The latest deliberations from the KPMG/SPSL Retail Think Tank (RTT), the body of leading industry figures set up to provide a non-partisan guide to the true state of UK retail, reveal that over the second quarter of 2007 the condition of retailing, based on the three key signifiers of Demand, Margins and Costs, deteriorated and is set to decline further in the next quarter.
The negative pressures, particularly on Demand and Margins, which were just beginning to be felt in Quarter 2 will amplify and hit retailers even harder in Quarter 3.
The panel judged Quarter 2 to have been difficult and challenging for retailers particularly in the last few weeks and for those in clothing, Britain’s second largest retail sector after food and drink. Retailers finished the quarter by deploying widespread sales to mitigate the effects of rising interest rates, falls in disposable income and the consistently poor weather.
The panel feels that this will have been enough in many cases to preserve retailers’ turnover growth at acceptable levels, as the quarter ended. It believes, however, that the pain will merely be shifted to the third quarter, when the full impact of heavy discounting and promotions to clear the growing mountains of unsold summer stock will hit. It does not consider that the continuing strength of the pound versus the dollar will be enough to preserve margins.
Demand is also likely to suffer as consumers are faced with yet another interest rate rise, the maturing of many fixed-rate mortgages, drops in disposable income and the diminution of liquid savings. The RTT felt though that some of the recent statistics related to consumer spending may not be a worrisome as portrayed.
The fact that Britons are reportedly now saving the smallest slice of their pay packets in 47 years, is more a reflection of people switching their savings into property than into more traditional channels. Houses are now a form of ‘pseudo saving’, the RTT believes.
Costs continue to remain the most negative factor affecting the health of retailing. The RTT believes that notwithstanding slowing rental and energy price growth, the true like-for-like cost growth is now 3- 4 per cent, and that sales are struggling to keep up with this.
What all of this tells us is that consumers are finally beginning to succumb to downward pressures and that moving into Quarter 3 retailers will be forced to sacrifice margins to stimulate falling demand, a dance for which many retailers, our panel fears, have not yet learnt all the steps. Continued cost growth or a fall in the value of the pound versus the dollar to further affect margins, will only serve to hasten the tempo and some retailers may yet trip and some will even fall.
The RTT expects that the state of health of the sector will therefore deteriorate in Quarter 3.
Commenting on the group’s assessment, RTT member Richard Hyman, of Verdict Consulting said: “This is a high risk time for retailing. The relationship between supply and demand has changed fundamentally and however intense the competition is now, it’s going to become more intense. Just look at the recent negative price inflation. The economics have changed - 25 years of relentless floor space growth has meant that the market is saturated with too many retailers and yet the next four to five years will see an acceleration of floor space growth and I’m absolutely certain there’s already too much stock out there now. Perhaps this is a good opportunity for retailers to take a long hard look at their strategies.”
Mark Teale of CB Richard Ellis said: “Retail occupational costs in Great Britain are amongst the highest in the world, adding significantly to UK retailers’ costs base. Many retailers seeking to expand are, in effect, priced-out of the market. There is, however, some potential for additional stock release over the next 2-3 years via higher than average lease expiry levels and new developments. Whether this will be sufficient to further dilute rental growth is unclear. Given the underlying supply constraints, and despite continuing efforts by retailers to increase the turnover from each square metre of store, retailer hopes of an actual reduction in occupational costs look forlorn.”
Nick Bubb, of Pali International commented: “Quarter 2 was punctuated by extremes. A sunny April was a good month for retailers, with very little discounting. The prospects for retail through the summer, predicted to be more of the same, weather-wise, must have seemed very different to retailers then. But it’s as if May and April were flipped in terms of weather and another wet month in June meant that gradually the difficulties have multiplied.”
Tim Denison of SPSL added: “Yes, the bad weather has certainly had a big impact. Less obvious is whether the re-heightening of terrorist threats will leave their mark and contribute to British shoppers reassessing the vulnerability of their positions.”
Vicky Redwood of Capital Economics said: “It’s becoming clear that a good proportion of the public has now reached the point where they’re loath to borrow or run down their savings any more.”
Paul Clarke of Barclays Retail and Wholesale agreed: “Consumers will have less capacity to absorb any more interest rate rises.”
“And if interest rates rise to six per cent in early September,” added Nick Bubb, “it will undermine the following quarter too, with knock-on effects on the key back to school trading season and even food retailers could soon start to feel the pains of price deflation.”
“Quarter 3 will see more of the same in many respects, as we have seen this last month or two,” summarised Helen Dickinson of KPMG, “though perhaps most ominously Demand growth looks set to fall significantly.”