The health of UK retail fell in Q2 2016, and is expected to fall further in Q3, according to the KPMG/Ipsos Retail Think Tank (RTT), which reports that 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 acknowledged that the general trend in recent months was already on its way down, and therefore, while Brexit was not the cause of this slowdown, 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 Q3.
Rising costs for retailers are expected to be the strongest driver of the decline, with sterling struggling in world markets making the importing of goods into the UK more expensive. Though most large retailers hedge funds six-18 months out, many of the smaller players do not, leaving them exposed.
The National Living Wage has not only increased retailers' 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.
The RTT debated at length how consumer confidence would be affected across the next 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.
The RTT recognised that quarters 3 and 4 would also be a challenging time for landlords who may need to renegotiate rent agreements in order to keep their estates attractive to retailers.
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 Q3. 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.
Overseas markets look a lot more attractive, and members expect further expansion plans to sell more outside of the EU, with the US, 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, says: “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 Q3. But the reported decline in consumer confidence post 23rd June could threaten the resonance of that message.”
Nick Bubb, independent retail analyst, comments: “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.”
Jonathan De Mello, lead retail consultant, Harper Dennis Hobbs, says: “This looks set to be a painful period for retailers, as rising costs on multiple fronts will squeeze margins throughout Q3. The National Living wage has already increased retailer wage bills - add to this rising import costs, petrol prices and energy bills, and if consumer confidence is hit due to uncertainty following Brexit, demand could also begin to tumble. We are potentially looking at a scenario when all three of the drivers for retail health, margin, demand and cost are working against retailers.”
Martin Hayward, founder of Hayward Strategy and Futures, says: “As the true effect of the referendum result settled in, I thought that we could potentially experience a ‘calm before the storm’ throughout Q3 - as people took stock of the new reality before the divorce proceedings kicked in. However, now that a new PM is in place and Brexit negotiations may soon begin, I expect the knock-on effect of Brexit to flow down to the consumer at a much faster pace. However, the reality is that the real impacts of Brexit will take many months, even years to be clarified, so a calmer period will probably follow this initial period of unease, as the consumer realises the sky hasn't fallen in.”
James Knightley, senior global economist, ING, comments: “With a new PM and Cabinet now in place, we can hopefully see some stability and confidence creep back into the markets. Only time will tell how and when negotiations for Brexit proceed, but in the medium-term the plunge in Sterling is bad news for retailers, and although many will have implemented currency hedging, the cost of imported goods is going to rise. People’s personal finances look good for now, with wages and employment still climbing, however consumer confidence could drop as Brexit negotiations intensify, leading to people thinking twice before making purchases and instead saving for a rainy day.”
Martin Newman, CEO at Practicology, comments: “Retailers in the UK may well first go through a process of consolidation as they take stock of the current political and economic climate. Those that then perform well and ride out the inevitable fall in consumer confidence will be the ones that have a clear vision and strategy in place - retailers must ensure that the core fundamentals within their business are robust. For instance, there will be opportunities that present themselves from such significant changes to the sector. Retailers may look to step-up the ‘Internationalisation’ of their business, looking for new markets outside of the EU to sell both off and online.”
James Sawley, head of Retail & Leisure at HSBC Corporate Bank, comments: “Pricing is going to be a big issue for retailers in the medium term, although most will be able to deflect the negative impact of a weak Sterling for at least the next 12 months having hedged against the Dollar. As these positions unwind there will unquestionably be increased costs that will either have to be absorbed or passed onto the consumer, and those retailers operating at the discretionary end of the consumer’s wallet may well have the hardest decisions to make. The UK retail sector is well accustomed to dealing with changes in the economic landscape and the knock on impact on consumer behaviour within the countries in which they operate and retail leaders may well look to other markets and other avenues for opportunity and growth."
Mike Watkins, head of retailer and business insight, Nielsen, comments: “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 policymakers that impact disposable income.”
