Pent up demand and savings accrued during lockdown are set to improve the health of the retail sector over the coming months as the UK moves to the next phase of its recovery plan, according to the KPMG/Ipsos Retail Think Tank (RTT).
Following its latest health assessment, the RTT has determined that pent up demand from consumers will see the Retail Health Index (RHI) rise by 3 points to 71 in Q2 2021, a considerable improvement from its nadir of 61 points for the same quarter last year.
The main driver of the improved RHI – a quantitative and qualitative assessment of retail demand, margin and costs – is predicted to be demand over the next quarter, as a result of a shift in spending patterns, with consumers choosing to spend on fashion and clothing as they shop for occasions and get back to socialising. The mood of the nation will be about spending on looking good again and making up for lost time. The RTT predicts the shift in spend will see a gradual move away from spending on in-home grocery consumption, DIY, technology and household items, which sustained retailers during the lockdown earlier in the year in favour of the hospitality sector. Overall it will be a strong quarter for non-food retailers and given the timings of the re-opening milestones, it will take time for food sales to lose momentum.
Stronger demand goes hand-in-hand with healthier margins, so this will reduce pressure on non-food retailers in the quarter ahead. Furthermore, the swing back to fashion, which is a higher margin category, will also contribute to stronger overall margins. The RTT registered some concerns of storm clouds ahead for margins in the food sector, as demand there begins to weaken.
The RTT predicts that costs will stay relatively stable, with rises in energy and commodity prices being partly offset by a strengthening pound. There will be savings on business rates and rent and the main costs of re-opening stores will be around re-stocking and labour costs as staff come back to work having been furloughed for much of the year. Retailers will be struggling to know whether they can afford to reduce the cost to serve online demand, as the swing back to store unfolds. The likelihood is that retailers will hedge their bets rather than pull resources at this point from their online service.
Commenting on the prospects for retailers for the next quarter, Paul Martin, UK head of retail at KPMG, said: “As the country slowly re-opens, consumers are eager to break free from home and get back into stores, and pent up demand will drive a much-needed sales boost for high street retailers.
“In addition, particularly for fashion and beauty products as consumers wait for hospitality venues to fully re-open, there is an estimated £140 billion of savings which could be used as consumers’ moods shift to spend mode.
“We are expecting much of the shift in spend to gradually move away from the supermarkets and technology retailers who benefited from high demand for food, computers and home entertainment as the country was locked down through winter.
“Retailers face an interesting few months as they assess the level at which online shopping falls back, in favour of people hitting the stores. We expect ecommerce levels will soften over the next quarter, which could help retailers with their high fulfilment costs. There are a few black clouds on the horizon however, as interest and some repayments on Coronavirus Business Interruption Loan Scheme (CBILS)
and bounce back loans given to support retailers at the beginning of the pandemic will need to start being paid from April alongside deferred rental payments.”
Retailers perform better than expected during lockdown
The optimism for Q2 comes as the RTT determined that the retail sector performed better than expected in the first quarter of the year despite the impact of a third lockdown, thanks to strong online spending.
The RHI put retail health as flat at 68 points in the first quarter of 2021 despite non-essential retailers being closed for three months. The unexpected strength of retail sales in the first three months of the year was driven in the most part by consumers spending on groceries and hard line categories such as technology, furniture and homeware as people stayed in their homes over the winter months. The lockdown diverted considerable consumer spend from travel, hospitality and entertainment into retail.
Commenting on Q1 retail health, Dr Tim Denison, head of analytics and Insights at Ipsos, noted: “Plunged back into the realities of lockdown at the start of the year, when it was dark and miserable, was hard for everyone. However, that mood of depression lifted as the quarter wore on to one of growing optimism thanks in part to the rapid vaccine rollout. Retail sales in Quarter 1 reflected this transition. The start of the year was very soft, but sales growth had picked up by March leaving the retail sector on an improving trajectory by the end of the first quarter with significantly more spent by consumers than forecast. People have responded well to the lot they have been given.
“Margins remained under pressure in the quarter thanks to some sales mix dilution to lower margin categories, some degree of clearance to provide warehouse space for new season goods and rising return rates. Despite this, there was no return to unnecessary give-aways in food, nor sweeping ‘fire’ sales in slow-moving categories such as fashion.
“The impact of new EU trading arrangements and rising logistic costs had a detrimental impact in the first three months of the year as freight costs, particularly shipping, spiked, , but this was offset in part by the continued Government support which helped to ameliorate costs in the retail sector. There is no doubt though that the cost agenda is getting more challenging.
“As we look ahead to the rest of the year, market conditions offer scope to spark a big surge in consumer spending. The full re-opening of the hospitalit