The latest deliberations from the KPMG/SPSL Retail Think Tank (RTT), the body of leading industry figures set up to provide a non-partisan guide to the state of UK retail, reveal that over Quarter 2 2007, as it had forecast, the state of the health of retailing, based on the three key signifiers of Demand, Margins and Costs, deteriorated and is set to decline further in the next quarter. The negative pressures, particularly on Demand and Margins, which were just beginning to be felt in Quarter 2 will amplify and hit retailers even harder in Quarter 3.
The panel judged Quarter 2 to have been a difficult and challenging quarter for retailers particularly in the last few weeks and for those in clothing, Britain's second largest retail sector after food and drink. Retailers finished the quarter by deploying widespread Sales to mitigate the effects of rising interest rates, falls in disposable income and the consistently poor weather.
The panel feels that this will have been enough in many cases to preserve retailers' turnover growth at acceptable levels, as the quarter ended. It believes, however, that the pain will merely be shifted to Quarter 3, when the full impact of heavy discounting and promotions to clear the growing mountains of unsold summer stock will hit. It does not consider that the continuing strength of the pound versus the dollar will be enough to preserve Margins.
Demand is also likely to suffer as consumers are faced with yet another interest rate rise, the maturing of many fixed-rate mortgages, drops in disposable income and the diminution of liquid savings. The RTT felt though that some of the recent statistics related to consumer spending may not be a worrisome as portrayed. The fact that Britons are reportedly now saving the smallest slice of their pay packets in 47 years, is more a reflection of people switching their savings into property than into more traditional channels. Houses are now a form of "pseudo saving", the RTT believes.
Costs continue to remain the most negative factor affecting the health of retailing. The RTT believes that notwithstanding slowing rental and energy price growth, the true like-for-like cost growth is now 3?- 4%, and that sales are struggling to keep up with this.
What all of this tells us is that consumers are finally beginning to succumb to downward pressures and that moving into Quarter 3 retailers will be forced to sacrifice Margins to stimulate falling Demand, a dance for which many retailers, our panel fears, have not yet learnt all the steps. Continued Cost growth or a fall in the value of the pound versus the dollar to further affect Margins, will only serve to hasten the tempo and some retailers may yet trip and some will even fall.
The RTT expects that the state of health of the sector will therefore deteriorate in Quarter 3.
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