Health of UK retail will worsen before it gets better, warns Retail Think Tank

UK retailers face a bleak outlook and the health of the sector is expected to worsen to record levels before any signs of recovering, according to the latest Retail Health Index from KPMG/Ipsos Retail Think Tank (RTT).

The RTT Retail Health Index is expected to fall to an all time low of 77 by the end of quarter two of 2012, report researchers. 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, in quarters two and three of 2009.  

The deterioration in health in quarter one of 2012 was not as significant as the RTT had originally forecast, partly due to higher than anticipated demand and margins pressures easing. However, costs again took their toll as retailers contended with an unexpected fuel crisis and higher energy prices as well as ongoing investment in online and multi-channel infrastructure.

Most worrying, the state of health by end of the second quarter of 2012 looks set to be the bleakest on record since the RTT Retail Health Index was established, said researchers.  

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 confidence and demand in quarter two.  

Although inflation is on the decline, it is still above wage rises and many consumers are now dipping into their savings to keep up with increasing pressures on their household budgets and disposable income, said KPMG/Ipsos RTT.

The majority view of RTT members is this is not sustainable and therefore the rate of deterioration in health will increase going forward, although voting was split – reflecting the level of uncertainty that exists.

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.

Retail sales at the end of the first quarter were partly buoyed by the build up to Easter and the warmest March weather in the UK since 1997 and the sunniest on record since 1929. With spring in the air, consumers were naturally more inclined to venture out and spend their money on items such as new clothes and outdoor goods – particularly for the garden, DIY and other outdoor activities such as BBQs. This benefit will unwind in the next quarter, said researchers.

Tim Denison, director of retail intelligence at Ipsos Retail Performance, said: “Following the unprecedented levels of promotions and discounts in quarter four of 2011 which had a severely detrimental impact on retailer margins, many businesses now recognise 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 we saw in December had continued.”

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.”