Decline in retail health begins to 'bottom out' - ToyNews

Decline in retail health begins to 'bottom out'

Retail health declines at a slower rate in the first quarter of 2009.
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Although the rate for Q1 still represents the poorest state of health that the sector has seen since April 2006, the KPMG/Synovate Retail Think Tank (RTT) judged that the rate of decline was slowing and beginning to ‘bottom out’.

Weak demand once again was the key determinant of the deterioration in health in quarter one. However demand was better than many had expected and better than that that seen in quarter four, reflecting higher disposable incomes, as mortgage costs and CPI inflation continue to fall.

Heavy discounting, the maturity of existing exchange rate hedging and the falling value of the pound for goods sourced in dollars or euros, along with the reluctance of retailers to pass on increased costs, all contributed to a further negative impact on health of margins.

Despite this, the RTT agreed that the impact on health of costs was positive in the first quarter as retailers continued to benefit from reduced pressure on rents, stabilising energy costs, staff rationalisation programmes, a new anti-bonus/anti-sales-commission culture and other cost-cutting measures.

Members also noted the beneficial impact for some chain retailers of the capacity shakeout caused by the demise of certain retailers such as Woolworth’s and Zavvi.

Looking forward to quarter two, the RTT agreed that there were clear signs that the falling state of retail health was beginning to ‘bottom out’. Nevertheless members pointed out this does not yet mean an end to the decline in retail health, which they consider will continue to fall in quarter two by a further three points to an RHI value of 80.

Richard Lowe, Barclays Retail & Wholesale Sectors summarises the thoughts of the RTT: “In quarter one the impact of demand on retail health was the key downwards driver with margins coming a close second.

“However costs were brought firmly under control providing a slight fillip to most retailers’ bottom lines. Overall it seems that as hard as retailers fight on one front, say costs, pressures from elsewhere chip away at overall profitability.

“Looking forward to quarter two we see that the opportunities for retailers to continue the good work on costs will become harder to find, demand will remain weak but margins will be hurt worst of all – and largely by factors outside most retailers’ control.

“If there is good news, and there is some, it is that the decline in the health of retail is slowing and the bottom of the downturn may be in sight. However we all expect that the journey along the bottom of the U-shaped slump will be extremely bouncy and rough even for those retailers insulated to some extent by their food offers."

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