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Consumers state of mind at Christmas provides a strong indication of year ahead
Archived article dated Friday January 11th 2008
The latest BRC-KPMG Retail Sales Monitor (RSM) provided one of the earliest indications of how the sector performed over Christmas.
By Helen Dickinson
Unfortunately the figures didn't make the kind of reading we were all hoping for.We did see growth in retail sales in December, but only of 2.3% on a total basis and 0.3% on a like-for-like basis. This represented the worst monthly performance since March 2006, plus the lowest growth in December since 2004, and can be at best described as weak.
The RSM revealed some interesting trends in the run-up to Christmas. There was wide variation in performance of individual sectors. The women's clothing and footwear market actually contracted although the decline was less acute than in November - and the jury is still out as to whether this was as a result of discounting more in order to generate sale. At the other end of the spectrum were food and drink, and toiletries and cosmetics, which grew.
There were also huge swings in performance on a daily basis as shoppers replaced an more even pattern of spending spread across the month with a smaller number of 'big swoops,' where bargain hunting was paramount.
So what does this all mean for the year ahead? Historically the last quarter of a year, particularly December, has set the scene for the year ahead - their state of mind at Christmas providing a strong indication of probable consumer behaviour in the near future. In December 2004, when the like-for-like figure was -0.4 per cent, nine out of twelve months the following year recorded a like-for-like decline. It now appears that like-for-like sales are set to move into negative territory in 2008 as well.
Of course, only time will tell and we really haven't seen the complete picture for December as yet - we are only part way through the trading update timetable after all. Hopefully many will give a clear picture of how margins have held up (or not, as the case may be) as like-for-like numbers on their own don't give a clear picture of the health of any individual retailer.
Either way, as we look forward, Marks & Spencer's results earlier this week and the comments from Sir Stuart Rose stating that “these are the toughest conditions I have seen for a decade” will not be cause for any cheer.
Consumer confidence seems to be continuing to weaken due to the ongoing problems in the financial markets, rising energy costs and a greater focus on saving instead of spending. This was highlighted by KPMG's annual retail survey, published at the end of last year, which revealed that 85 per cent of shoppers were planning to spend the same or less on their Christmas shopping.
All these factors do not bode well for retailers, particularly those more reliant on the high street rather than their on-line presence, who are struggling with rises in their cost bases, of around 4%.
It goes without saying that cash flow is going to be crucial in the year ahead, but it's also important to ensure there is flexibility in the forecasts, allowing capital expenditure on projects such as store refurbishments and new openings to be slowed down or put on hold if necessary.
It will be interesting to see whether the slowdown accelerates any structural changes in the property market. While rent reviews have been upward in recent years, there may be an opportunity for retailers to use the current slowdown to their advantage.
Many retailers will be taking the time to review their supply chains as well. Do they need shortening or tweaking to create more agility to respond to the customer? Clearly the trend for sourcing has been to go further afield in the quest for cost reduction over the past few years but is there scope to bring this closer to home to meet quickly changing demand?
Outsourcing is proving to be another area of focus - with the need to focus on all aspects of the cost base, many retailers are looking at moving non-core activities to third parties and/or overseas locations.
Last year was tough but 2008 looks set to get even tougher. Retailers taking appropriate actions now will be those who mitigate the worst effects of the consumer spending slowdown.
Helen Dickinson is Head of Retail at KPMG
Tagged as: kpmg
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