Q4 could see strongest quarter-on-quarter improvement since 2009, RTT Index shows

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The health of UK retail has shown some signs of improvement over the past quarter and the outlook is looking more encouraging than it has done for some time, particularly as the nation heads into the Christmas season feeling better about itself.  

Following its quarterly meeting in October, the KPMG/Ipsos Retail Think Tank (RTT) upgraded its Retail Health Index to 79 and its panel of retail experts forecasted that this could improve to 81 in quarter four. This would not only mark the highest level since Quarter Three 2011, but the strongest quarter-on-quarter leap for four years. Two of the three key drivers of retail health – demand and margin – were more positive in quarter three than in the previous quarter, and cost factors over the period were largely neutral. It is the first time for three years that both demand and margins have contributed positively to the improvement of retail health.

Reflecting on a rosier picture of the UK retail sector in quarter three, particularly in July and August, the RTT pointed to the warm and welcome weather as a major factor as consumers headed to shopping centres and made the most of the summer months – buying seasonal clothing and eating outdoors. Unfortunately, September proved to be a damp squib as cooler and wetter weather reached UK shores and stores but were not so cold as to encourage replenishing winter wardrobes.

The RTT noted many of the high street retailers left standing appear to have stabilised their businesses – with the threat of insolvencies nowhere near the levels experienced over the previous 18 months – and, significantly, several are now focusing on investment in their stores and staff as they look to improve their fortunes. By comparison, although online sales continue to show relatively strong growth, the incremental transport costs and logistical challenges of fulfilment remain a growing burden, with the likes of click-and-collect space requirements at stores over Christmas. The impact on overall costs will be mitigated in part by falling commodity prices.

The RTT predicts an even more promising outlook for UK retail over the next quarter, not only because it’s the Christmas trading period; consumer confidence appears to be on the increase, the housing market is more buoyant and economic conditions are generally improving. One important consequence, the RTT believes, is that as people become less nervous at losing their jobs and interest rates remain low, they are less intent on saving and becoming more comfortable to spend. And if people do start shopping more, they may be inclined to ‘trade up’ to premium goods, particularly over Christmas.

However, there is still some caution waiting in the wings as unwelcome rises in energy prices may once again put the brakes on some householders’ incomes, especially if the weather in winter months remains true to the season. And a pre-election boom, based on artificially cheap credit, is unlikely to be sustained, unless real incomes start to grow again. 

Nick Bubb, RTT member and independent retail analyst, said: “Because July and August were so good for retailers, it’s possible that there was some retrenchment in September as consumers decided to hold onto their cash. It was also noticeable that there were two autumnal weeks and two warmer weeks in September, so there were some ‘fits and starts’ to trading at the end of the quarter. This summer there appears to have been a reverse of what happened in 2012. Last year Easter was summer and then all of the rain came. This year, Easter was slow and then what we saw was pent up demand being spent in July and August.”

David McCorquodale, RTT member and head of retail, KPMG UK, said: “Margins have not been under as much pressure as in previous months. Retailers have become used to holding far less stock meaning there is less of a need to discount in order to shift goods. Going into quarter four and the Christmas period it will be intriguing to see how they handle this balance – to what extent will they hold their nerve or will one follow another like a pack of cards? There may be a real temptation by some retailers to offer price reductions and grab market share.”

Mark Teale, RTT member and head of retail research at CBRE, said: “Consumer and business sentiment has improved markedly since the spring. The consumer economy remains too weak to stir any significant upturn in retailer expansion activity but the steady trickle of administrations that we have seen over the last three to four years has certainly eased. Rating value distortions, made worse by the Government decision to defer revaluation, continue to inhibit expansion activity and exacerbate vacancy problems in secondary trading locations. The market meanwhile remains as awash as ever with redundant small-unit tertiary shopping that is unviable for retail purposes, yet cannot clear because of rigid use controls and the tax disincentive to relax use controls resulting from empty rates.  Shortages on the primary stock side are meanwhile as chronic as always. With development activity stuck at a recessionary low, expansion activity – particularly on the large store side – will remain sluggish by default: the old UK story of far too much of the wrong space in the wrong place and far too little of the right space in the right place. The current boom in London provides an implicit hint of what will happen to retail occupational costs in major shopping locations elsewhere in the UK if spending growth begins to tick-upward.”