Retail Think Tank Warns Of Uncertain Times Ahead

Following its recent quarterly meeting, the KPMG/Ipsos Retail Think Tank (RTT) has released its latest findings, stating that the health of UK retail fell in the second quarter of 2016.

The RTT’s Retail Health Index (RHI) dropped one point to 83, the first time it has declined since Quarter 3 2014. Disappointing sales in April and June reflected flat demand and the National Living Wage came into force before productivity strategies had been implemented to lessen the damage to their cost bases.

Although consumer confidence continued to improve and the public’s personal finances were strong, with both employment and wages rising, there was no real uplift from the Euro 2016 tournament and the unseasonably poor weather hurt fashion retailers.

The RTT forecasts that the RHI will drop a further 2 points in the third quarter and acknowledged that the general trend in recent months was already on its way down, and therefore, while Brexit was not the cause of this slow down, it could aggravate the existing issues that retailers are facing.

The three main drivers of retail health; demand, margin and cost, are all expected to work against retailers throughout the third quarter.

Rising costs for retailers are expected to be the strongest driver of the health decline, with sterling struggling in world markets making the importing of goods into the UK more expensive. Though most large retailers hedge funds six to18 months out, many of the smaller players don’t, leaving them exposed.

The National Living Wage has not only increased retailer’s wage bills, but further investment will be required to increase efficiencies in an effort to counteract the largest National Living Wage rise by 2020. The RTT discussed whether or not these rising costs would be passed onto the consumer, but it was felt that retailers would be looking to keep prices down and the additional costs would need to be largely absorbed by retailers and their suppliers.

There was also concern that energy and fuel inflation in the coming months would hurt retailers on multiple fronts, impacting not only on their costs, but also on consumer confidence as these are very ‘obvious and apparent’ price rises that effect people day-to-day.

The RTT said it debated at length how consumer confidence would be affected across the quarter. Wage and employment levels are still healthy and disposable income is rising, but as has been an ongoing narrative, a disproportionate amount of this money is being spent in the leisure and hospitality sector rather than in retail. The RTT agreed that it has never been more important for retailers to fight back and work hard to win more of the consumer’s wallet.
Retailers selling big-ticket items such as televisions and sofas, and goods at the discretionary spend end of the spectrum, are expected to be hit the hardest in the third quarter. The RTT predicts that a softening of the housing market would have a knock-on effect on large purchases until the dust of Brexit had settled and people had a clearer view and understanding of what will happen next and what the impact will be for business.

The RTT predicts that if demand falls, retailers could well be forced into activating further discounts and sales to keep consumers spending in the quarter to come. The RTT suggested these could be prolonged and deep, which coupled with rising import costs, will squeeze margins even tighter.

If weaker demand materialises in the third quarter, fashion retailers in particular will be forced into deploying heavier discounting programmes to stimulate sales and clear stock levels in advance of Quarter 4. Post June 23rd overseas markets look a lot more attractive and members expect further expansion plans to sell more outside of the EU, with the USA, China and Australia cited as natural targets. The confusion and unpredictable nature of the market also present opportunities for retailers already in strong positions, and in a similar way to during the last recession, some retailers could benefit from a ‘land grab’ and take a larger proportion of the market.

The RTT recognised that whilst overseas opportunities look attractive, there is also an opportunity for retailers to take advantage of their heritage and provenance of products if positioned correctly.

Dr Tim Denison, head of retail intelligence, Ipsos Retail Performance, said: “Uncertainty is one of the most damaging bête noirs in retailing, and the spread of opinions around the table speculating about the short term impact of the ‘out’ vote was symptomatic of the degree of uncertainty that exists in the sector. It is possible that if retailers can connect with consumers and portray a message of ‘buy now while prices are low’, we could see demand maintained throughout Quarter 3. But the reported decline in consumer confidence post 23rd June could threaten the resonance of that message.”

Nick Bubb, independent retail analyst, added: “Before the UK took the Brexit plunge, retailers were already struggling with rising costs, squeezed margins and softening demand. The decision to leave the EU has now aggravated these issues with Sterling struggling and uncertainty creeping into both boardrooms and the mind of the consumer. The underlying issues that retailers are facing still exist, but there is now just a greater urgency required in addressing them.”

Meanwhile, Mike Watkins, head of retailer and business insight, Nielsen, said: “The Brexit vote left consumers in a state of shock and it will have had an initial impact on consumer confidence. Historically, August is a holding month for retailers with many people abroad or looking to save money upon returning from holidays. This may amplify the weak demand we have seen in recent weeks due to the unseasonable weather and could intensify with the uncertainty of Brexit still in the air. However, the success retailers have in a normally buoyant September could well be a better barometer for ongoing performance over the following six months and looking further ahead, whatever changes are made by policy makers that impact disposable income.”