The health of retail in the UK dropped unexpectedly in Q3 for the first time since Q4 2012. It follows another very disappointing trading period for food retailers and a tough September for fashion retailers. However, industry expert body the Retail Think Tank expects consumer demand to rally in Q4, leading to more positive results for the sector.
Following its quarterly meeting on October 7th 2014, the KPMG/Ipsos Retail Think Tank (RTT) has released its latest findings that state the health of UK retail unexpectedly declined in Q3 2014. The RTT’s Retail Health Index dropped back one point for the first time since Q4 2012 to 80, putting it back to where it stood in Q1. Retail health is expected to bounce back again though in Q4, reflecting continued growth in employment and sustained consumer confidence nurturing demand.
Of the three key drivers of retail health – demand, margin and cost – demand for non-food goods was particularly weak in the latter part of Q3, and alongside another poor showing from food retailers, was largely responsible for the overall drop. Following positive results in July and August for non-food, unexpected warm weather in September impacted heavily on demand for clothing and footwear. The effect of a disappointing September was exaggerated further as it was a five-week month and was responsible for reversing the positivity of July and August.
Food retailers continued to struggle, as they have for a year now. Changes at the top of Tesco could impact heavily on the other major food retailers in Q4, if it decides to go on the offensive before the year end and this will play a part in shaping Q4. The RTT acknowledged they could not predict what Tesco would do, but considered it unlikely that an aggressive price war was imminent, particularly this side of Christmas, so alleviating pressure on the food sector over the festive period.
Going into Q4, there are signs that the health of the UK retail market is set to improve. The RTT believes that strong employment, improving job security and resilient consumer confidence will drive demand through to Christmas. There are also nascent signals that wage rises will increase towards the year end, and with inflation remaining low, higher disposable incomes could come at a fortunate time for retailers.
Those non-food retailers that have been able to invest in the race to deliver true omnichannel for Christmas, have done so, learning from the winners last year, and putting them in a stronger position to convert this demand into sales. In addition, retailers have had plenty of experience over recent years to avoid building large stockpiles for their Christmas campaigns only to discount heavily to stimulate late demand. The extra trading day this year over last will also help stave off panic measures and alleviate pressure on margins.
Retailers are continuing to invest in backend systems, digital and technology. There will be a final push to get everything ready for Christmas, but this should be seen as a necessity, as any advancements will service any increase in demand. The RTT noted that all retailers would feel the increased cost of the 3% minimum wage rise ripple throughout the entire pay structure, but over the quarter, savings made from falls in fuel and petrol prices may balance this out over the quarter. One caveat comes from geopolitical concerns relating to Russia, Ukraine and the EU. As we head into the European winter the potential for an escalation of tensions could see gas supply disruptions that lead to wholesale energy price spikes. If these are prolonged it could mean utility bills rise sharply.
David McCorquodale, head of retail, KPMG UK, said: “The retail market really didn’t get the luck it needed with the weather in September. During the mild temperatures, we saw a multitude of mid-season discounting in an effort to kick start sales of winter clothing and reduce stock levels. Food sales have continued to go backwards and last quarter it was non-food propping up the UK retail market. With September being so poor, everyone has struggled and it has really impacted on the whole quarter.”
Dr Tim Denison, head of retail intelligence at Ipsos Retail Performance, said: “This coming quarter should see the results of a year’s worth of investment in omnichannel come to fruition. In an effort not to fall behind, the race for omnichannel was put high on retailers’ agendas early on in the year, following strong performances from the likes of John Lewis and Next last Christmas. With everyone raring to go and demand set to swing for the better, retailers should be in a great position to deliver positive results without having to discount heavily before Christmas.”
Martin Hayward, founder of Hayward Strategy and Futures, said: “The polarised fortunes between food and non-food continued for the first two months of the quarter, and the health index was most likely on track to hold steady. The negativity of September really showed the fragility of the retail market, where one bad month for non-food cannot be supported and results in a negative point score.”
James Knightley, senior global economist at ING, said: “After soaring the pre-recession highs, consumer confidence has started to stabilise. This could be due to market uncertainty surrounding the Scottish referendum and Mark Carney’s recent speech signalling that an interest rate rise is on the way. This rise looks likely to be early on in 2015, reducing the impact on retailers looking for good Christmas sales figures. Whilst costs for retailers will increase with the 3% rise in minimum wage, this will somewhat be negated by savings made with falling petrol prices.”
Nick Bubb, retail consultant, said: “In recent months, food sales have been falling by an unparalleled degree. The decisions of the new CEO at Tesco could well be the overriding factor behind the retail health outcome for the next quarter. Margins for all food retailers will continue to be squeezed, and any announcement that leads to a food price war pre-Christmas will impact heavily on everyone.”
Mike Watkins, head of retailer and business insight, Nielsen, said: “There has been a range of outside influence on the retail market over the previous three months. The near-promise of the first interest rate raise in nearly four years, consumer confidence peaking but then no sustainable increase in consumer spend within retail, the Scottish referendum, September being warm, the housing market cooling and continued problems in the Eurozone all have had conflicting effects on UK retailers. The non-food retailers have been propping up the poor showing of the supermarkets for a year now, so it’s worrying that a poor month from the high street can have such a detrimental effect on the market, when there are continuing strong headwinds for 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
Neil Saunders, 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.
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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This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.