Retail health is now considered to be poorer than it was in the depths of the 2008 banking crisis
Following its January meeting, the KPMG/Ipsos Retail Think Tank (RTT) concluded that the deterioration in retail health seen throughout 2011 continued in quarter 4. The Retail Health Index (RHI) dropped a further two points to 80 in the quarter, the fourth quarter in a row that the RHI has fallen.
In order to stimulate demand retailers cut prices and increased unplanned promotions in the quarter, which did stimulate demand, but at some costs to margins and profits.
Signicantly, for the first time since quarter 3 2008, costs are beginning to have a negative impact on retail health, reflecting the exceptional Christmas period investment associated with servicing multi-channel operations.
The majority of RTT Members predict that the rate of decline in retail health will accelerate in quarter 1 2012, plunging the RHI downwards by three points to 77, putting the state of retail health at its worst point since the RTT was formed in 2006 and generating a downward momentum not seen since the start of 2009.
They also found that margins suffered in quarter 4 at the hands of aggressive price cutting, so necessary to stimulate demand. Retailers will struggle to re-build margin in the short term and this will continue to act as a drain on retail health in quarter 1.
Helen Dickinson, KPMG, commented, “As we predicted three months ago Christmas was not experienced at full price. Retailers fought hard to get ‘their share’ by matching or exceeding competitors’ offers. This of course impacted margins significantly although it did drive a late uplift in demand in December, with some retailers doing significantly better than others. However, there were many other austerity factors acting to hold it down across October and November. These included a depressing Autumn Statement from the Chancellor; high petrol, diesel and home energy costs; rising unemployment; public-sector strikes over pension changes; the Euro crisis and even the unseasonably mild weather at the start of the quarter.”
Retail analyst Nick Bubb commented, “Retailers who undertook reactive and unplanned discounting in quarter 4 effectively saved Christmas - so far as their balance sheets are concerned. But once you train consumers to expect deep discounts you make a rod for your own back when you attempt to increase margins again. Sadly, many of the best-performing retailers of the 80’s, 90’s and 00’s have continually downgraded their brands; losing brand equity as well as market share. Right now very nearly the only thing propping up demand is the illusion created by food price inflation, and that’s no comfort at all".
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