Pent up demand and savings accrued during lockdown are set to improve the health of the retail sector over the coming months as the UK moves to the next phase of its recovery plan, according to the KPMG/Ipsos Retail Think Tank (RTT).
Following its latest health assessment, the RTT has determined that pent up demand from consumers will see the Retail Health Index (RHI) rise by 3 points to 71 in the second quarter of 2021, a considerable improvement from its nadir of 61 points for the same quarter last year.
The main driver of the improved RHI – a quantitative and qualitative assessment of retail demand, margin and costs – is predicted to be demand over the next quarter, as a result of a shift in spending patterns, with consumers choosing to spend on fashion and clothing as they shop for occasions and get back to socialising. The mood of the nation will be about spending on looking good again and making up for lost time.
The RTT predicts the shift in spend will see a gradual move away from spending on in-home grocery consumption, DIY, technology and household items, which sustained retailers during the lockdown earlier in the year in favour of the hospitality sector. Overall, it is expected to be a strong quarter for non-food retailers, but given the timings of the re-opening milestones it will take time for food sales to lose momentum.
Stronger demand goes hand-in-hand with healthier margins, so this will reduce pressure on non-food retailers in the quarter ahead. Furthermore, the swing back to fashion, which is a higher margin category, will also contribute to stronger overall margins. The RTT registered some concerns of storm clouds ahead for margins in the food sector as demand there begins to weaken.
The RTT predicts that costs will stay relatively stable, with rises in energy and commodity prices being partly offset by a strengthening pound. There will be savings on business rates and rent and the main costs of re-opening stores will be around re-stocking and labour costs as staff come back to work having been furloughed for much of the year. Retailers will be struggling to know whether they can afford to reduce the cost to serve online demand, as the swing back to store unfolds. The likelihood is that retailers will hedge their bets rather than pull resources at this point from their online service.
Paul Martin, UK head of retail at KPMG, commented: “As the country slowly re-opens, consumers are eager to break free from home and get back into stores, and pent up demand will drive a much-needed sales boost for high street retailers.
“In addition, particularly for fashion and beauty products as consumers wait for hospitality venues to fully re-open, there is an estimated £140bn of savings which could be used as consumers’ moods shift to spend mode.
“We are expecting much of the shift in spend to gradually move away from the supermarkets and technology retailers who benefited from high demand for food, computers and home entertainment as the country was locked down through winter.”
He added: “Retailers face an interesting few months as they assess the level at which online shopping falls back, in favour of people hitting the stores. We expect e-commerce levels will soften over the next quarter, which could help retailers with their high fulfilment costs. There are a few black clouds on the horizon however, as interest and some repayments on Coronavirus Business Interruption Loan Scheme (CBILS) and bounce back loans given to support retailers at the beginning of the pandemic will need to start being paid from April alongside deferred rental payments.”
NAM Implications:
- Cynics might observe anything seems brighter following 2020…
- That said, fingers crossed.
- And NAMs should revert to basics, assess relative competitive appeal and go for it.
- Secure in the knowledge that 90% of their rivals will await a return to normal…
