Retail growth unlikely to improve in 2016, warns KPMG/Ipsos Retail Think Tank

Retail growth unlikely to improve in 2016

With consumer confidence faltering, the KPMG/Ipsos Retail Think Tank (RTT) warns that retail sales growth is set to edge back in 2016 from c1.8% to around 1.7% as consumers look to other sectors in which to spend their disposable income.

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Introduction

James Knightley, Senior UK Economist at ING said: “With wages finally responding to the tightness in the labour market and spending power further boosted by the plunge in energy costs, consumer fundamentals are looking in excellent shape right now. This positive momentum looks set to be carried through into the New Year with employment growth having re-accelerated following a General Election related lull, consumer confidence at close to record highs and demand for credit continuing to strengthen.”

“For the first time in 8 years we now have an optimistic consumer mind-set around local job prospects, personal finances and immediate spending intentions. This will stimulate demand across non-food and out of home channels,” added Mike Watkins, Head of Retailer and Business Insight at Nielsen UK. 

However, despite much to be positive about, the RTT highlights that the way people are shopping has fundamentally changed and that while there is, in the main, more money in consumers’ pockets, this isn’t hitting the retail tills. So what does this mean for the future of the retail sector in 2016?

Where will the money go?

A big question reflecting on 2015 is where all that extra consumer spending went? Maureen Hinton at Conlumino said “consumers are looking beyond retail for goods and services to spend their money on. This is making it much harder for an over-subscribed retail sector. Leisure, culture, entertainment, have shown much stronger growth than retail over the past five years and this trend is being exacerbated by an aging population.”

Nick Bubb, Retail Consultant added “ there is little evidence that pubs and restaurants have done that much better from the growth in real personal disposable incomes in 2015 and only modest evidence that consumers have splashed out on new cars and holidays instead.”

The RTT believes that early repayment of mortgages, experiential activities and paying tradesmen to upgrade properties are absorbing a higher percentage of consumer spend and will continue to do so in the coming year. As such, if consumers weren’t feeling motivated to spend on retail during 2015, macro uncertainties in 2016 are likely to make it another tough year for the sector.

Further political uncertainty…

Drawing a parallel with last year’s outlook, Dr Tim Denison, Director of Retail Intelligence at Ipsos Retail Performance, said: “In 2015 the uncertainty of the outcome of the general election put the country on hold for months. In 2016 the uncertainty over the wake of the EU-referendum threatens to be a destabilising factor,” weakening both business and consumer confidence with negative implications for spending.

Added to this, a significant threat to retailers over the next year is the potential interest rates rise. “With domestic demand looking strong and last year’s plunge in the oil price dropping out of the annual CPI calculation, headline inflation is likely to rise fairly swiftly through early 2016,” said James Knightley. Both these factors are likely to make consumers and retailers somewhat jittery about the future.

…and added complications for 2016

Building on difficult prospects for the coming year, at the top of the boardroom agenda post-Christmas will certainly be the implementation of the National Living Wage before April 2016. David McCorquodale, UK Head of Retail at KPMG highlighted that this will result in “a significant overnight increase to the cost base but much more complex than a simple rise in hourly rate as it  has a knock on impact on, inter alia, pay differentials, staff discounts, tea breaks and pensions. It is further complicated with the wage set to increase for each of the next four years.”

An additional complication for 2016 is the review rather than adjustment of business rates being undertaken by local authorities. “This will, to a certain extent, level the playing field for centres outside the South East that are in desperate need of retail-led investment,” explained Jonathan De Mello, Head of Retail Consultancy at Harper Dennis Hobbs, “but will certainly force retailers in 2016 and beyond to re-evaluate their approach to location strategy.”  

To address escalating costs as a result of these changes, there’s been some speculation in the industry that we may see moderate price increases to help protect margins. Richard Lowe, Head of London at Barclays Corporate Banking, highlighted that “high levels of employment in the wider economy should mean that consumers have good levels of disposable income, but I think it’s important that retailers don’t overplay their hand when considering price points... As tempting as price increases are, it’s really cost management that has to be the priority in 2016.”

Moreover, the RTT agrees that only those with the strongest and differentiated brands will be able to pass this cost increase onto the consumer. Instead, the majority of retailers will need to closely examine how productivity can be improved through more efficient use of resources or technology solutions

More striving for the omni-channel dream

In order to best ride the wave of complications and uncertainties in the year ahead, the RTT suggests retailers will be further challenged to adapt business models and find new ways to better serve customers. “Retailers will aim to deliver what we would describe as a seamless multi-channel customer experience,” said Martin Newman, CEO at Practicology, “one where the shopper is supported and served irrespective of the mixture of channels they use.”

However, fulfilling this omni-channel experience profitably cannot be done from systems and processes designed for just one or two channels which means we are likely to see more investment in technology, mobile, fulfilment options and convenience for consumers in the year ahead. In fact, “the rising costs involved in providing an attractive and efficient omni-channel service is a growing threat that must be managed carefully,” highlighted Richard Lowe. “I see this as the biggest single issue for retailers at the moment – finding the right cost balance between the range of sales channels on offer could be the difference between a positive and negative outcome in 2016.”

Technological innovation will continue…

So as part of the drive to deliver a seamless, joined up consumer experience, the RTT believes technology will continue to be at the heart of retailing in the coming year with everything from payments to delivery being transformed by the ‘digital revolution’. As David McCorquodale said: “not every self-service checkout is welcome but the use of technology to enhance the experience and eliminate friction in the customer journey is increasing and I’d expect to see further innovations in 2016.”

As consumers continually adapt to technological advances, so too must retailers. “The technology drive is integral to future success,” added Dr Tim Denison. “Stripping out complexity on the one hand, to make shopping easier and quicker, and adding intelligence on the other, to make it more personal and rewarding. Bringing intelligence of current customer behaviour to the heart of the business, making big data effective to deliver on-demand service through retail analytics will be instrumental in making retailers more agile and responsive.”

…but cutting corners to keep up could put cyber security at risk 

At the heart of technological advances, is the use of data to know customers and anticipate their needs. But as retailers get to know their customers more intimately so data governance and protection becomes more and more important. According to Dr Tim Denison, cyber security is a “pre-requisite to deliver in 2016, as ‘trust’ becomes as important to retailing as ‘experience’.”  

David McCorquodale added; “hackers have moved from hacking governments and financial institutions to the retail sector because of the amount of bank and other personal details held by retailers.  As cyber criminals become increasingly more sophisticated, company defences have to gain sophistication too as any breach is hugely damaging.”

Therefore, following a number of high profile blunders during in 2015, the RTT anticipates that the issue of cyber security will remain at the top of the boardroom priority list. 

Weaning consumers off a diet of discounts

In the past, retail promotions were implemented as a reaction to an unexpected slowdown in sales (often weather related), the need to clear seasonal stock, or participation in planned promotional `events` eg. Mother’s Day. However, the RTT highlights that shoppers no longer think this way, but rather consumers plan spending in advance (particularly for big ticket items), shop around for the best deals, and chase promotional discounts from outlet to outlet.

Mike Watkins noted that “the digitally enabled world of shopping for `anything, anytime and from anywhere` has tipped the balance of power so that consumers are now in control.” As such, the RTT predicts that, going into 2016, the scars of austerity continue to linger and consumers will remain inherently cautious about discretionary spending so will remain hooked on this diet of discounts. 

Retailers therefore need new strategies and customer propositions that really do save consumers money, and at the same time, generate incremental demand.

“Promotions will have to be multi-channel, which brings with it the risk of adding to supply chain costs but more importantly, strategies need to be technology driven, where `big data` is key to making the crucial supply and margin decisions,” added Mike Watkins.

Retailers need to get personal

As part of weaning consumers off the perpetual discounting trend, the RTT believes that 2016 is the year retailers will need to redouble efforts in finding ways to encourage long-term loyalty from customers and the key to this will be personalisation. 

Martin Hayward, Founder at Hayward Strategy and Futures, said “in many retailers the promise of a digital future, where offers are personalised and relevant has so far been missed…Many customers want to feel valued, and want to build relationships with their chosen suppliers but we are currently often making this hard for them to do…For long term brand health, retailers have to focus again on their most important customers. Get to know them, talk to them and love them. The data exists, the tools exist and the customer would love you to do it – the appeal of relentlessly chasing the deal is beginning to diminish.”

As such, while being competitive on pricing, deals and rewarding regularly returning customers remain key lynchpins in retailers’ strategies, Martin Newman highlighted that “customer experience will be an important defining factor in how successful retailers are in 2016.”

More pressure for the grocers

The RTT agrees that the big supermarkets will remain the “wooden spoon” of the retail sector. “Despite weak comps, LFL sales remain firmly negative for the big supermarkets as a result of persistent food price deflation and the market share growth of the discounters Aldi and Lidl,” said Nick Bubb.

Nielsen Homescan figures demonstrate that the market share of the ‘Big Four’ has fallen from 75% to 70% in the last 5 years as a consequence of the discounters achieving a breakthrough FMCG market share of 11%. 

Maureen Hinton added “the food discounters (or more accurately, budget retailers) and general merchandisers will continue to take share because of their increased availability to consumers via new store openings.  But volumes are not rising enough to support all this expansion and there has to be some consolidation in the sector to take out the excess supply.”

According to Mike Watkins, Nielsen fully expects the market share gains for Lidl and Aldi to continue in 2016, so next year seems unlikely to bring much relief for the big supermarkets. The outlook is that the hard grind will continue, with the added complication that there will be higher wage bills to pay for and there will be more competition in Online Grocery from Amazon.

Going global

The final key theme for 2016 will be increased internationalisation. On the back of investment this year from the Chinese in House of Fraser and Hamleys, and from South Africans in Phase Eight, New Look, and Office, it’s clear that UK retailers make an attractive investment platform for international players. 

Jonathan De Mello highlighted “many international brands not currently trading in the UK see the UK as an increasingly attractive proposition, given relatively low taxation, a stable economy and retail-friendly labour laws. The UK is often seen as a springboard into Europe by American brands such as J Crew, American Eagle and others, and a test bed for the US for European brands.”

“At the same time, cross-border ecommerce continues to be a big opportunity for UK retailers,” added Martin Newman. “PayPal research has estimated that a staggering 86.4 million overseas shoppers from 29 countries surveyed bought online from the UK in the last year. So even brands who have no physical presence overseas can bolster domestic demand by opening their online store to the world and developing a localised online presence for markets that warrant the investment.”

Overall outlook for 2016

Overall, the RTT believes there is plenty to be positive about going into next year to support an increase in spend and spending power by UK consumers, but it remains to be seen as to how much retail is going to benefit from this.

“While 2016 is likely to be a much more positive year in growth terms, not all retailers and sectors will benefit,” explained Maureen Hinton.  “An improving economy will not solve the problems of how to deal with the fundamental changes in how consumers shop, and the rising costs of meeting their expectations.

”As such, Dr Tim Denison noted that “2016 will be a tricky year to get the balance right between cost control and investment. Retailers will need to keep on their toes. Success will not necessarily come from running quicker. At times it may come from running in a different direction. Retailers would be well advised to look outside the sector, not just inside, for inspiration and guidance.”  

-Ends- 

For further information please contact:

Jess Liebmann, KPMG Corporate Communications

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