Consumer confidence grows in build up to general election

shutterstock_127396400The health of retail in the UK saw marginal signs of improvement in Q1, but not at as strong a rate as other consumer services, according to the KPMG/Ipsos Retail Think Tank (RTT).

  • The health of the UK retail market improved by one index point after a disappointing end to 2014, with consumer confidence rising in line with higher wages and greater economic stability.
  • The uplift in retail health was tempered both by the impact that Black Friday had on the traditional January sales and also by price deflation.
  • Consumers and retailers in Q1 were unaffected by the uncertainty surrounding the general election, a trend that will continue into Q2.
  • Retail health in Q1 driven by higher levels of demand to continue in Q2. spent on experiential services rather than on consumer goods.
  • Hangover from Black Friday could spell the beginning of the end of traditional January sales.

The RTT’s Retail Health Index has climbed by one point to 81 in Q1 of 2015, its highest standing in three and a half years. However, the quarter got off to a slow start, with the hangover of Black Friday leaving less to spend in the traditional January sales. As the quarter wore on, promising signs that demand is on the up became more evident, with sectors such as homewares and household appliances doing comparatively well, indicating that the market is on the mend. The shop price deflation, particularly in the food sector, meant retailers had to sell more to stand still and consumers had little incentive to rush to
spend.

Of the three key drivers of retail health – demand, margin and cost – demand was the strongest factor. RTT members acknowledged that the increase in the RHI would perhaps be higher, however consumers appear to be choosing to spend any savings made on energy and petrol costs on experiential leisure services rather than goods.

A major talking point in the RTT’s quarterly meeting was the upcoming general election, though across the board it was agreed that the health of the market is unlikely to be affected in the short term. With unemployment falling and a general ‘feel better’ factor it is disposable income that has fuelled demand. The potential of ‘discount exhaustion’ in the run-up to the election was also cited as an influence on spending behaviour. With consumers feeling more relaxed, due to minimal economic policies being brought in ahead of the election campaign season, retailers have been keen to capitalise with increased discounting tactics. It is this strategy however that may have turned consumers off retail and on to leisure activities in Q1.

Margins as a driver of retail health did not have a significant impact, with the continued strength of the pound meaning savings have been passed on to consumers – any change in this is not expected to hit until Q3 when foreign currency hedging arrangements will begin to unwind. The RTT warns that the fashion sector will need to be smarter in the future to respond to unseasonal weather conditions to avoid early discounting of its seasonal collections.

Costs remained constant in Q1, with no significant change in the key driver – retail property markets. With just a handful of new projects in progress, there is minimal movement in locations outside of London. This may change in Q3 as forecasts are released in six months’ time. There is some momentum building around the difference between the Minimum Wage and the Living Wage and this may become a factor that puts more pressure on retailers to meet these demands.

Looking ahead to Q2, the RTT expects that the RHI will continue to be driven by demand, with consumer confidence remaining unaffected by political change in the short term. Consumers will continue to feel the benefits of lower costs throughout the quarter, and discounting is expected to continue in a bid to attract sales across the fashion and grocery sectors. The current strength of the economy is set to carry on until the start of Q3, when the value of the pound is likely to vary, impacting retailers’ costs. Operating costs are also expected to rise due to increased discussions on employers meeting the living wage going into Q3.

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