Health of UK retail remains in doldrums but buoyed by summer events

19 July 2012

- Demand in quarter two was better than expected, but still detrimental to
the health of UK retail.  A similar trend is expected in quarter three.

- Margins were better protected in quarter two than quarter one as
promotional activity and discounting was more targeted and discreet.

- Costs remained largely neutral rather than detrimental to health.

According to the KPMG/Ipsos Retail Think Tank (RTT), the state of retailing
was not quite as bad as in quarter two as it had predicted it would be back
in April. The Retail Health Index (RHI) dropped one point to 78 over the
quarter, maintaining the rate of decline seen in quarter one. The RTT
expects this rate to continue in quarter three. Though the health of the
sector is still in the doldrums, the downward gradient is not as steep as it
was over the second half of 2011.

Following its meeting in July 2012, the RTT – a panel of retail experts that
meets quarterly to provide authoritative and independent views on issues
affecting the sector – states that summer events have helped bolster retail
sales, and without them the sector would have suffered far greater.  The
underlying state of the economy continues to plague retailers affected by
one of the country’s wettest summers on record; this despite petrol prices
decreasing slightly and inflation easing.

At the end of quarter one, the RTT had predicted another difficult quarter
ahead for the retail industry, whilst acknowledging it would be buoyed by
The Queen’s Diamond Jubilee celebrations. That proved to be the case, with
food and drink sales in particular, boosted.  However, the rise in footfall
and sales on the back of the Jubilee was immediately dampened by poor
weather, which has remained.  This was in stark contrast to the Royal
Wedding in 2011 when the event created a feel-good-factor that brought about
a three-week mini boom for retailers.

RTT members agreed that April was a dire month, and were it not for the week
of good weather in May and the Jubilee week in June, the quarter would have
been far worse. On a positive note, though, RTT members reported that demand
for indoor goods, including home ware and small electrical goods, is more
robust, as households put more emphasis on home living and home
entertainment. The inclement conditions and televised sporting events (such
as Euro 2012 and Wimbledon) were also factors at play.

In the current abandonment of normal shopping patterns, of shopping for
summer clothes as collections are released during spring and early summer,
and for seasonal goods and equipment for the garden and outdoors, consumers
are instead in reactive mode, responding to opportunities as and when the
mood takes them. Demand is far spikier than before.

Helen Dickinson, Partner and Head of Retail, KPMG UK, said: “Overall, there
have been some downsides and upsides to retail health in the quarter, but
nothing especially dramatic, including the impact of the Jubilee.  Costs
remained pretty neutral and it was really low demand and eroded margins that
were the two weakest links.  The underlying trend is still very weak. When
the good weather has appeared occasionally, it’s had an impact, but people
are only spending then because they’ve been holding back.”

Dr Tim Denison, Director of Retail Intelligence at Ipsos Retail Performance,
said: “Earlier in the year we saw a lot of promotional and discounting
activity among retailers, but this could not be sustained because margins
were taking a real hit.  There has been some similar activity in quarter
two, but this has been more discreet and targeted.  In some cases, retailers
have got away with offering a little bit less than they did in quarter one.
Notably, the launch of summer sales at the end of June helped to lift
footfall.”

Neil Saunders, Managing Director of Retail Analysts, Conlumino, added:
"Shoppers spent far less in April, especially on summer stock.  What we have
noticed, though, is latent demand among consumers. Spend that would have

happened in April was brought into both May and June. Much of this was
driven by the Jubilee which was a fantastic excuse for people to splash out
a little. Without this impetus the whole quarter would have been extremely
subdued.”

Vicky Redwood, Chief UK Economist at Capital Economics, said: “Consumer
confidence failed to pick up over the past quarter, consistent with the idea
that underlying demand remains relatively weak - perhaps because disposable
incomes are still under significant pressure.   We will see real incomes
rising soon for the first time in a long time, but pay is still below
inflation.  And other uncertainties, such as the Euro crisis, are having an
impact on credit conditions, so all in all it’s still a bit of a minefield
for consumers and retailers.”

Mark Teale of CB Richard Ellis, said: “There is a degree of consumer boredom
with the High Street offer. It is not just the clone-town thing. Many brands
are pretty tired: it is no coincidence that many of the multiples that have
slipped into administration over the last 3-4 years had been around, with
very similar offers, for many years. You can see the same thing happening
with the traditional food court. Much of the fast-food offer is pretty tired
too. High Streets need change. They need new blood. That is happening at the
luxury end of shopping, most obviously in Central London. It is also
happening at the discount end. Change elsewhere is at a snails’ pace, not
least because many retailers are simply struggling to keep their heads above
water and new entrants are few and far between. We are in recession after
all. But new offers will grow out of the wreckage.”

Independent Retail Analyst, Nick Bubb, said: “The type of purchases by
consumers have been highly skewed towards indoor goods such as televisions,
other electronic and electrical devices, and other home related products.
By comparison, the food sector is under intense pressure because it’s driven
by events and promotions.  The weather has had an impact, but it works both
ways; people sometimes shop because there’s nothing else to do! What this
all means is that we’ve seen wide variations in the performances of
different retailers, such as John Lewis and Marks & Spencer.”

Commenting on the next quarter, Richard Lowe, Head of Retail & Wholesale at
Barclays, said: “There should be some upsides this summer as sporting events
take prominence, enticing a greater number of overseas visitors to the
Capital. Early summer sales have already given a much-needed boost to retail
sales and contributed somewhat to the recent fall in inflation.  This drop
in inflation will benefit most households, however it will take time for
this to have a material impact on consumer behaviours in terms of changing
spending habits.”

Summarising the RTT’s July discussion, Helen Dickinson of KPMG, said: “The
health of UK retail in quarter two was pretty much as expected and our
forecast for quarter three is much the same as quarter two.  There continues
to be a poor and underlying situation facing retailers that pushes out any
sign of recovery for the sector.  The question is whether or not we will see
any upturn.  In other words, is the situation now normal, will it get worse,
or is the ‘new normal’ just slightly better than what retailers are
currently experiencing?  The fact might be that yesterday was much better
than it should have been.”