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Retailers benefit from resilient demand in Brexit fallout

The recent decline in the health of the UK retail sector ended in Quarter 3 2016, with demand proving resilient in the face of rising costs and shrinking margins. The figures are provided by The KPMG/Ipsos Retail Think Tank (RTT).

Following its quarterly meeting on October 11th 2016, the KPMG/Ipsos Retail Think Tank (RTT) has released its latest findings, stating that the health of UK retail remained flat in Quarter 3 2016. The RTT’s Retail Health Index (RHI) held steady at 83, putting retail health at the same level it was in Quarter 3 2015. Of the three main drivers of retail health; demand, margin and cost, it was demand from customers that, albeit pretty flat, provided the most positive news for retailers in Quarter 3.

Following the Brexit decision in June, initial fears of a dramatic drop in retail health were alleviated as new appointments within government and swift fiscal action helped repair consumer confidence; this in turn resulted in demand holding firm. With personal finances remaining strong, the job market continuing to improve and pay increasing, people have felt secure in their spending patterns. However, as has been a consistent narrative in recent years, the RTT was keen to stress that a disproportional amount of disposable income is still being spent in the leisure sector, as consumers look to invest in experiential pursuits rather than buying goods.

The grocery sector experienced a mini-revival of sorts, with a better performance in food impacting positively on the retail sector as a whole. Picnic and barbecue sales provided a boost during the summer heat wave, and prices in supermarkets stabilised, as discounting and promotional mechanisms were both less apparent and the threat of further escalation of the price war never materialised. Demand was also boosted with an upturn in consumer confidence, as the feel good factor of the sunny weather and Team GB’s success at the Rio Olympics kept people in a positive frame of mind.

The RTT agreed that although there was reason for positivity in Quarter 3, certain sectors of the retail market did not perform well. Fashion retailers struggled, as margins were squeezed with promotional activity extending right into summer; and unadventurous, new clothing lines failed to excite the public into making purchases and the mass middle market continued to shrink. The new wave of online only fashion retailers fared better, having the ability to react quicker to the weather and moving fashion trends. They were also efficient getting their sales messages out to consumers quicker, making them far more agile, and therefore successful, than traditional stores.

Looking ahead to Christmas, of the three drivers of retail health; demand, margin and cost, it is only demand that is not expected to impact negatively on retailers in Quarter 4 2016.

Spiralling fuel prices will add to the increasing cost of fulfilment and home delivery, as the RTT predicted online sales would increase again over the coming festive period. The National Living Wage will continue to add to retailers’ costs, thanks to the addition of seasonal staff, threatening significantly higher Christmas wage bills than in previous years. In addition, the early impact of currency movements will begin to impact input prices, although the greater impact of this will be felt in early 2017.

Black Friday will again be a point of focus over the next three months, and although retailers will have prepared well in advance, margins are expected to suffer as a whole across the sector. The RTT discussed at length the benefits of Black Friday for retailers, and it was largely agreed that, as in 2015, the promotional activity would not increase the total amount of revenue – instead, it would both take some volume from October and early November as consumers wait for a bargain, and bring forward transactions from December as consumers take advantage of the sales to start their Christmas shopping early.

The RTT was keen to stress that even though Quarter 3 delivered a better performance than expected, and the sales boost at Christmas would be a welcome addition, retailers should ‘make hay when the sun shines’. The negative chatter from corporates is expected to become more vocal as Britain closes in on activating Article 50, fuel prices are predicted to rise and the poor performance of the pound abroad will deliver its full impact on retailers in Quarter 1 2017.

David McCorquodale, head of retail, KPMG, UK, said: “Strong personal finances are improving the spending power of the consumer, however retailers are struggling to ignite these potential sales and turn disposable income into money at the tills. People are continuing to choose to spend on leisure, experiential pursuits and holidays; retailers are going to have to work hard to win back favour. Fashion retailers have felt the brunt of this over the last quarter, with an apparent lack of new styles and trends failing to excite and inspire consumers. Looking ahead, retailers may well have ‘one last hurrah’ this Christmas, before the currency impact from the Brexit vote really hits home as hedging unwinds in the early months of 2017.”


Read the full report here.