The health of the UK retail sector is expected to dip in Q2 2016, as retailers bear the brunt of soaring costs, reports the KPMG/Ipsos Retail Think Tank (RTT), which believes that the National Living Wage, a weak sterling, continued investment in channel shifts and rising petrol prices are expected to significantly outweigh improving consumer demand.
The RTT’s Retail Health Index (RHI) resumed its upward trajectory, climbing a point to 84, after its flat performance in Q4 2015. It now matches the retail health of five years ago thanks largely to a rise in demand.
A strong performance throughout January carried through into February. However, March was a let down, with the unseasonal bad weather and an early Easter resulting in a disappointing last two weeks of the quarter. As has been a common story in recent months, demand continues to be the positive shining light for retailers. Employment statistics and wage growth are both robust, and as savings continue to fall, the public has more disposable income to spend.
Nevertheless, the improvement is expected to be short-lived, with the index falling back to 83 over Q2 as retailers are hit hard with rising costs - this despite the stronger demand expected to endure in Q2. Members warn that the battle ahead continues to be about steering consumers away from the current trend of spending in the leisure rather than retail sector.
The RTT commented that money was being spent in the DIY sector, as people moving house are spending on renovating their properties, and if not moving are spending money on doing them up.
A combination of the mandatory introduction of the National Living Wage adding 5-7% to average wage bills, rising petrol prices adding to fulfillment costs and an 11% drop in sterling’s value since November - detrimental to new hedging deals - are all expected to subdue retail health over the next quarter.
The RTT acknowledge that in order to combat the rising wage bill, investment in productivity and efficiency is the key driver for sustained progress. However, this will take time to implement, and the imminent cost shift is deemed significant enough to outweigh rising demand - impacting negatively on retailers in the coming quarter.
Margins are expected to come under pressure too in Q2, as the weak pound is already causing retailers pain, and this will only intensify in the coming months. RTT members agreed though that retailers have reshaped their pricing and discounting strategies to reasonably good effec - while they have not given margin away, they have not been able to make it up. The rise in supplier insolvency levels is testament to the hard bargaining that has been going on. The RTT believes that retailers should be able to balance out the external financial pressures and maintain margins throughout Q2.
The RTT believes that uncertainty of the upcoming EU referendum will be causing unease and uncertainty at a boardroom level, but during Q1 it seemed this had yet to filter down to the consumer – people seem to be still happy to spend rather than save. However, as the campaigns themselves heat up over the coming 10 weeks and the press coverage intensifies, the uncertainty may begin to creep up on the consumer, and then onto the high street.
Mike Watkins, head of retailer and business insight, Nielsen, says: “We are now eight years from the start of the global economic crisis and four years since we exited recession. Currently UK consumer confidence is now as good as it gets, and evidence suggests that the current consumer cycle may be coming to an end. Many shoppers also had rising disposable incomes last year but are still looking to save money.
"So, something of a perfect storm may be happening in terms of different external factors working against the retail industry. Shopping behaviour has changed and there is no turning back the clock, as shoppers are now digital and more demanding. The business models of many retailers need to evolve faster as technology is the new disrupter with the capacity to significantly change consumer expectations.”
