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Published on July 23rd, 2021 | by The GC Team

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Retail in fine fettle but staffing hurdles could drive slowdown

The run in sales that lifted the retail sector during the second quarter of 2021 looks set to continue into the early part of quarter three, but a rise in inflation, increase in supply chain costs and staffing pressures could force a summer slowdown.

According to the latest retail health assessment by the KPMG/Ipsos Retail Think Tank (RTT) analysts, the health of the retail sector grew more strongly than expected from April to June as pent-up consumer demand led to a buoyant few months which saw the Retail Health Index (RHI) rise by 4 points to 72, taking it above pre-pandemic levels.

Strong demand from consumers heading to reopened high streets, and a willingness to keep shopping both online and in-store for higher-margin categories, led to increased sales for retailers looking to recover from months of closure. Margins reportedly remained healthy as the enthusiasm of consumers able to shop in-store again reduced the need for retailers to discount, but costs showed signs of rising with employment and supply chain rates starting to increase.

Early indications from July sales figures show that consumer demand remains strong, and the RTT predicts retail health will continue to grow in Q3, albeit at a much slower rate: this being two points during the quarter due to the reopening of hospitality and travel taking a share of consumer spending and rising cost pressures impacting the overall economy. 

Rising inflation, staffing pressures, increases in commodity and component costs, stalling consumer confidence and an escalation in Covid-positive cases could lead to an economic slowdown as we head into the end of Q3, according to the RTT.

Commenting on the prospects for retailers for the next quarter, Paul Martin, Head of Retail at KPMG in the UK said: “The strength of performance across both non-food and food categories in Q2 2021 was even stronger than anticipated and retail health is now back to pre-pandemic levels.

“The feel-good factor from the Euros has helped to get July off to a great start, but with the full reopening of the leisure, hospitality and travel sectors we can expect retailers to be fighting for share of wallet as consumers look to restart social engagements and holidays.

“Whilst it was inevitable that there would be a bit of a slowdown as the economy climbs back to its pre-crisis level, early signs are that it is coming sooner than expected with GDP figures falling short of expectations. 

“Retailers are facing increases in employment costs due to the shortage in workers, not helped by the so-called pingdemic, which is forcing large numbers of staff to self-isolate.  Supply chain costs are continuing to put pressure on margins and the rise in inflation will no doubt eat into households’ spending power. 

“This could all have an impact on how well the retail sector continues to recover as we move through the next quarter. Whilst I expect growth to continue, it is likely that things will slow down as we move through Q3 2021.”

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