By Daniel Hunter

Following its quarterly meeting in April, the KPMG/Ipsos Retail Think Tank (RTT) was able to report better news at last for the sector, although a significant increase in the health of UK retailing is unlikely to arrive any time soon.

The RTT’s Retail Health Index improved one point to 77 points, thanks to a marginal lift in demand, which would have been better still had it not been for the prolonged extension of wintry weather throughout the whole quarter.

The RTT agreed that overall Christmas trading figures had been relatively good, and that there were very few new casualties coming through now — the consequence of better run businesses and an uplift in demand. Once again, the food sector was the star performer, with convenience formats trading particularly well in the inclement conditions. In non-foods, the decline in footfall over the quarter did not prevent a slight gain in overall demand, led by technology goods.

Retailers’ margins remained under pressure over the quarter. While food margins remained broadly flat, extra discounting was necessary to stimulate clothing sales in particular, and some major players remained heavily promotional led in the quarter (notably Debenhams and M&S). Smaller margins on technology products also meant that the change in sales mix was unhelpful to margins.

Costs in the quarter remained static overall. Despite multichannel operations continuing to add to the cost base and fuel and energy price increases in the quarter, the RTT acknowledged that reductions in estate sizes and ever-more creative ways of taking costs out of their businesses are enabling retailers to keep their costs in check.

Looking forward, the RTT believes that the outlook for retail health in quarter two is set to stutter, flat lining in the quarter rather than continuing to gain momentum.

The panel conceded that the scene remains very mixed, with many influences on retail health ebbing and flowing. Consumer confidence is likely to remain weak, as the recent employment growth is expected to tail off, inflation is on the increase again, and with fuel and energy prices set to rise. However, there is some support on income tax thresholds and lending coming through, and if there is any movement in the housing market it will provide a boost to spending around the edges.

All in all, the demand side still looks very soft. The RTT expects margins will continue to be squeezed in the fashion sector, where the need to promote will continue. On the cost front, retailers may still be able to offset some unhelpful external factors, such as the potential increases to pension costs impacting particularly small/medium size businesses, by looking to take out any further costs from the business that they can.

“Overall the quarter was quite an even one for UK retailers as demand, margins and costs all remained relatively static and it looks like we’re at the bottom of the decline," David McCorquodale, Head of Retail, KPMG UK, said.

"The weather did affect demand in terms of footfall being down, but otherwise sales were largely ok. Retailers are trying not to bring their prices down and hold their margins and we are seeing businesses being better run as they look to take unnecessary costs out of the equation in a more sustainable way.”

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