As retail data indicated better than expected consumer demand, the KPMG/Ipsos Retail Health Index (RHI) fell one point in the first quarter of 2023, meaning retailers will have had more struggling to achieve profitable growth given rising costs and tighter margins.
The think tank found that although margins continue to be squeezed, some retailers are not passing on price increases to customers, in an effort to keep demand stable..
Despite some pressures such as raw material and freight costs are beginning to ease, labor costs are the biggest challenge facing the sector, with wages rising to attract much-needed staff and avoid labor turnover. staff.
Rising manufacturing costs are also a major challenge for retailers, many of whom have exhausted cost-cutting exercises.
The government’s continued support for energy, the use of savings accumulated during the pandemic and the Easter weekend helped maintain consumer demand relatively strong in the first quarter of 2023 for food and non-food products.
With the grocery market accounting for about half of retail sector spending, rising food inflation, which still stands at 19.6%, continues to impact all areas of retail, dampening consumer demand for non-essential spending. Failure to control rising food inflation will likely lead to a continued decline in retail health over the summer.
Commenting on the Retail Health Index, Paul Martin, Head of UK Retail at KPMG, said: “Consumer demand remained strong in the first few months of the year, but food inflation continues to have a huge impact on household budgets., with people spending a lot more to bring home about 5% less goods.
“Retailers are fighting hard for every sale at the moment and with market share at risk and inventory increasingly full due to the wet and colder weather, we have started to see a number of retailers launching programs price reduction in order to attract consumers, which will inevitably affect their profitability. The health of the sector continues to slowly deteriorate amid rising costs, as retailers struggle to create healthy demand, which not only sees their sales rise, but also their profits.
“UK consumers are resilient, and we are starting to see the impact on real incomes of high inflation start to fade, but just like retail operators, they are adjusting their spending and working hard to see where they invest their money. It’s a very mixed environment in retail right now. Whereas during the pandemic we had winners and losers of goods categories, now we see winners and losers within categories, so even for example, in the grocery business which is doing well, you have operators who are doing very well, and some who are really struggling.
“The retail industry has done a good job of meeting the challenges of the past three years, and it’s a testament to its strength that we haven’t had more casualties given the economic headwinds. It is as if the economic conditions are improving and pAs inflation continues to decline and consumer confidence returns, we could see the sector rebound and rebuild as early as the fall.