An unusually low level of profit warnings among retailers makes interesting reading as warnings across all companies hit three-year high.
An unusually low level of profit warnings among UK retailers makes interesting reading as warnings across all companies hit a three-year high.
FTSE general retailers and FTSE food and drug retailers together issued just nine warnings in the first six months of 2014, according to the EY profit warning report. Furthermore, the total percentage of retailers warning in the first half of 2014 was 8%, compared to 16% in the same period of 2013.
The sector’s overall lack of profit warnings is testament to the deep level of restructuring undertaken in the past decade, as well as the focus on operational fitness and getting the basics right. We also saw investor confidence in the retail story reflected in the domination of the IPO market in the first half of the year.
However, the pace of change for retail is not letting up, especially in the grocery sector, and market enthusiasm has waned in recent weeks. The consumer outlook may still be improving, but in fits and starts and with a worrying interest rate rise on the horizon.
Competition is intense and the pace of structural change unrelenting – consumers have a pervasive focus on pricing and value and are increasingly fickle. There are still plenty of challenges ahead giving retail bosses sleepless nights.
The EY ITEM Club expects consumer spending to rise by 2.5% in 2014, up from 2.2% in 2013 and 1.4% in 2012. However, the continuing pinch of inflation on disposable income leaves retailers vulnerable to sudden shifts in sentiment.
According to BRC figures, after a volatile first quarter a late Easter boosted April sales, but appeared to dent May’s – although total like-for-like (LFL) sales still grew year on year. However, with interest rate rises back on the agenda in June, consumer confidence dropped and LFL sales fell by 0.8% – the worst performance in three years, excluding Easter variations.
The first interest rate rise may not come until spring 2015 and the pace of monetary tightening should be slow. However, UK household debt has only fallen from 165% of earnings in the run-up to the crisis to 135% – still one of the highest global levels.
Any rise in interest rates will translate quickly into a squeeze on disposable income, while the build-up may also dent sentiment and cool the housing market, which is–so indelibly tied into consumer spending and confidence.
UK shop prices fell for the 14th straight month in June, accelerating to a 1.8% decline – the deepest level of deflation since the BRC survey began in 2006.
Responding to the challenges
The retail sector has already undergone a deep level of restructuring in response to competition and structural change. Unfortunately, this pace isn’t letting up and the grocery sector looks set to face the next round.
It is only by operating at their full potential, remaining in tune with consumer behaviour and leveraging their advantages that retailers will be able to benefit from the upturn in consumer spending and meet the challenges that lie head.
Companies should be looking to take operational measures to get ready for growth and ensure their businesses are flexible enough to face the future.
Physical retailers will undoubtedly need to reshape their footprint to meet these demands. However, the store is by no means dead. It still offers advantages for retailers to leverage from the need for immediate gratification to the creation of a brand experience and the ability to provide a seamless multi-channel offering. They key to retail, as it always has been, will be to engage us as the consumer.
- Julie Carlyle, head of retaill at EY