Retail business confidence hits all-time low, finds study

Knight: retailers should prepare for a possible downturn

Fourth quarter confidence among businesses in the retail and wholesale sector has fallen to the lowest level seen this year and is now significantly below the UK average, according to the latest ICAEW/Grant Thornton UK Business Confidence Monitor (BCM) revealed to Retail Times.

According to BCM, which tracks the confidence levels of UK finance and business professionals, only 37% of companies in the retail sector are more confident in the economic prospects facing their organisation over the next 12 months compared to the last 12 months. This is in contrast to a national average of 46%.

The Confidence Index (CI) for retail and wholesale businesses stands at 1.7 points, 10.2 points below the national average of 11.9 points. The retail and wholesale CI has also fallen from the 10.8 points seen in Q3 this year and is down from the peak of 27.6 points seen in Q1 2010.

Over the last 12 months, the retail sector faired better than the UK average for growth in profits, sales and turnover. However, expectations for the next 12 months do not suggest this positive performance will continue. Having seen a 2.8% increase in sales over the last 12 months, retailers expect sales growth to slow to 2.6% over the coming 12 months while across the economy as a whole, sales are expected to rise by 3.6%. Retailers saw a 3.5% increase in gross profits over the last 12 months but expect growth to slow to 2.6% over the coming year. Across the economy as a whole, profits are expected to increase by 3.3% over the next 12 months.

On the positive side, retail and wholesale firms expect exports to increase by 4.7% over the next 12 months in comparison to the national average of a 4.3% rise. Exports for the retail sector over the last 12 months increased by 4.1%.

Barry Knight, head of retail at Grant Thornton, said: “Given levels of economic growth seen over the last 12 months and looking at their bottom line, most retailers were probably positively surprised at how well business held up. The sector performed more resiliently than was feared and we didn’t see the cuts in consumer spending feed through to the sector as much as anticipated, perhaps helped by low interest rates.

“However, retailers’ subdued expectations for the next 12 months are founded in some real concerns, mainly rises in VAT, falling house prices, spending cuts and rising commodity prices.

“We are likely to see boosted sales leading up to Christmas, due to consumers bringing forward their purchases to avoid January’s VAT rise, but despite this, retailers have realistically lowered their expectations for 2011 and many should prepare for a possible downturn in the mid-term.”

Retailers saw a 2.8% increase in input prices (prices paid for commodities) over the last 12 months but only expect a 1.9% rise in input prices over the next year. As an  increase in input price is still expected in 2012, it is likely that retailers will  pass on some of these to consumers. While their selling prices rose by only 1.6% over the last 12 months, they expect prices to increase by 1.8% in the coming year.

“With factors such as a rise in cotton prices already seen this year, retailers don’t expect input prices to rise much more in 2011. However due to economic factors impacting consumer spending, they expect a marginal increase in selling prices to avoid margins being squeezed further. Whether they will be able to force price increases through though, remains to be seen,” Knight said.