Retail confidence steadies but business failures on horizon

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Knight: retail failures likely

Falling confidence in the retail and wholesale sector has been curbed this quarter (Q1 2011) following three quarters of decline, according to the latest ICAEW/Grant Thornton UK Business Confidence Monitor (BCM).

However, the industry is more cautious than others about overall business prospects and Grant Thornton said it expects to see a rise in the number of retail failures in 2011.

BCM, which tracks the confidence levels of UK finance and business professionals, reveals the Confidence Index (CI) for retail and wholesale businesses now stands at 8.1 points. This is marginally above last quarter (Q4 2010) when the sector saw confidence decline to a yearly low of 1.7 and in line with the national average of 9.6 points. Retailers’ confidence this quarter is well down on the high of 27.6 points seen in the sector at the same time last year (Q1 2010).

According to BCM, retailers expect improvement across key financial performance indicators over the year ahead. Gross profits are expected to increase by 4.2%, compared to the 2.8% increase seen in the last 12 months, while sales volumes are expected to increase by 4.9% (3.4% in the last 12 months). The sector’s profit growth expectations are in line with the national average while sales volume growth is expected to be marginally stronger than across the UK as a whole.

Retailers also expect a larger increase in prices over the next 12 months than the average expected across the economy, (2.4% compared to 1.3%). This is likely to reflect rising commodity prices and the increase in the rate of VAT as of 4 January this year.

The surveyed retailers also expect to increase employee numbers by 1.3% over the next 12 months.

However, despite these expected improvements firms in the retail and wholesale sector are still more tentative about overall economic prospects than other industries in the UK. Thirty eight per cent of retailers are more confident about the next 12 months, compared to a national average of 44%. Only in the construction sector is the confidence less than the retail and wholesale sector, with  27%, of firms reporting more confidence for the year ahead.

Barry Knight, head of retail at Grant Thornton, said: “Confidence in the sector seems to be holding up reasonably well, and it is encouraging to see the three-quarter long trend of falling confidence has been curbed.

“The expectations for improved financial performance over the coming year may not be fulfilled however, reflecting the difficult trading climate the industry is facing at the moment. Indeed, many have reported February has been one of the worst months they have ever had.

“The more positive outlook expressed by respondents could possibly have been driven by a short term boost in optimism as the worst impacts of the bad weather faded and relatively strong sales resumed in January. But we need to look beyond the one-off bargain frenzy that traditionally boosts sales in January and may momentarily have lifted confidence.

“Another issue to note is the difference in outlook for bricks and mortar compared to online retailers. Pure online players and smaller retailers with a strong online offering are still optimistic about sales and expect growth, which is not the case for more traditional firms in the sector. As a result, we expect a rise in the number of retail failures during the year, counterbalanced by aggressive expansion for the more successful retailers.

“Trading conditions will remain volatile and the UK consumer is expected to increasingly tighten their belts as falling disposable income and the rising cost of living, alongside government spending cuts and looming job losses continue to pinch.

“There is however some positive news to come over the next quarter. The royal wedding in April could potentially inject an additional £1.5bn worth of spending across the retail sector from memorabilia and other related items, with this boost hopefully sustained some time after thanks to increased tourism,” said Knight.