Low growth environment set to remain in retail but no death knell for the sector
This was one of the findings of the latest KPMG/Synovate Retail Think Tank (RTT) white paper published this week, ahead of the crucial Christmas trading period, which looked at the effects of the Spending Review on the retail sector.
The RTT reports that while the high street was sluggish before the Spending Review, trading since then has showed no signs of changing significantly and sales have actually picked up slightly. But the picture remains uneven; not every region of the country is faring the same although London and the South East are continuing to outperform.
However, the panel of industry commentators does expect that the Spending Review will contribute to a continuation of the current low growth environment and retail spending, as opposed to wider consumer spending, will continue along its current trajectory for some time to come.
One of the key factors in how the Spending Review plays out is disposable income and this will depend on a wide variety of economic factors including interest rates, savings levels and tax increases. And while interest rates are expected to stay low for some time, the big unknown is how the relationship between the announced and as yet unannounced tax rises/Government spending cuts and savings levels plays out.
However, the RTT is sceptical about the ability of the private sector to “fill the gap” created by the public sector and does not expect that the Government’s projected private sector recovery will be as consumer-driven as it has been in previous recessions. However, it does not believe retail sales “will fall off a cliff”; instead the environment creates a modest growth curve, albeit with pain over the medium term for some. This comes with a word of caution though – if the growth of GDP – to which retail contributes about 25 percent – falls well short of Government forecasts, it could cause retail sales to be in danger of slipping into decline, particularly if households choose to save and pay down debt rather than spend.
The RTT considers that the direct effect of public sector job losses – estimated to be approximately 490,000 by 2014/15 the Office for Budget Responsibility – has been overstated, despite the bias of public sector jobs and proportion of people supported by benefits in certain regions of the UK. With job losses spread across the UK as a whole and over a number of years, spending losses attributable to a public sector jobs contraction of 100,000 annually over five years cannot have an appreciable impact on aggregate retail consumer spending trends, assuming the latter figure is exceeded by private sector employment growth.
And it’s not just the impact on spending habits; the RTT also expects it will act as a catalyst to speed up the pace of existing changes, with a more rapid concentration of retail into fewer trading locations. But while there is a differing picture for retail across individual locations, the RTT does not envisage this will create a more pronounced North/South divide. Instead, there will be winners and losers in many different areas, with the smaller, secondary and tertiary locations which already have trading problems hit hardest – a trend the RTT has been monitoring for some time.
The RTT also predicts an acceleration of the divergence between strong and weak retailers and between the food and non-food sectors. Falling disposable incomes have the smallest adverse impact on the food sector as the split between necessities and discretionary purchases shifts. Throughout 2009, sales of food in value terms rose more quickly than non-food. In 2010, performance has been more consistent but the gap has started to widen again as food inflation creeps back in, thus reducing income available for more discretionary non-food purchases. The sectors most adversely impacted will be big ticket ones related to the housing market
Looking ahead, it is likely there will be continued low levels of expansion in retailing and where there is expansion, retailers will be very careful about the location and strategy for any new stores given that trading locations will see further concentration. Low growth, but growth none the less, is here to stay – this is the new norm. Retailing has got tougher but as customers wants and needs continue to evolve, it’s all still to play for.
To see the full version of the latest RTT white paper, “Post Spending Review: the impact on the retail sector?” please go to www.retailthinktank.co.uk
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