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Health of UK retailing ‘will worsen to record levels’, says analyst

26 April
09:47 2012

KPMG/Ipsos Retail Think Tank (RTT) is reporting an even bleaker outlook for UK retailers, with the health of the industry expected to worsen to record levels before any signs of recovery, following its quarterly meeting in April 2012.

The RTT Retail Health Index is expected to fall to an all time low of 77 by the end of quarter two of 2012. This compares with 79 at the end of the first quarter and is five points lower than the level recorded during the depths of the original banking crisis and recession, in quarters two and three of 2009. 

The deterioration in health in quarter one of 2012 was not as significant as the RTT had originally forecast, partly due to higher than anticipated demand and margins pressures easing. Costs again took their toll as retailers contended with an unexpected fuel crisis and higher energy prices as well as ongoing investment in online and multi-channel infrastructure.

Most worrying, the state of health by end of the second quarter of 2012 looks set to be the bleakest on record since the RTT Retail Health Index was established. The combined effect of increased energy costs, raised fuel prices and higher borrowing costs – among other economic and financial influences – is expected to further dampen consumer confidence and demand in quarter two. 

Although inflation is on the decline, it is still above wage rises and many consumers are now dipping into their savings to keep up with increasing pressures on their household budgets and disposable income. The majority view of RTT members is that this is not sustainable and therefore the rate of deterioration in health will increase going forward, although voting was split – reflecting the level of uncertainty that exists.

Although high profile events such as The Queen’s Diamond Jubilee celebrations and 2012 Olympics Games will inject a ‘feel good’ factor for some, underlying economic trends will have an increasingly detrimental impact on consumer confidence and spending, according to the RTT.

Retail sales at the end of the first quarter were partly buoyed by the build up to Easter and the warmest March weather in the UK since 1997 and the sunniest on record since 1929.  With spring in the air, consumers were naturally more inclined to venture out and spend their money on items such as new clothes and outdoor goods – particularly for the garden, DIY and other outdoor activities such as barbecues. This benefit will unwind in the next quarter.

Tim Denison, director of Retail Intelligence at Ipsos Retail Performance, said: “Following the unprecedented levels of promotions and discounts in quarter four of 2011 which had a severely detrimental impact on retailer margins, many businesses now recognise that this is not a sustainable strategy. 

“Rather than continuing to discount and offer promotions to the same degree in 2012, manufacturers and retailers decided to back the strength of their brands.  This is partly why margins have not been so badly affected as might have been the case if the levels of promotions and discounting that we saw in December had continued.”

Source: KPMG/Ipsos Retail Think Tank (RTT)

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