Retail sales are predicted to grow by 2% at most in 2015 as consumer confidence remains fragile, warns the KPMG/Ipsos Retail Think Tank.
David McCorquodale, Head of Retail at KPMG, said: “2015 will see some growth, but retailers will do well to break through the 2% barrier. There are multiple factors which could knock sales off course, including concern around the general election and an interest rate rise.
“There is undoubtedly growth coming through online sales, but this is a double edged sword. Online sales have a higher ‘cost to serve’, putting even more pressure on retailers’ margins.”
Political uncertainty remains a real risk to consumer confidence, with a general election and turmoil in the Eurozone expected to cause significant jitters.
James Knightley, Senior UK Economist at ING, said: “The Eurozone break up story could come back very hard next year, posing risks to the UK growth outlook. This will jangle the markets’ nerves and could offset the positive domestic story.
“Worrying political and economic developments around the globe have led to wild swings in currency markets. Sterling is currently benefiting, but this may not last. May’s general election will possibly reignite talk of Scottish Independence, should Labour form a coalition with the SNP. Alternatively, a Conservative/UKIP coalition will heighten fears of the UK leaving the EU. Either option will weigh on Sterling, suggesting that imported commodities will become more expensive. Some currency hedging could mitigate these risks.”
Concerns around the outcome of the general election, coupled with a Budget planned for later than expected on the 18th March, could cause consumers to pause their spending whilst they wait for greater clarity. “The outcome of the election seems likely at this stage to be messy and inconclusive, which will do little to help consumer confidence,” said Nick Bubb, Retail Consultant.
“Consumers are concerned about what the election will mean for their own finances,” said Neil Saunders, Managing Director of Conlumino. “There are questions outstanding on how the next Government will tackle the country’s finances. Does this take the form of a VAT rise or further public sector cuts? This, against a background of an economy that is still very unstable, will worry consumers.”
A possible rise in interest rates and VAT could also constrain consumers’ ability to spend in 2015. Conlumino estimates the VAT rise in Japan cost the country £6.7bn in lost retail spending growth.James Knightley of ING added: “Policy makers have seen the impact of Japan’s VAT rise. Consumer confidence was badly hit and has not recovered. It has demonstrated that this could be the thing that tips you back.”
"Whoever is in power, a rise in VAT looks almost inevitable by the end of the year," commented Nick Bubb, Retail Consultant. "It is an unfortunate truth that one of the easiest taxes to generate enough revenue to help with the Government deficit is VAT, as in the short term this is simply a tax on retailer’s profit margins. The current 20% rate is a little below VAT rates in some parts of Europe, with the 23% VAT rate in Ireland one benchmark to consider."
The KPMG/Ipsos Retail Think Tank believes that food sales will remain in negative territory in 2015, caused by price deflation and changes in shopping practices by consumers.
“The food retailers were easily the worst performing sector in the stock market in 2014 and it will be a surprise if they can avoid picking up the wooden spoon in 2015,” said Nick Bubb, Retail Consultant.
“Profound structural changes in the market sent volume into decline in 2014 and a combination of intense discount competition and good harvests also reduced food prices; things will not get any better in 2015. The beleaguered Tesco is expected to launch a major new price campaign early in the New Year, as it battles with its surplus hypermarket space and the threat of another credit rating downgrade.”
Mike Watkins, Head of Retailer and Business Insight at Nielsen UK, said: “The food sector remains embattled with fierce competition, so sales are likely to be flat at best and may even fall by up to 1% in value terms. Food retail is no longer immune from the vagaries of discretionary spend.
“Deflation is going to be a big concern for at least the first part of the year and will keep many CEOs awake at night, and FMCG volume growths may enter a third year of decline. Private label will once more be a safe haven for shoppers and a suitable disruption for some retailers, as it accounts for over 50% of all food and drink spend in the UK and continues to grow ahead of brands in premium food.”
Tim Denison, Director of Retail Intelligence at Ipsos Retail Performance, said: “The retail environment will remain tough, partly because the economy’s momentum is expected to slow, but partly too thanks to the demanding and dynamic market conditions. However, there are some bright spots on the horizon. Shoppers will benefit from lower prices particularly in the food sector. Home wares will also continue to improve, but the sector’s fortunes are inextricably linked to the performance of the housing market.”
The KPMG/Ipsos Retail Think Tank believes that in order to take back market share grocers must re-examine and promote their own brand values to win consumers’ custom, rather than engaging in an all-out price war. Offering personalised, relevant services will help to set them apart from the competition.
Online sales growth will exacerbate profitability problems
The KPMG/Ipsos Retail Think Tank warns that 2015 will be an incredibly expensive year for retailers as ever increasing online orders inflated the overall ‘cost to serve’. Unless retailers achieve decent sales growth, this will impact profits over the next 12 months.
Mark Teale, Head of Retail Research at CBRE, commented: “Online sales growth has exacerbated profitability problems because of the inability of many retailers, particularly in grocery markets, to claw back the full cost of fulfilment from online shoppers. Margin dilution is the inescapable result of this pressure. Online has proved brilliant at capturing sales; its record as a profit generator is much less impressive.”
The trials and tribulations seen on Black Friday proved that retailers need to improve resilience, as it was that many could not deal with the sudden spikes in demand.Richard Lowe of Barclays, said: “Retailers need to have a robust IT platform that will work smoothly across all channels and can withstand spikes in demand, such as Black Friday or Cyber Monday.
“There has been speculation that Twitter will launch a “Buy Button” next year, following a trial in the US, and this will make “social shopping” even more accessible. Retailers are right to take these types of emerging developments seriously and increasing numbers of our clients are already planning to finance large scale overhauls of their web and mobile systems.”
Despite margins being under pressure, retailers will need to spend more in 2015, in order to remain competitive and catch up with consumers’ evolving shopping habits. Evolving technology offers more opportunities to personalise and innovate services, enabling retailers to respond quickly to changing consumer shopping habits.
Martin Newman, CEO of Practicology, concluded: “Domestic retailers also need to brace themselves for competition from overseas to start invading the online arena. Many US brands are investing to make their ecommerce propositions to the UK more competitive, as are European etailers such as Zalando. And 2015 could see Chinese ecommerce giants – including Alibaba – throw themselves into the mix.”
- ENDS -
Notes to editors:
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.
The RTT panellists rely on their depth of personal experience, sector knowledge and review an exhaustive bank of industry and government datasets.
The intellectual property within the RTT is jointly owned by KPMG (www.kpmg.co.uk) and Ipsos Retail Performance.
Zoe Sheppard, PR Manager, KPMG
T: 0117 905 4337
M: 07770 737 994
Max Bevis, Tank PR
T: 0115 958 9840
KPMG LLP, a UK limited liability partnership, operates from 22 offices across the UK with approximately 12,000 partners and staff. The UK firm recorded a turnover of £1.9 billion in the year ended September 2014. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. It operates in 155 countries and has 162,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.