Retailing Review: June 2007

Each month Hays Retail brings you the latest news from Barclays Retailing Review.

Sector Overview

• Growth in retail sales have so far been resilient to the four interest rises that have occurred since last August. Despite a marginal decrease in the volume of sales in April, the underlying growth remained robust with a 4.8% increase in retail sales’ volume in the past three months compared with the same period last year

At a sub-sector level, the trend growth in the volume of sales was as follows:

• Non-store retailing and repair (which includes internet and mail order retailing) +17%
• Clothing stores +6.4%
• ‘Other’ non-food retailer +6.1%
• Household goods +4.5%
• Food stores +2.3%
• ‘Non-specialised non-food retail (which includes department stores) +0.8%
  
  
• The non-store sales remained buoyant in May, mainly reflecting the continued strong growth in specialist internet and mail order sales
• Although clothing and footwear retailers reported healthy growth in the latest three months compared with a year earlier, sales actually fell in May due to the very unsettled and unseasonal weather

• High street retailers have seen a further increase in price inflation which amounted to 1.0% in April compared with 0.4% in March. It is not clear to what extent this reflects cost pressures and to what extent it reflects retailers attempting to increase their profit margins

Prices

• The price inflation in the high street eased slightly to 0.5% in May compared with 1.0% in April

Survey evidence

• The consumer confidence index rose by 4 points to -2 in May, reaching its highest level since July 2005
• Four of the five measures improved
• The upbeat consumer confidence was mainly driven by the increasingly positive opinions on the general economic situation. (This seems a little surprising given the recent rises in interest rates.)
• Meanwhile households remained positive about their personal financial situation and optimistic about their personal financial and general economic outlook
• On average, retailers were optimistic about the outlook for May 2007

• According to the CBI Distributive Trades Survey, sales in May fell slightly short of April’s expectations, as a balance of 31% of retailers reported a rise in sales

• The most robust sectors are retailers of grocery, confectionery, tobacco and news and hardware, china and DIY. Booksellers and stationers continued to report a fall in sales’ volumes, along with chemists and suppliers of durable household goods. On average, retailers expect sales growth to ease further in June 2007

Sub-sector Focus: Department and variety stores

• According to official statistics, department and variety stores accounted for 8.4% of UK retail sales in 2006, and the turnover of businesses in the sector amounted to £21.4bn compared with £20.8bn in 2005 Trading conditions improved last year, with growth in the volume of retail sales accelerating to 3.9% in 2006, compared with 1.1 % a year earlier. The sector achieved its highest growth rate since 2002. Turnover growth increased by 2.8% in 2006, which was in stark contrast to a 0.4% fall a year earlier. The improved performance was helped by the favourable economic environment and the consolidation in the sector
• The relative strong trend has continued in the early months of 2007. In the first quarter of 2007 the sales’ volume rose by 3.1% while turnover grew by 2.1%, compared with the same period last year. However, the latest retail sales indicated that growth has slowed appreciably in the second quarter. In the three months to May growth in sales’ volume and turnover have slowed to 0.8% and 0.5% respectively
• Anecdotal evidence suggests savings made in sourcing are now being cancelled out by other cost increases
• Costs in the sector in terms of labour costs and rents continue to increase and are putting pressure on retailers’ margins. However, recent statistics suggests that utility costs, such as gas and electricity bills have been falling modestly since beginning of the year
• The major department stores have managed to maintain their profit margins by focusing on brand value and product quality, despite the increasing competition from major supermarkets. Nevertheless, the fortunes of individual retail groups operating in this sector have been very mixed, with some performing well but others struggling under the weight of competition
• Department and variety stores are likely to find conditions increasingly challenging during the reminder of 2007 as the rises in interest rates begin to bite and sales of household items are impacted by an expected slowdown in activity in the housing sector

Retail Sector Outlook

There looks to be a continuing momentum behind retail sales in the near term, resulting from both resilient consumers’ expenditure and buoyant activity in the housing market. This boosts not only sales of household goods but also has beneficial wealth-effects on consumers. However, the consensus of forecasts suggests that economic growth will slow down modestly this year after growth of 2.8% in 2006.

However the key question is how resilient consumers’ expenditure will be in the face of four interest rate rises since last August and the prospect of at least one further increase in the near future. So far, consumers have relied upon increased borrowing together with their savings and investments to offset pressure on their real disposable income.

Although we expect retail sales to grow by around 3.5% in 2007 as a whole, some slowing is likely to be evident in the second half of the year as the rises in interest rates begins to bite, a trend which is likely to continue into 2008.

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To view the May Review, click here.

To view the April Review, click here.