Insight: retail growth will stagnate overall in 2017
Members of the KPMG/Ipsos Retail Think Tank have said that the current political environment combined with UK consumer price inflation set to rise to 2.5 - 3%, means that any growth in non-discretionary retail will be offset by a decline in discretionary spend. This will result in an overall retail growth figure of 0.5% in 2017.
Paul Martin, RTT co chairman and UK head of retail at KPMG, said: “From a macroeconomic perspective, 2016 was a positive year with the UK delivering what is set to be an impressive 2.1% growth in GDP. However, the year is not likely to be remembered for this fact but rather the UK’s decision to leave the EU; the election of the new President of the United States, and the repercussions these events may entail for the years to come.
“Indeed, you could argue that the ‘Great British’ consumer has broadly ignored the results of the Brexit referendum, with consumer spending continuing to grow over the final months of the year.”
The think tank members have all recognised how the political landscape in the UK will influence the health of the UK retail sector in 2017.
Tim Denison, director of retail performance at Ipsos Retail Intelligence, suggested that “politics had finally caught up with retailing” in the way in which shoppers and voters are both pushing against the establishment.
He added: “For years now, shoppers have been voting with their feet, punishing the ‘safe and established’ retailers that became disconnected from their customer, bringing them to their knees or, worse, sending them to the cemetery. In 2016, the same thing happened in mainstream politics: politicians experienced first-hand the damage that public disillusionment can inflict on the establishment.”
The think tank members have also noted how UK shoppers have been relatively relaxed until now about the results of the Brexit referendum, with consumer spending on the rise over the final months of 2016. However, they warned that this may change as Brexit negotiations and the changing political landscape across Europe crystallise.
Whilst consumers have benefited from deflated prices, Paul Martin of KPMG said: “We will see inflation rise, potentially up to 3% by the end of the year and in conjunction with continued foreign exchange fluctuations, prices will rise.”
Martin’s conservative view is that this could amount to a 5-8% increase in prices over the course of 2017 – albeit varying across retail categories. This raises questions regarding how much of this increase would be absorbed by the supplier base, the retailer and the customer.
Maureen Hinton of Verdict Retail said the main inflationary impact will be in food and grocery. She also pointed to Verdict’s forecast that inflation in food and grocery will average 2.4% over the year – the highest since 2013 and highest in any sector.
Referring to the ongoing price deflation experienced by the grocery sector, Nick Bubb, retail consultant, said: “The return of some modest food price inflation is not a bad scenario for the sector, assuming that it does not impact on volumes, so 2017 could well be a better year for the major players in food retailing.”
The think tank has predicted that a potential reduction in rents next year could ease some of the pressure on retailers. Jonathan De Mello commented: “It is almost impossible to see how landlords can justify an upward only rent review in the context of the potentially substantial amount of retail business failures we could witness post-Christmas.”
The think tank has also stressed that 2017 will bring several reasons for optimism. Some members regrad the upcoming challenges as an opportunity for retailers to be more agile in the ever-changing external environment. The key, according to Martin, is to focus on “controlling the controllable.”
“For retailers, this means an on-going focus on transforming their businesses in light of the structural issues they are facing – embracing new technologies, becoming truly channel agnostic and placing their customer at the heart of their organisations”, he added.
Denison said: “The consumer-led digital revolution has brought about massive change to the retail world in the last few years. Technological innovation is now a core strand of business strategy in the retailer’s books [however], it come as at cost, as not all new technologies are winners.”
Meanwhile, Practicology chief executive Martin Newman said the growth of online retail was one of the ‘few bright sparks’ for the retail industry during the last recession but questioned whether it would again save the day. He also suggested that multichannel retailers will be looking much more at their cost of sale and the role of the store as the percentage of sales transactions completed online continues to grow.
Denison added: “Retailing has become more complex given today’s variety of shopping channels. “Smarter and simpler retail is the future and we can expect leading players to adopt this thinking as a focus for some of their energy in the year to come.”
Mike Watkins, head of retailer and business insight at Nielsen UK, reinforced this focus on multichannel, suggesting that: “There is no need to build new stores but instead build brand equity and ‘go digital’ before the technology titans transform how we shop.”
Structural changes are another area for consideration by retailers according to Martin, however many of the RTT members suggested that this was more difficult now than in previous years. Newman explained: “There is much less fat to cut. There’s little low-hanging fruit with existing multichannel operations models, but it could be quite a different story if retailers are prepared to more fundamentally change how they do business.”
In an environment where competing on price is no longer enough to differentiate, the think tank has pointed to an increased focus on customer engagement and experience as a means to ensure survival in the coming year. Martin Hayward, founder of Hayward Strategy and Futures, suggested that 2017 will be a great time for retailers to rediscover customer engagement. He added: "Yes, price and efficiency are important, but now always at the expense of human interaction, trained staff, provenance and an enjoyable experience.”
The mergers and acquisitions market could see more activity in 2017 according to some of the members. James Sawley, head of retail & leisure at HSBC, said: “M&A will continue to play its role in achieving scale, differentiation and diversification as we trade through the challenging period.” He also suggested that consolidation with the leisure sector is an expected trend, as retail spend increasing becomes cannibalised by spend on leisure activities.
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