Gloomy 2012 Awaits Retailers Despite Olympics, Inflation Boosts

Michelle Remo, “Big 4″ observer
December 30, 2011 /

The New Year will fail to bring a rosier outlook for the UK’s struggling retailers, according to the KPMG/Synovate Retail Think Tank (RTT). Even the London Olympics, the Queen’s Diamond Jubilee celebrations and a falling inflation rate are unlikely to provide much respite for those hardest hit.

When considering the prospects for 2012, the RTT members believe that consumer confidence will remain depressed with economic forecasts pointing to slow growth at best.

“2012 will be about future proofing the business to ensure survival in a market that will not change any time soon,” said KPMG’s UK Head of Retail, Helen Dickinson. “The squeeze on personal incomes will continue despite the expected decline in the rate of headline inflation.”

Overall, RTT members expect sales volumes will continue to fall. Competition will remain fierce as retailers compete to maintain their share of a smaller pie. The non-food sectors will be hit harder than food. There will however, be some businesses that escape the worst effects in 2012.

The feel-good factor from the London Olympics and the Queen’s Diamond Jubilee celebrations should provide retailers with a sales boost, but Nick Bubb warns that “the great British weather may not look as kindly upon these events as it did in April 2011 for the Royal Wedding”.

There are also concerns that outside of the South East, the Games may become a reason to stay at home rather than visit the shops. Its positive effects could also be limited by the seismic shift in consumer attitude towards impulse buying.

“Emergent behavioural patterns that have spawned since the downturn will become mainstream and engrained,” said Tim Denison of Synovate Retail. “For shoppers, ‘value for money’ will remain lodged top-of-mind, eager to ensure that their lower level of discretionary income is spent wisely. The retailer’s response will continue to focus heavily on promotional activity and on helping shoppers establish justification to buy.”

The continued rise of online shopping and the prevalence of sites offering customer reviews has accelerated this process, with customers now able to easily source the best quality products at the best value.

Changing, and challenging, consumer behaviour has meant that retailers have been forced to alter the way they run their business, streamlining their operations and adjusting strategy to allow for greater flexibility.

“Retailers have spent a considerable amount of time sorting out their capital structures and fewer remain highly financially geared, putting the sector in a stronger position to manage the toughening economic climate,” said Richard Lowe, Head of Retail & Wholesale at Barclays Corporate.

In 2012, it will be the operators that best manage all these changes who will turn a difficult market environment to their advantage. The RTT does, however, expect there to be a number of high profile administrations in the early part of year.

Tough economic conditions, coupled with the continued growth of online shopping, raises the ominous prospect of some High Streets being littered with vacant properties during 2012. The RTT members acknowledged that this could be a concern in some areas but was unlikely to affect prime retail sites, where demand for outlets is still high.

CBRE’s Mark Teale said there was a chronic shortage of available space for flagship units where premiums (£5m-£10m being paid on Regent Street) are back with a vengeance, while chain retail and catering and leisure branch numbers continue to grow.

Neil Saunders adds “While all of this makes for gloomy reading, the truth is that these austere circumstances will continue to reshape the retail sector and the process of reconfiguration is a painful one. The current shape of the sector – the number of shops, the amount of space, the way retailers do business – is one that was created to reflect the demands of previous years.

Now a more muted demand environment means a new shape – less space, fewer shops, more focused business practices – is required.”

The continual need to drive operational improvements will be prevalent and strong retailers will continue to improve visibility and control of all aspects of the business ensuring they have the right information to take decisions quickly and manage cash flow very tightly. This way of operating will be the new norm as challenging market conditions will continue into 2013 and beyond, concludes Helen Dickinson.

 

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