Reason for retail optimism in 2011?
At its January meeting, the RTT reported that negative pressures – political, psychological, environmental and financial – on the sector meant that the improvement in UK retail health which it had been seeing in 2010 came to a standstill in quarter 4. The group agrees that these pressures are likely to continue through quarter 1, which is also traditionally the weakest period of trading as consumers cut back on spending post-Christmas.
But having faced tough trading conditions throughout the past three years, UK retail has demonstrated remarkable resilience and avoided the devastation that so many commentators predicted at the start of the recession.
Over the course of 2010 I have become more not less optimistic about the outlook for 2011 and beyond. The worry since the downturn kicked in during late 2007 was always that retail sales would “fall off a cliff”. But the last three years have provided enough evidence to show that consumers continue to love shopping and will therefore find a way to spend whatever the state of the economy.
This is not to say that the next year will not be a challenge, the pressure on disposable income will be greater than at any point since the downturn began. Low sales growth is here to stay and we will see total retail sales only growing in line with the growth in GDP - i.e. less than 2.0% - and volumes will fall. Food will continue to outperform non-food. On the non-food side, big ticket items are likely to continue to bear the brunt of impact of belt tightening consumers and the clothing sector is in for a challenging year given rising costs of cotton, Chinese labour and transport costs.
We will see shop prices rise over the year, feeding into higher inflation. However, like-for-like store non-food sales growth will be difficult to come by and only achievable by those who continue to deliver exactly what their customers want. New ways of assessing store performance will come to the fore as on-line growth will take more than its fair share, social networks and digital media greater influencers and the lines between channels continuing to blur.
Structural changes will continue, accelerated by the challenging environment, including greater concentration to prime trading locations and empty secondary high street sites. We’ll see some failures: smaller secondary non food retailers, and those whose business model was already under threat. The bigger retailers, including the supermarkets, will have to work really hard on promotions to drive real like-for-like volume growth.
The successful retailer has three things: flexibility; visibility; and sustainability. They have improved their customer insight, management of costs, cash, and forecasts across the business.
The gap between them and the laggards will continue to widen. Cash (over profit) will remain King.
And although I do not see the outlook as bleak for all, an early and then sustained period of interest rate rises would risk shifting low growth into a contracting market.
The economic environment of the past three years has increased the rate of structural change in retail and 2011 will be no different.
As always there will be winners and losers, particularly in the low growth environment which has become the norm, with fewer shopping trips. Those who innovate, know their customers better than their competitors and have the right proposition and business model are more likely to be in the former category.
Helen Dickinson is Head of Retail at KPMG
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