By Daniel Hunter

The health of UK retail has shown signs of steadiness rather than notable improvement over the past quarter, and quarter three is likely to be a continuance of this trend. This was the overriding view of the KPMG/Ipsos Retail Think Tank (RTT) at its quarterly meeting in July.

The three key drivers of retail health — demand, margin and cost — were all relatively neutral, with demand slightly up on quarter one of 2013, margins still under slight pressure and cost factors largely negligible. The RTT’s Retail Health Index notched up another point, to 78, the second increase in succession since continuously falling from the beginning of 2011.

Retailers are at last feeling more positive than they have done for several months and appear to be focusing on the right areas of their business to avoid insolvency and, instead, concentrate on sales and future growth. However, there are no strong indications this marks the beginning of a robust recovery for UK retail.

The outlook remains a confusing and uncertain one for UK consumers too. Although most people are aware of their household incomes and budgets and tend to plan accordingly, with so much economic doom and gloom in the past 18 months, some may resort to the ‘sod it’ factor during quarter three and spend regardless of their personal financial situations.

The RTT identified that some sectors within retail are likely to benefit from pent up demand in quarter three. With more positive signs in the property market, for example, this may have a knock-on effect for certain retailers, particularly those in areas such as home furnishing and DIY. If people are buying new properties or refurbishing, invariably they will wish to furnish them. Similarly, with the sun shining and people able to get outside, garden centres can expect to see strong pick up in quarter three.

Many retailers continued to feel pressure to promote sales and discount in quarter two and margins have still been squeezed by consumers expecting to grab a bargain. The food sector, in particular, remains extremely competitive with many of the major grocery stores still discounting to claim market share. And because of the lengthy wintery weather conditions, the clothing market has been concertinaed into a very short season.

Notably, cost factors did not have a major influence of retail health in quarter two as petrol prices were lower (compared to the same period last year), rates were up roughly in line with inflation and labour costs overall were quite modest.

The RTT acknowledged that the arrival of Mark Carney, the new governor of the Bank of England, offered more positive signs for the retail sector as he indicated that interest rates would remain low and not stifle any chance of economic recovery.

David McCorquodale, Head of Retail, KPMG UK, said: “Compared to the carnage that occurred in 2012, this year we are seeing a far more settled picture which is a welcome sign for the retail industry. Certainly, there is less gloom, and expectations that retailers will enter into administration are lower, but for those sitting on large debts, there is still inevitably a risk of insolvency.

“The retailers left standing appear to be working on the right areas of their business and are feeling and being more positive. Working capital is much tighter, retailers appear to be holding far less stock and in fact have done so for the past 18 months.”

Nick Bubb, independent retail analyst, said: “The retail sector continues to bump along a corrugated bottom and it’s a mixed and very messy picture. Consumers are to an extent fed up with it being so gloomy and may be inclined to resort to the ‘sod it’ factor — spending money regardless of the state of their finances. With interest rates so low, there is simply no incentive for them to save.”

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