Following its latest health assessment, the KPMG/Ipsos Retail Think Tank (RTT) has determined that retail health worsened severely in the second quarter of 2020. The RTT’s Retail Health Index (RHI) – a quantitative and qualitative assessment of demand, margin and cost – fell by 10 points, bringing the index to a record low of just 61 – down nearly 40% if compared to its initial basing (RHI score of 100) in 2006.
The RTT stressed that there have been more promising signs in recent weeks, especially with the latest BRC-KPMG Retail Sales Monitor showing total sales up 3.4% in June. Indeed, throughout the quarter, performance appeared to improve month-on-month, albeit April’s performance was an unimaginable low and was subsequently hard to recover from. Despite the recent uptick, the prolonged lockdown restrictions and the closure of large swathes of the industry – especially non-food – severely weighed down health overall. The RTT agreed that overall health no longer reflected the extremes being noted between essential and non-essential retail. If looking at food versus non-food, food’s health was believed to be strong, while non-food’s health was drastically low.
Looking ahead, the RTT believes that the third quarter of 2020 will be more promising, with the unleashing of pent-up consumer demand helping to revive health to a degree. There are, however, still major concerns around how long that uptick will last, with the RTT currently predicting that health will recover by 3 points, moving the RHI score up to 64. This, the think tank’s members stress, will be dependent on how the ‘mood music’ plays out in the coming months. If looking at the food versus non-food split, the improvement of food’s health is predicted to ease off, while non-food’s health is expected to rebound in the upcoming quarter.
Reflecting on the second quarter of 2020, Mike Watkins, head of retailer and business insight at Nielsen, said: “While many retailers will have been expecting a challenging second quarter, few would have been able to comprehend the extent of COVID-19’s impact, nor the length and breadth of the lockdown restrictions that came along with it. The fallout was certainly worse than anticipated earlier in the quarter, but the return of growth in the last few weeks has provided slight relief for the lucky few that have been able to capture it.
“What is clear is that not all sectors of retail have been impacted equally. With the closure of restaurants and pubs and limited travel, the shift away from out of home consumption has been somewhat of a bonanza for grocery – logistical challenges aside – while non-food retail, especially fashion, has really suffered. Overall, there is no doubt that retail has been weakened by the pandemic and the impact of that will be more structural change to business models.”
If looking at retailers’ margins, grocery and other essential categories had little reason to discount, with such strong demand throughout the quarter. Meanwhile, other categories were hard pressed to shift excess stock, even with slashed pricing in place. When it came to cost, government relief initiatives and rent reductions may have offered a helping hand, but additional costs – ranging from additional staffing costs and warehousing to logistics and fulfillment – eroded bottom lines even further.
Looking ahead to the third quarter of 2020, James Sawley, head of retail & leisure at HSBC, said: “With lockdown restrictions easing and sales up, it’s clear that consumers are starting to unleash pent up demand. They are finding ways to treat themselves, perhaps even diverting spend that would have otherwise gone towards a summer holiday. That will naturally be a real opportunity for retailers – provided they can capture it – but it’s unlikely to undo the damage of sales lost earlier in the year. The key question now is: how long will the release of pent up demand continue? There are naturally real concerns growing around the threat of unemployment and the possibility of local resurgences of COVID-19, which retailers will need to be on the alert for.”
Putting consumer demand aside, the RTT collectively feels that costs in the coming quarter will need to be watched closely, especially as furlough schemes unwind and rent demands return. Likewise, margins will be under pressure as retailers balance ‘buying consumer demand’ through slashed pricing with their core aim of trying to make a profit. While the RTT expects a slight recovery in the coming quarter – especially in July and August. September was identified as the month to watch, being key in terms of sales volumes. Those volumes however, could well be significantly impacted by the unwinding of the furlough scheme and the possible return of consumer anxiety.