UK retail health to sink in Q4 says think tank

More evidence has come showing UK retail heading for a decline. The new KPMG/Ipsos Retail Think Tank (RTT) said that Q3 ‘retail health’ having levelled out may have brought some respite to the sector after two quarters of decline, but it’s predicted to drop again in Q4.

If it does, that would be the first time retail health would have declined between a third and fourth quarter since 2012. Q4 is usually the biggest shopping season with Christmas gifting, cold weather clothing and party wear all boosting turnover for stores and large numbers of temporary staff being taken on to deal with the rush.

So what’s going wrong now and what went right to help Q3 to a better-than-expected performance? There are a number of reasons from weather effect, to currency issues, the higher cost of fulfilling online orders and much more.

SUMMER STRENGTH

KPMG/Ipsos Retail said that improving demand over the summer months contributed to a better performance for retailers, holding off a third consecutive drop in retail health this year. The think tank (whose members include a number of retail experts) said its Retail Health Index (RHI) stayed steady at 81 for Q3. That happened as a number of other reports suggested that consumers felt relatively upbeat over the summer, despite the impact of rising inflation and the uncertainty around the general election. They were still spending and often using debt to fund their purchases.

But the RTT predicts that increased Christmas demand will fail to outweigh negative pressures on costs and margins and that will see the RHI dropping to 80.

In recent years, demand among consumers during Black Friday sales and Christmas has been the primary driver for maintaining the state of retail health in the final quarter. However, the RTT felt that this year may be different.

Members speculated that demand might be a little softer thanks in part to some fashion sales having been brought forward into Q3 by the early arrival of autumnal weather. John Lewis’s weekly reports have reflected that view with September seeing strong fashion sales but October experiencing a setback.

DISCOUNT-DRIVEN

Consumers are now expected to be more hesitant in their spending, with pressure on household finances building as personal debt levels increase, as interest rates edge up, as wages shrink and inflation continues to rise.

RTT members expect stores to get caught up deep discounting in an attempt to drive up demand at the expense of margins. Further damage to margins will be felt by the full effect of currency hedging unwinding – with many retailers locked into poorer dollar currency rates for the remainder of the year.

Cost continues to be an issue for retailers across all areas of the sector, with substantial investment taking place to both improve internal productivity, and deliver a true multichannel offering to customers. Efforts to strip out costs continue to be a high priority with head office staff remaining vulnerable. The expense of fulfilment for home deliveries continues to impact on retailers’ costs and to squeeze margins. This is predicted to intensify in Q4, with the RTT expecting online sales to make up a higher percentage of total sales throughout Christmas and Black Friday promotional activity.

RTT member Maureen Hinton, who is also group research director at GlobalData Retail, said: “Retailers felt the benefit of a slightly better performance in Q3, with fashion, food, and health and beauty, the three largest sectors, showing some improvement. The cost of fulfilment will play heavy on the minds of retailers heading into the fourth quarter. Black Friday sales and promotional activity leading up to Christmas will already tighten margins, and the added cost of home delivery and returns will only impair retail health further.”

UK retail health to sink in Q4 says think tank

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