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Published on April 17th, 2015 | by The GC Team

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Retail health shows slight signs of recovery

Retail health in the UK saw marginal signs of improvement in the first quarter of 2015, but not at as strong a rate as other consumer services, according to the influential KPMG/Ipsos Retail Think Tank (RTT).

The health of the UK retail market improved by one index point to 81 after a disappointing end to 2014, with consumer confidence rising in line with higher wages and greater economic stability.

But the uplift was tempered both by the impact that Black Friday had on the traditional January sales and also by price deflation, which meant the quarter got off to a slow start.

Promising signs that demand is on the up became more evident as time wore on, with sectors such as homewares and household appliances doing comparatively well, indicating that the market is on the mend, but shop price deflation, particularly in the food sector, meant retailers had to sell more to stand still, according to the RTT, and consumers had little incentive to rush in and spend.

Richard Lowe, Managing Director, head of retail & wholesale at Barclays, said: “One of the strongest indicators of an improving retail environment is the health of the homewares sector. Often the first to come under pressure, sensitive to fluctuations in the housing market, and the last to recover, it has enjoyed significant growth in recent months.”

“There is a real sense across various retail sectors that the sun is starting to shine a little brighter,” said Martin Hayward, founder of Hayward Strategy and Futures. Food continues to be an area for concern, and it will take a significant period of time before this improves. Real income is on the rise, and with consumer confidence the highest it has been since the economic crash, it is important that the industry grasps those shoots of recovery.”

But Barclays Lowe warned that the impact of the living wage would be a “significant issue” for retailers. “It is set to become a far-reaching topic in the year ahead and for the retail sector it is a question of when, not if, this will have an impact on operating costs,” he said.

David McCorquodale, head of retail, KPMG, UK, also cautioned that retailers may come under increasing pressure, with more calls for pay to rise to meet the living wage. “It remains to be seen when this will take hold,” he said.

Of the three key drivers of retail health – demand, margin and cost – demand was the strongest factor during the quarter. RTT members acknowledged that the increase in the Retail Health Index would perhaps be higher, but consumers appear to be choosing to spend any savings made on energy and petrol costs on experiential leisure services rather than goods.

Mike Watkins, head of retailer and business insight at Nielsen, commented: “The outlook for retailing over the next few months is a little more positive but for sales growth to gain further momentum, we would still need any increase in real incomes to drop into shopping baskets, and not to be spent on leisure, entertainment or other out of home activities.

“Supermarkets are starting to see some volume sales growth but deflation is now taking the edge off top-line value growth. On the upside, consumer confidence is back to an eight-year high and this can only help non-food retailers.”

 

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