The health of retailing in the UK hit a new low in quarter four of 2012, despite customary spikes of increased Sale activity in December.
Following its quarterly meeting in January 2013, the KPMG /Ipsos Retail Think Tank (RTT) pronounced that quarter four was largely flat, exacerbated by low levels of demand during October and November and margins coming under pressure as a consequence of widespread discounting in December.
The RTT’s Retail Health Index (RHI) dropped a point, to 76, marking another consecutive decline in the Index - the eighth quarter in a row - and a difficult end to another difficult year for retailers.
The fall had not been anticipated when the RTT last met in October, when conditions looked as if there were signs of improvement ahead.
Despite challenging economic conditions facing consumers and tough trading conditions affecting retailers, there were some good news stories, including the John Lewis chain that recorded positive sales of fashion items and electrical goods. Some sectors within the retail industry have also enjoyed success, including smartphones and Tablet PCs, as well as ‘pound shops’. However, there were also some major casualties as retailers like Comet entered into administration.
Although flooding in some parts of the UK made it difficult for some people to get out, weather wise the quarter was relatively kind to most UK retailers compared to the same period in previous years.
Consumer demand in the Christmas trading period in December always buoys the retail sector in quarter four, but margins came under some pressure, especially among food retailers as supermarket chains fought for their share of consumer spending. Although online trading in December in particular was higher than in previous years, higher logistics and distribution costs were also incurred, taking some of the shine off this growing aspect of retail health.
The outlook for quarter one of 2013 shows no signs of significant change for UK retailers. On the back of a flat quarter four, the RTT forecasts that demand will remain subdued because of continuing economic challenges facing consumers and retailers. With added financial pressure on consumers such as taxation on high earners claiming Child Benefit from January 7, disposable income will be further squeezed.
With the Christmas trading period out of the way and retailers keeping their stock levels low compared to previous years, there will be less pressure on stores to discount in the quarter, therefore protecting margins to a degree. However, the RTT expects there to be further casualties on the high street in the quarter as certain retailers that have underperformed, such as Jessops, face the prospect of administration.
Commenting on quarter four, David McCorquodale, Head of Retail, KPMG UK, said: “As far as demand is concerned, what we saw is a stand off between consumers and retailers through the quarter, pushing Christmas spending into the last two weeks. Consumers waited for retailers to discount whilst retailers were keen for consumers to buy at full margin, resorting to price discounting as late as possible. Evened out, the quarter has been relatively flat and if anything has been slightly worse than expected.
“It appears that the economic situation has led some people to have honest discussions with family members not to buy Christmas presents for each other, with the exception of getting gifts for children.”
Nick Bubb, independent retail analyst, said: “John Lewis was a shining light in the sector, achieving astonishing growth. This was partly attributable to its online sales for the five weeks to 29 December. Sales were up by 44% on last year and its online business now accounts for a quarter of all the firm's revenue.
“People want the convenience of ordering online and more are choosing to do so. This is good news for online retailers, but online and multichannel distribution costs – more van deliveries and more fuel, for example - also need to be factored into the equation.”
