By Daniel Hunter

The health of UK retail has shown some signs of improvement over the past quarter and the outlook is looking more encouraging than it has done for some time, particularly as the nation heads into the Christmas season feeling better about itself.

Following its quarterly meeting in October, the KPMG/Ipsos Retail Think Tank (RTT) upgraded its Retail Health Index to 79 and its panel of retail experts forecasted that this could improve to 81 in quarter four. This would not only mark the highest level since Quarter Three 2011, but the strongest quarter-on-quarter leap for four years.

Two of the three key drivers of retail health — demand and margin - were more positive in quarter three than in the previous quarter, and cost factors over the period were largely neutral. It is the first time for three years that both demand and margins have contributed positively to the improvement of retail health.

Reflecting on a rosier picture of the UK retail sector in quarter three, particularly in July and August, the RTT pointed to the warm and welcome weather as a major factor as consumers headed to shopping centres and made the most of the summer months — buying seasonal clothing and eating outdoors. Unfortunately, September proved to be a damp squib as cooler and wetter weather reached UK shores and stores but were not so cold as to encourage replenishing winter wardrobes.

The RTT noted that many of the high street retailers left standing appear to have stabilised their businesses — with the threat of insolvencies nowhere near the levels experienced over the previous 18 months — and, significantly, several are now focusing on investment in their stores and staff as they look to improve their fortunes.

By comparison, although online sales continue to show relatively strong growth, the incremental transport costs and logistical challenges of fulfilment remain a growing burden, with the likes of click-and-collect space requirements at stores over Christmas. The impact on overall costs will be mitigated in part by falling commodity prices.

The RTT predicts an even more promising outlook for UK retail over the next quarter, not only because it’s the Christmas trading period; consumer confidence appears to be on the increase, the housing market is more buoyant and economic conditions are generally improving. One important consequence, the RTT believes, is that as people become less nervous at losing their jobs and interest rates remain low, they are less intent on saving and becoming more comfortable to spend. And if people do start shopping more, they may be inclined to ‘trade up’ to premium goods, particularly over Christmas.

However, there is still some caution waiting in the wings as unwelcome rises in energy prices may once again put the brakes on some householders’ incomes, especially if the weather in winter months remains true to the season. And a pre-Election boom, based on artificially cheap credit, is unlikely to be sustained, unless real incomes start to grow again.

Dr Tim Denison, Head of Retail Intelligence at Ipsos Retail Performance, said: “Footfall and demand were stronger in quarter three than they had been in the two previous quarters, and certainly July and August were very good months for UK retailers. September spoiled the summer party a bit, largely because of changing weather conditions, but there are bound to be blips along the path to recovery. The key point is that we are now trending upwards again just in time for the most important time of the retail year.”

Nick Bubb, independent retail analyst, added: “Because July and August were so good for retailers, it’s possible that there was some retrenchment in September as consumers decided to hold onto their cash. It was also noticeable that there were two autumnal weeks and two warmer weeks in September, so there were some ‘fits and starts’ to trading at the end of the quarter. This summer there appears to have been a reverse of what happened in 2012. Last year Easter was summer and then all of the rain came. This year, Easter was slow and then what we saw was pent up demand being spent in July and August.”

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