Retail health remains relatively steady, despite cost-of-living challenges, but difficult autumn lies ahead, says KPMG/Ipsos Retail Think Tank

The health of the retail sector remained relatively steady during the second quarter of 2022, despite the challenging economic climate, as pent-up consumer demand slowed less than expected, according to the latest assessment by KPMG/Ipsos Retail Think Tank (RTT) members.

As predicted in their last assessment, declines in footfall have not translated into declining sales in the way consumer confidence polls might suggest, leading the Retail Health Index (RHI) to fall by just one point to 74 points for Q2 22. Data reveals footfall is recovering to pre-covid levels and retail sales over May and June shrank by just 1% according to the BRC. The return to stores and footfall parity with pre-covid has at the same time led to the growth slowing online, giving multichannel retailers the advantage in the battle for customers according to RTT members.

Double digit sales growth in health, beauty and apparel categories (as consumers replenished wardrobes for social events, the casualisation of the workplace and heading off on holidays) were the main drivers in the relatively steady health of the retail sector in Q2 22. However, retailers that sell goods in pandemic boosted categories like home, garden and computing are seeing large declines in sales as consumers spend more time back at work and socialising.

Despite a rising cost position (driven by increasing prices across most cost-lines and salary inflation) and gross margins coming under increasing pressure, the RTT are confident consumer demand will continue to prop up retail health well into Q3 22. However, after a scorching summer, the RTT predict September could signal a turning point in retail health, with the arrival of a second energy price hike, increased interest rates and credit card bills from a summer of spending putting the brakes on non-discretionary spending.

Commenting on the RHI for Q2 22 Paul Martin, head of retail at KPMG in the UK, said: “What we have seen since the beginning of this year is the stagnation of the retail sector, with a very slow decline in the last couple of months.  Despite consumer polls telling us that confidence is at an all-time low, this hasn’t translated to money not being spent at the tills, with footfall levels and sales growth declining only marginally over the quarter.  Pent up demand especially for new clothes has so far been at a significant enough level to hold the impact of rising costs at bay.  With travel and summer socialising very much on the agenda this year, it is unlikely that sales growth will fall dramatically over July and August.

“However, the summer could very easily be the lull before the storm as conditions for retailers get even tougher towards the end of the year.  Spending on big ticket items has already slumped and with another energy price hike, interest rates rising and inflation continuing to rise it is most likely to be in the autumn that we see shoppers putting the brakes on spending.   With margins set to be challenged, and costs continuing to rise, a significant drop in demand will have a detrimental impact on the health of the retail sector, and a cost driven decline could take much longer to recover from.” 

Battle for customers will intensify as cost-of-living crisis continues

Whilst some non-food categories have seen double digit growth over the last quarter, the food sector has had a more turbulent time.  Rising inflation has helped top-line food sales but shoppers are spending differently to compensate for the rising cost living, tending to buy less, forcing volumes down as prices continue to climb. 

The rise in petrol prices has led to a change in consumer behaviour with shoppers visiting local supermarkets on foot and buying smaller baskets of goods as people shop little and often. Whilst inflation is working to drive the number of value lines that retailers are carrying, the absolute focus for retailers over the next year will be on volumes.The RTT believe that in Q3 22 prices will continue to rise, with some manufacturers wanting to lock in price rises before Christmas.  Some retailers have already started to pass on increases to customers, but this is unlikely to be a long-term strategy in the battle to retain customers. Competitive pricing is set to be a key element of the rest of the year for retailers as demand declines, and retailers may need to take a hit on margins in order to keep valued customers.

Whilst the value of the retail sector will rise over the next year due to inflation, the volume of sales is falling and will continue to fall. With consumers taking the decision to buy less, spending is likely to be spread across fewer retailers.  Consumers will be increasingly conscious of what they are wasting, and be looking for value, the combination of price and quality, resulting in trading down to lower price ranges or switching retailers. The first half of the year has seen a swing to value players in the market and in order to keep customers loyal to the brand, supermarkets will need to offer compelling reasons not to switch.

Many of the food retailers have been absorbing some of the cost increases they have faced and invested key areas such as more price matches. Whilst margins are set to get tighter as we move to the end of 2022, retailers, particularly the supermarkets, will start to absorb more cost than they have done so far this year predicts the RTT.

Peter Luff, managing director, Ipsos Retail Performance, said:“By the end of Q3 22, with stronger cost of living headwinds, consumers will have to prioritise essentials, and discretionary product spending will come under increasing pressure.“The retailers that are set to do best in this environment will stay true to core principles and prioritise a healthy bottom line over revenue growth.  In the short term, many of the larger retailers do have capacity in their balance sheets to not pass on price rises and instead absorb them in addition to finding further efficiencies.“Customers need help and those retailers that have come through covid in good shape will be best placed to take advantage of this opportunity to win customer loyalty, market share and build longer term shareholder value. “

Martin concluded :“During the last UK recession retailers put lots of new initiatives in place, from reducing pack-sizes without changing prices, reducing overall inventory levels and de-layering management structures within stores. These types of initiatives will no doubt need to be repeated as consumer demand starts to fall away over the rest of this year although the “runway is shorter” with many of these levers having already been pulled in the past and their impact likely to be of diminishing return. The need to focus on growth initiatives whilst also supporting the consumer through these difficult times will be paramount for the health of the sector as we move through the rest of this year. Doing this will require understanding consumers in a different and much more detailed fashion than ever before.”