Retailers in the UK will have their mettle tested by increasingly squeezed margins, low consumer confidence and a host of other economic pressures in the months ahead, according to a new report from a leading industry think tank.
Meeting this week to assess the state of the industry during the first quarter of 2011, the KPMG/Synovate Retail Think Thank (RTT), comprising some of the most respected sector analysts, found that retail health deteriorated more than expected over the three-month period.
Unforeseen hikes in petrol prices, a drop in disposable incomes and a widening gap between living costs and wage inflation were all said to have had a major impact on the state of retail health, as consumers reined in their spending.
Retail margins suffered in Q1 with many companies extending winter sales and heavily advertising their promotions, while certain businesses absorbed January’s VAT increase for an extended period to protect customers from higher prices.
Tim Denison, a member of RTT and Director of Retail Intelligence at global market research company Synovate, described the current situation as “crunch time” for retailers nationwide.
“Footfall is down, consumer confidence is waning, disposable income is declining as high inflation bites and talk of interest rates going up jangles the nerves further,” he stated.
“Retailers will need to be on their mettle to read and respond to shopper idiosyncrasy in the months ahead.”
RTT Members, including Capital Economics economist Vicky Redwood, Verdict Research’s Neil Saunders, CB Richard Ellis’s Mark Teale, KPMG’s Helen Dickinson and John Dawson from Universities of Edinburgh and Stirling, agreed that things are going to get worse before they get better, but also acknowledged that the change in timing for Easter had a major impact on sales and overall retail health in Q1.
Assessing the last three months, fellow RTT representative and retail analyst at Arden Partners Nick Bubb said: “We shouldn’t be too judgemental yet, as there is a timing effect due to the late Easter.
“I expect April to be a better month, but overall Q2 will be tough, with serious pressure on disposable income hitting much discretionary purchasing and consumers making different lifestyle choices for essentials, too.”
Already this year retailers such as Dixons Retail, HMV Group and Carpetright have issued profit warnings and there have even been some casualties in the form of Officers Club, Oddbins and others. Considering this tough start to the year many industry observers are predicting that thousands more stores will close down as 2011 progresses, accompanied by a plethora of retail insolvencies.
In the upcoming months it will be important to keep interest rates at its record low of 0.5 per cent in order to prevent consumer confidence from falling any further, while the Easter period and royal wedding is sure to boost retail sales in Q2, in the absence of a major global sporting tournament this summer.
There are new companies entering the sector, though, with Theo Paphitis’s lingerie specialist Boux Avenue and convenience retailer Ugo among those recently joining the mix, and there are businesses like Waitrose and Go Outdoors currently undertaking ambitious growth programmes - all of which proves the industry is not beset with doom and gloom.
And of course times of diversity often present opportunities for businesses to take advantage of their rivals’ struggles and expand their own operations.
Richard Lowe, RTT member and Head of Retail & Wholesale at Barclays Corporate, commented: “There will be opportunities for new and existing retail entrepreneurs to ‘seize the day’ and with proper finance, a well chosen and carefully sourced product range and a clear vision of what customers want, will thrive and prosper.
“They will create a new retail paradigm, one that is fit for these times of retrenchment.”