18 May 2024, 20:45
By Furniture News Jul 27, 2015

Retail health improves for third consecutive quarter

Following its quarterly meeting on July 14th 2015, the KPMG/Ipsos Retail Think Tank (RTT) has released its latest findings that state that the health of UK retail improved in Quarter 2 2015. The RTT's Retail Health Index (RHI) has climbed by one point to 82, the third consecutive quarter that it has risen. The RHI now stands at its highest level since Quarter 3 2011. This is expected to again improve in the coming quarter although the RTT cautioned retailers to anticipate a rise in costs, specifically in terms of wages and the costs of offering omni-channel services, which would begin to affect retail health detrimentally.

Of the three key drivers of retail health - demand, margin and cost – it was demand that had the biggest impact on retailers in Quarter 2. With real wages growing through low inflation, higher pay awards and increased employment levels, together with economic indicators pointing in the right direction, has left consumers feeling more confident in the last three months, resulting in an increase in spend with retailers.

Whilst the weather in Quarter 2 was not decisive in driving demand, it did have a positive impact on many areas of the retail market at the very end of the period. Outdoor furniture stores reaped the rewards of the hot weather, helping to form a positive narrative for the quarter.

The RTT was keen to stress that although the outlook is improving for retailers, many factors have, and will continue to, constrain growth. Not all of the financial benefits of recent pay rises have made their way into the retailers’ tills, with many individuals electing to pay off mortgage debt. There has also been growth in the leisure sector, with consumers spending more of their spare cash dining out, holidaying and on experiential pursuits. The RTT advised retailers that they will continue to have to work hard to win a greater share of the growing disposable income among UK consumers. It pointed out, however, that the picture is very different across the country, with households in London and the South East, West Midlands and the North West in the strongest position.

Looking ahead to Quarter 3, the RTT expects the RHI to again improve one index point to 83. Much the same as the last quarter, it was thought that the growth would be largely driven by consumer demand. Sales of big-ticket items and homeware have risen considerably in recent months, an early indicator that consumers are feeling more confident in spending rather than saving. 

The RTT warned that retailers’ costs are going to become more problematic in Quarter 3, and are expected to play a big part in holding back the potential growth that the increase in demand could deliver. Wages are continuing to rise across the country, and with the living wage announcement in the Chancellor’s emergency budget, retailers will have to start integrating these additional costs into their future strategies.

A major talking point for the RTT was the recent announcement that John Lewis, soon to be followed by other major retailers, will start charging customers for using click and collect. It was agreed that this was an indicator that margins are now approaching a level whereby retailers will look at methods of disaggregating pricing in order to build back margin. This has some way to run as the increased costs of giving the consumer what they want need to be factored in.

David McCorquodale, head of retail at KPMG UK, says: "There is much to be optimistic about as we head into Q3. Economic indicators are positive, real wages are growing, the grocery sector could be on the turn and spending on big-ticket items is increasing. However, there is still plenty of work to be done and retailers will have to ensure that the increased costs of employment from the new living wage are factored into future plans, as costs will play a key part in reeling in future growth.” 

Dr Tim Denison, head of retail intelligence at Ipsos Retail Performance, says: "Quarter 2 added another constructive building block in the slow road to recovery in the sector. The quarter ended well with strong sales performance reported in June, but paradoxically, with a reduced number of shoppers on the high street. Retailers benefitted from a significant upturn in online transactions, as although the hot weather drove sales of seasonal items, it also deterred shoppers from the physical store themselves. Investment in omnichannel solutions, personalised to the individual customer, will need to increase to ensure retailers have a powerful tool for driving people back onto the high street.”

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