Any hopes of a recovery in the UK retail sector have been ‘obliterated’ by the coronavirus outbreak and subsequent lockdown – with KPMG/Ipsos Retail Think Tank’s (RTT) Retail Health Index (RHI) falling by 3 points to 71 in the first quarter of 2020, a new record low.
According to separate research by McKinsey, consumer confidence is at an all-time low, with just 17% of British consumers saying they believe the economy will rebound in the next 2-3 months.
The global picture also looks bleak, with a third research report – this time from Global Data – anticipating global retail spend to fall 3.0% in 2020, equating to $549.7 billion, in comparison to a previously expected rise of 5.0% prior to COVID-19 (+$927.7bn).
Previous to the coronavirus, the RTT members had been ‘cautiously optimistic’ about the prospects for 2020, predicting that retail health would likely hold steady at 74 in the first quarter of the year. Indeed, during the RTT’s assessment back in January this year, the members previously held high hopes for the reemergence of political and economic certainty following the conclusive General Election, which they believed would benefit the sector in subsequent quarters.
COVID-19, however, has quickly eclipsed even the sector’s previous woes, and with it any hopes of improved health for the foreseeable future. The nation’s lockdown, and its impact on demand in particular, has sealed the fate for many retailers, especially those deemed ‘non-essential’.
Reflecting upon health in the first quarter of 2020, Paul Martin, co-chair of the RTT and UK head of retail at KPMG, says: “If looking at total sales in the UK over the first quarter of 2020, non-food retail was on a -1% trajectory in both January and February. However, from mid-March onwards, the decline was far more severe as anxiety around COVID-19 started to rapidly rise. The lockdown only came into effect on March 23rd, but non-food retail sales fell by anything from 50 to 100% thereafter, dependent on whether the retailer in question had any stable online operations or not.”
Martin continues: “The lack of consumer engagement was mirrored by footfall figures during the quarter too, which fell substantially as the health consequences of COVID-19 became clearer as the quarter progressed. A record decline in footfall of 14.2% was recorded in February, whilst that low was quickly superseded by a fall of 51.3% in March – and that only measured the footfall at stores which remained open.”
Martin adds: “Grocery and online sales have soared though, especially towards the back-end of March as consumers started to stockpile despite calls not to. Despite this seemingly beneficial rise for ‘essential’ or online retailers, even this uptick wasn’t enough to offset the declines noted throughout the quarter and across the sector more broadly, as has been made painfully clear by recent retail sales figures.”
According to the latest data collected on April 18th-19th, 2020 from global consulting firm McKinsey & Company,
a quarter of consumers surveyed in the UK believe that COVID-19 will cause the economy to fall into a long-lasting recession. As such, 36% of consumers say they are cutting back on spending with a further 36% saying uncertainty is preventing them from making purchases they would normally make.
This contrasts greatly with consumers in China where 56% expect the economy to rebound within 2-3 months and in the US where 35% are still optimistic of a rapid recovery. Generally European consumers are much less optimistic, the exception being Germany where 24% expect the economy to bounce back within 2-3 months.
Aside from the economy, nearly two thirds of UK consumers are extremely or very concerned about the uncertainty of the duration of the COVID-19 crisis. This is compounded by other top concerns for UK residents such as public health, safety and the health of vulnerable relatives.
Amid the new economic reality, British residents are starting to feel the effect of the crisis on their incomes with 30% noticing a reduction in their income, 50% thinking their finances will be impacted for four months or longer and 44% being very careful how they spend their money as a result.
How things progress across the rest of the year is also troubling many in the industry. The RTT members fear that an even more seismic drop by 9 index points – taking the RHI score to just 62 – could hit the second quarter. This would be greater than the drop recorded in the shadows of the 2008/09 financial crisis.
However, the RTT members do stress that the magnitude of this downward shift is highly dependent on the length and nature of the country’s current ‘lockdown’ restrictions, as well as the impact this has on consumer and business psyche. If the members’ future assessment comes to fruition, the health of retail will have fallen by 38 points since the think tank’s inception in 2006, when the index was originally based at an RHI score of 100.
The RTT’s economist, Ruth Gregory of Capital Economics, explains: “We think that the lockdown implemented to contain the coronavirus will trigger a peak-to-trough fall in GDP of around 25% in the first half of this year, which would dwarf the 6% drop during the 2008/09 financial crisis. Retail sales could fall by as much as 30% in parallel.”
Gregory continues: “Meanwhile, although not all of those applying for Universal Credit will have been made unemployed, the 1.75 million new applications lodged in the four weeks to 9th April will probably raise the unemployment rate from 4.0% in February to 5.3% in April. And if some firms find that they cannot balance the books once the government support ends, then worse may be yet to come.”
Globally things look similarly worrying. Sofie Willmott, Lead Analyst at GlobalData, believes that “North America and Europe are set to experience the steepest drops in retail spend forecast to decrease 4.8% and 4.4% respectively. And while APAC is expected to only see a relatively minor decline of 1.3% which looks good relative to other regions, pre-COVID 19 we had forecast the region’s growth to be 7.2%.”
This is backed up by McKinsey’s study, which finds that consumers around the world, including the UK, are universally pulling back on most discretionary spending. Some of the categories showing the most dramatic drops in spending include restaurants, apparel, footwear, accessories, travel, and entertainment out of home.
In the select categories where consumers expect to spend more (grocery and home-based entertainment), UK customers have switched to online shopping to make these purchases. Many consumers have also switched brands and retailers, especially grocery stores, and more than half expect to stay with them after the crisis.
The RTT tend to focus their attention largely on demand – or rather the lack thereof – in the upcoming quarter. However, to a lesser degree, yet still significant, margin and cost are also predicted to weigh retail health down.
Cost pressures impacting retail margins were said to be working their way through food supply chains, whilst non-food items would need to be largely written off.
Meanwhile, fixed costs relieved by government intervention – while wholly supported and welcomed – weren’t likely to fully compensate for rising variable costs elsewhere, especially by those still trading.
Tim Denison, co-chair of the RTT and director of retail intelligence at Ipsos Retail Performance, says: “There are a myriad of dynamics at play and not all retailers are feeling the pain equally – there is a clear divide between ‘essential’ and ‘non-essential’, between online and physical channels, as well as between ‘premium’ versus ‘value’. The cons will likely outweigh the pros though. Indeed, even those noting surges in sales aren’t necessarily finding it easy to translate these additional sales into profit. We all know that home delivery for example, isn’t always cost efficient.”
He adds: “Government schemes and relief have of course been welcomed, easing some fixed cost pressures like business rates and staff costs. However, other costs have arisen, including those relating to: additional people power, airfreight, supply chain and storage, or product manufacturing for example. It’s easy to assume that those still trading have it easier, but that’s not the case. Likewise, those not trading still have bills to pay, with costs inherently sticky.”
Denison concludes: “The future is rather murky, and consumer confidence is likely to be volatile for the foreseeable future, especially as the longer-term impact of the pandemic becomes clearer. Retail isn’t likely to be a high priority for most and it remains to be seen whether retail health will recover sharply or slowly, if indeed it recovers fully at all.”