Health of UK retail will worsen to record levels

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 the 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 demand for in quarter
two of 2012. Although inflation is on the decline, it is still above wage
rises and many consumers are 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 retailers will struggle even further,
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 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.

Helen Dickinson, Partner and Head of Retail, KPMG UK, said: “For several
reasons, the first quarter of 2012 was not quite as dire as the RTT had
originally forecast in December; demand for goods and services was slightly
better than we had predicted and margins weren’t hit as badly. However,
there will be a latent effect going into quarter two as the stark reality of
the economy begins to take its toll on consumers in the coming months.”

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 BBQs. This benefit will unwind in the next
quarter.

In contrast, the colder and wetter weather in early April, leading up to the
Easter bank holiday weekend, helped department store chain John Lewis to
enjoy a “stunning” trading period as its customers chose to shop inside
instead of shivering outside. The company reported especially high sales of
electrical goods, including the latest iPad, as well as televisions, ahead
of London and the south of England’s digital switchover.

The RTT noted that John Lewis is only one of a handful of UK retailers
riding against the tide; many others are struggling to compete for business,
resorting to heavy promotions, voucher schemes and discounting.

Dr Tim Denison, Director of Retail Intelligence at Ipsos Retail Performance,
said: “Following 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.”

Neil Saunders, Managing Director of Retail Analysts, Conlumino, added: “In
quarter four of 2012 there was a lot of discounting going on ahead of the
Christmas period. By comparison, the January sales were better planned and
managed by retailers – there were still promotions happening, but nowhere
near as heavy.”

Independent Retail Analyst, Nick Bubb, said: “March was boosted by various
seasonal and calendar factors, notably the earlier fall of Mother’s Day and
the fine weather, but these have reversed in April. Fashion and food
retailers who expected the exceptionally warm and sunny weather of last
April to be repeated have been sorely disappointed by this month’s cool and
wet conditions. And though the current miserable weather is more helpful to
“indoor” or household goods retailers, with TV sales the current boom area
in London, this will simply bring forward sales from the rest of the year
and take spending power away from other areas. Overall, Q1 wasn’t as bad as
feared for the High Street, but Q2 seems likely to revert to type.”

Against this backdrop of continued uncertainty and one or two exceptional
circumstances that occasionally help to boost retail trade, such as warm
weather, it appears that the main issue facing UK retailers in quarter two
of 2012 are underlying economic and financial pressures.

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