It cautions that the growing competitive tensions amongst the main grocers, compounded by the strong comparatives from last summer, will overpower the positive demand in the non-food sector and drag down the health of the overall retail sector next quarter.
The food sector escaped the worst of the recession, but now the economy is moving into growth, the largest players are beginning to suffer. It also points to the accelerating investment being made in online services, delivery schemes and store expansions increasing the supermarkets’ costs in Q3. Retailers in the non-food sector too are incurring increasing costs to ensure that they are able to offer omni-channel convenience and flexibility to consumers for Christmas 2014. The RTT will be carefully monitoring the food sector in Q3 and is cautious that competitive tensions in that space, coupled with a further squeezing of margins, will drive a flat showing for Q3.
David McCorquodale, head of retail, KPMG, UK, said: “This quarter really has been a battle between the gains made in non-food and the supermarkets’ ongoing troubles. The grocery market has never been so tough, competition is fierce and margins are being constantly squeezed as price matching and ongoing discounting becomes ever more common. This isn’t set to let up in Q3, as investment of store expansion will continue and the cost of delivering online retailing will rise as the popularity of the services increases.”
James Knightley, senior global economist at ING, said: “Retailers have benefited in Q2 from an increased level of disposable household income. Jobs are continuing to be created and the raising of the income tax threshold has left more money in consumers’ pockets. It should be noted that as we head into Q3, increased chatter about an interest rate rise could knock purchasing confidence. A rise of 0.5% would increase the average annual UK mortgage payment by around £317, enough to negate the benefits of the previous tax threshold changes.”
Richard Lowe, head of retail & wholesale at Barclays, said: “Throughout Q2, consumer confidence has been high as people felt more secure in their jobs and had better expectations of the economy. This confidence has translated into a strong few months for fashion and footwear retailers as this extra money has been spent on non-essential purchases. Going forward, as an interest rate rise looms ahead, Q3 may flatten out as consumers tighten the purse strings in preparation for increased mortgage costs.”
Nick Bubb, retail consultant to Zeus Capital, said: “The ongoing struggles of the food sector really have been the headline story so far in 2014. Whilst the non-food sector is fighting against the tide and making gains, looking ahead to Q3 it will be interesting to see how the fierce competition in the food sector will affect the overall health of the UK retail market, especially given the tough comparisons it will face to 2013’s strong summer figures due to the July heatwave.”
Neil Saunders, managing director of Conlumino, said: “While there has been steady growth within retail as a whole, the food sector is much more of a struggle with volumes in negative territory. Part of this is the result of changing consumer habits, including a shift to smaller, more regular convenience based shops which has reduced wastage. It’s also the result of a more savvy shopper saving money at discounters and cutting back on volume driving B.O.G.O.F style promotions.”
Mark Teale, head of retail research at CBRE, said: “Economic messages remain very mixed. The market remains deflationary: BRC reported shop prices in June falling at the fastest annual rate since 2006. Sterling strength is an added complication. Grocery market conditions are looking increasingly dire and are now weighing negatively on the health of the whole sector. Public finances, and bank lending remain weak and the spectre of interest rate increases draw ever closer. Public sector strife over wage constraint is meanwhile continuing to grow. On the plus side, some economic measures – including employment – are going in the right direction but when a sustained trickle-down will finally begin to boost household spending remains highly uncertain.”
Martin Hayward, founder of Hayward Strategy and Futures, said: “Non-food has definitely been the winner of additional disposable income and new found economic confidence. It will be interesting to see in the coming months how a rise in interest rates affects peoples’ spending habits, as it could be that that people cut back on non-essential and big-ticket purchases in an effort to increase savings.”
Dr Tim Denison, head of retail intelligence at Ipsos Retail Performance, said: “Since the RTT first sat in 2006, we have never struggled so hard to agree upon the current state of retail health, such is the polarity between the food and non-food sectors. At a time when the economy is strengthening, it is disturbing to believe that retailing may be weakening as we move into Q3.“
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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:
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.
Max Bevis / Marie-Anne Leuty at Tank PR
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This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.