Retail health improves for third consecutive quarter

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The health of retail in the UK saw continued improvement in Q2, a trend that is predicted to carry on into the next three months according to the KPMG/Ipsos Retail Think Tank (RTT).

The RTT’s Retail Health Index (RHI) has climbed by one point to 82, the third consecutive quarter that it has risen. The RHI now stands at its highest level since Q3 2011. This is expected to again improve in the coming quarter although the RTT cautioned retailers to anticipate a rise in costs.

Of the three key drivers of retail health – demand, margin and cost – it was demand that had the biggest impact on retailers in Q2. With real wages growing through low inflation, higher pay awards and increased employment levels, together with economic indicators pointing in the right direction, have left consumers feeling more confident in the last three months, resulting in an increase in spend with retailers.

However many factors have constrained growth. Not all of the financial benefits of recent pay rises have made their way into retailers’ tills, with many individuals electing to pay off mortgage debt. There has also been growth in the leisure sector, with consumers spending more of their spare cash dining out, holidaying and on experiential pursuits.

Margins amongst food retailers have continued to be squeezed, with the big four still discounting heavily in a competitive segment and deflationary pressures continuing.  Price cuts, rather than multi-buy offerings, have become the preferred mechanic of the supermarket.

Looking ahead to Q3, the RTT expects the RHI to again improve one index point to 83. Much the same as the last quarter, it was thought that the growth would be largely driven by consumer demand.

The RTT warned that retailers’ costs are going to become more problematic in Q3, and are expected to play a big part in holding back the potential growth that the increase in demand could deliver. Wages are continuing to rise across the country, and with the living wage announcement in the Chancellor’s emergency budget, retailers will have to start integrating these additional costs into their future strategies.

David McCorquodale, Head of Retail, KPMG, UK, said: “There is much to be optimistic about as we head into Q3. Economic indicators are positive, real wages are growing, the grocery sector could be on the turn and spending on big-ticket items is increasing. However, there is still plenty of work to be done and retailers will have to ensure that the increased costs of employment from the new living wage are factored into future plans, as costs will play a key part in reeling in future growth.”

James Knightley, Senior Global Economist at ING, concluded: “The challenge for retailers in the coming months will be to take full advantage of the improving economic conditions that are driving up consumer confidence. Average earnings are up, VAT receipts are climbing and employment in retail has improved. Retailers need to ensure that they are getting their ‘fair share’ as consumers loosen the purse strings.”

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