Outlook for UK retail remains bleakFriday, 04 May 2012
The RTT Retail Health Index is expected to fall to an all time low of 77 by the end of quarter two of 2012. This compares with 79 at the end of the first quarter and is five points lower than the level recorded during the depths of the original banking crisis and recession in2009.
The state of health by the end of the second quarter of 2012 looks set to be the bleakest on record since the RTT Retail Health Index was established. The combined effect of increased energy costs, raised fuel prices and higher borrowing costs - among other economic and financial influences – is expected to further dampen consumer demand in quarter two of 2012.
Although high profile events such as The Queen’s Diamond Jubilee celebrations and 2012 Games will inject a ‘feel good’ factor for some, underlying economic trends will have an increasingly detrimental impact on consumer confidence and spending, according to the RTT.
Helen Dickinson, Partner and Head of Retail, KPMG UK, said: “For several reasons, the first quarter of 2012 was not quite as dire as the RTT had originally forecast in December; demand for goods and services was slightly better than we had predicted and margins weren’t hit as badly. However, there will be a latent effect going into quarter two as the stark reality of the economy begins to take its toll on consumers in the coming months.”
Retail sales at the end of the first quarter were partly buoyed by Easter and the warmest March weather in the UK since 1997. With spring in the air, consumers were more inclined to spend money on items such as new clothes.
In contrast, the colder and wetter weather in early April, leading up to the Easter bank holiday weekend, helped department store chain John Lewis to enjoy a “stunning” trading period as its customers chose to shop inside instead of shivering outside.
The RTT noted that John Lewis is only one of a handful of UK retailers riding against the tide; many others are struggling to compete for business, resorting to heavy promotions, voucher schemes and discounting.
Dr Tim Denison, Director of Retail Intelligence at Ipsos Retail Performance, said: “Following unprecedented levels of promotions and discounts in quarter four of 2011 which had a severely detrimental impact on retailer margins, many businesses now recognise that this is not a sustainable strategy. Rather than continuing to discount and offer promotions to the same degree in 2012, manufacturers and retailers decided to back the strength of their brands. This is partly why margins have not been so badly affected as might have been the case if the levels of promotions and discounting that we saw in December had continued.”
Changes in retailers fortunes are also impacting the retail property sector, with new, and more modern retail space rendering older and outdated retail property derelict. “Despite the gloom, demand for space in Central London remains exceptionally strong,” said Mark Teale of CB Richard Ellis. Vacancy levels in the prime pitches of many major locations are dwindling too."
Casting a positive light across an otherwise bleak picture for UK retailers, Richard Lowe, Head of Retail & Wholesale Barclays Corporate, said: “A lot of retailers do still believe there are costs savings to be made, especially if they are able to adapt their business models. The world of online shopping has created international outlets for UK retailers, with several performing very well in overseas markets. In certain cases, where retailers have been able to spread their wings, they have managed to support their UK operations during difficult times.”
Summarising the RTT’s April discussion, Helen Dickinson of KPMG, said: “What we expected to happen to the health of the UK retail sector in the first quarter looks to have been delayed until the second. The underlying economic and financial trends are pointing in the wrong direction for retailers, many of whom are struggling to generate sales, protect their margins and control their costs. The retail sector is undergoing structural change as our desire to consume ever increasing volumes of goods diminishes and technological advances continue to change the way we shop. Future increases in selling prices are not an option for retailers to use to help them respond to these changes and maintain sales growth. Maintaining and improving profitability is a goal which is becoming harder and harder for retailers to achieve and hence the state of health will continue on a downward trajectory for the foreseeable future.”
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