2007: What really happened?

 

2007 was a tougher year for retailers than many before it, especially for the non-food sector. Right from the off, we feared that the outlook for the year looked poor.

 

A heavy cost base continued, with swinging increases in both utility prices and business rates particularly in quarter 1. Thankfully though, the rate of growth was slowing, after the onslaught of double-digit price inflation in fuel costs of 2006.

However, the real concern at the start of the year majored on speculation over a slowdown in the rate of demand growth, driven by the three 2006 interest rate rises the anticipated impact on consumer confidence and raised public consciousness of personal debt.

 

In the event, demand growth did not weaken in quarter 1 - it accelerated. For the quarter, the BRC-KPMG Sales Monitor registered a 3.5% like-for-like year- on-year basis, up strongly from 1.9% on the previous quarter. This set the tone for much of the year: consumer resilience flying in the face of growing economic pressure, buoyed on, we believe, primarily by the ongoing strength in the housing market - enabling growth in mortgage equity withdrawals and the possibility of individuals restructuring their personal borrowings.

 

Two more interest rate rises by the Bank of England in quarter 2 did little to curb retail spending. Food sales remained very strong, seemingly untouched by conditions, but non-food goods, particularly clothing, struggled in the rain deluge that besieged the country in May and June. As a consequence the overall rate of sales growth slowed.

 

Costs remained the key worry to retail health during quarter 2. Notwithstanding slowing rental and energy price growth, the true like-for-like growth in retail costs was up to 3.5 - 4% and sales were struggling to keep up.

 

During the autumn it was a matter of retailers sticking it out amidst fears that a downturn in consumer demand was imminent. There was consensus among the Retail Think Tank members that a change was on its way, but there was disagreement as to when. The broader impact of the Northern Rock debacle and a slowing in GDP helped create a general air of uncertainty. The most telling data discussed in October, perhaps, came from the housing market, where a step increase in the number of households (up from 70,000 to 120,000 a month) coming off existing fixed rates and onto more expensive deals was feeding through the pipeline.

 

In actual fact the rate of growth in retail sales did indeed flatten in quarter 3, (the BRC-KPMG Sales Monitor saw growth slow from 2.5% like-for-like in quarter 2 to 2.1% in quarter 3), but this certainly didn’t represent the free fall situation that had been feared as early as from the start of the year.

 

A continued slowing of rental increases, alongside subdued staff costs rises in the sector helped ease cost pressures in quarter 3, though they remained a negative influence on overall retail health.

 

By quarter 4, for the first time of the year, the three key drivers of demand, margin and costs had all contributed to the deteriorating overall state of health in the UK retail sector. This was borne out by the difficult trading conditions which were widely reported and the subsequent downbeat trading statements from retailers.

 

For the first time in the year, the spotlight settled on margins. A weak dollar had helped to protect retail margins throughout 2007. Food retailers had also continued to strengthen their buying-muscle with suppliers, limiting the passage of any cost of sales inflation. However, on the non-food side, higher prices of goods sourced from China were beginning to damage margins, particularly as they were generally not being passed onto the consumer.

 

Equally, as demand growth weakened, the need to incentivise through discounts and promotions in order to stimulate sales became increasingly necessary. With the exception of high street fashion and footwear, most managed to avoid going to full Sale before Christmas, but many deployed selective damage-limitation campaigns to nurture consumer spend.

 

2007 began with accelerating demand growth, but by the end of the year this had finally given way to a slowdown. The impact of interest rate rises on mortgages, the credit crunch, a reported leveling off of house prices, rising inflation and a disposable income level expanding at its slowest pace for 25 years were all considered as key contributing factors.

 

For quarter 1 2008, we expect the state of health to deteriorate further and at a faster rate. Our expectations were downgraded further in two of the three drivers, margins and demand, with the impact on health of costs still being negative. Consequently the Retail Think Tank produced its most pessimistic set of predictions since it was formed in mid 2006.

 

The next section of our annual review gives different perspectives on the prospects for 2008.

Leave a Comment

Name

Mail (will not be published)

Website