UK retail health falls, fashion under most pressure

UK retail sector health fell back in the first quarter of this year and Q2 looks like more of the same, despite the sector having seen 18 months of retail health rising for staying flat.

Fashion stores are under more pressure than other retailers, new analysis shows

That’s the conclusion of the latest KPMG/Ipsos Retail Think Tank (RTT) research that expects retail health to fall for two consecutive quarters for the first time since 2012.

The Q1 dip came as discounting continued to be rife on the high street, especially in the non-food sector, with the clothing sector in particular having to rely heavily on offers and promotions to keep consumers spending at the tills.

The RTT said weakening demand, squeezed margins and rising costs all contributed to the one-point drop to 82 in the Retail Health Index. The late Easter hurt Q1’s figures but while Q2 should benefit, a one-point decline is also expected for the April to July period.

The snap general election and delayed Brexit negotiations could create further distraction for retailers in the coming months while rising costs will work heavily against retailers. As the currency hedges that have protected stores from major Brexit-linked price rises begin to unwind, margins could be hit and the next rise of the National Living Wage also comes into effect. And retailers also have to deal with rising utility and fuel costs, increased business rates and the new apprenticeship levy.
The RTT agreed that of the main drivers of retail health – demand, margin and cost – all conspired to work against retailers in Q1. Retailers struggled with demand, as the spending power of the consumer was squeezed, and a late Easter failed to deliver a bump in sales in March. It was agreed by RTT members, that while not a disastrous three months for most stores, the sector was still on a downward trend and retailers should be prepared for worse times ahead in 2017.
For Q2, the RTT expects that the improved demand in April, boosted by the late Easter and warmer weather, will be only a temporary increase as uncertainty surrounding the specifics of a Brexit deal and toughening economic conditions start to impact heavily on consumer confidence.

The surprise announcement of a general election on June 8 could cause further distraction for retailers over the next quarter too. Meanwhile, rising fuel and utility bills will have a negative effect on retailers from two fronts, as consumers will have reduced disposable income and the retailer’s own running and fulfilment costs will increase.
Maureen Hinton, group research director, GlobalData Retail, said of the predictions: “The late Easter will help to boost sales in April, particularly for grocers. [But] while clothing retailers should benefit from warmer weather, competition in the sector is so strong, and discounting so prevalent, that profits will continue to be under pressure, putting a further strain on weaker operators.”

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