uk retail outlook -...

UK Retail outlook

Brian Burchfield, Director—

March 2019

2

Document Classification: KPMG Confidential

© 2019 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Economic outlook— As March 29 approaches, we will hopefully see a

narrowing of the different directions Brexit could take, allowing businesses to make more targeted contingency plans and potentially unlocking some of the investment that has stalled this year

— Should the Withdrawal Agreement clear the UK and EU parliaments and the UK avoids a no-deal scenario, we expect to see a short-term surge in investment growth to 1.6-1.7%. As a result, we see a slight uplift in growth momentum, with the UK economy growing by 1.6% in 2019 followed by 1.5% growth in 2020

— However, if a no-deal scenario cannot be avoided, GDP growth could fall to at least 0.6% in 2019 and 0.4% in 2020 due to temporary disruptions to supply chains and trade

— With the impact of sterling depreciation and oil price hikes moderating, the rise in import prices is likely to be more limited, putting a check on aggregate business costs. We expect inflation to move closer towards its 2% target in the next year

— The Bank of England has confirmed its commitment to continue raising interest rates gradually if the economy evolves as expected. The Bank has been reluctant to say what it will do in the event of a more negative Brexit outcome, but in practice it is more likely to keep rates low in order to cushion a blow to demand

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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Rea

l GD

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owth

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UK real GDP annual growth rate and forecast

Real GDP growthForecast

UK Economy

Source: ONS and KPMG Macroeconomics forecast

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UK consumer price inflation and forecastCPIForecastBOE inflation target

Source: ONS and KPMG Macroeconomics forecast

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Economic outlook (cont.)— Sterling has depreciated significantly against major

currencies since the Brexit referendum in June 2016

— Sterling weakness has been a major driver for above-target levels of inflation since early 2017 as a large segment of the UK consumer goods basket is sensitive to the price of imports, but this effect has now begun to wane

— In recent weeks we have seen more volatility in sterling. That is likely to persist as we move closer to Brexit day and the market reacts to any news that veers away from expectations

— We expect the extent of any volatility to be limited in the event the Withdrawal Agreement takes effect and therefore do not expect higher imported inflation either

— A no-deal scenario, on the other hand, would see a significant depreciation in sterling and a rise in inflation

Forecast Sterling exchange rate2015 2016 2017 2018 2019 2020

Exchange rate US$/£ (average)

1.53 1.36 1.29 1.34 1.28 1.31

Exchange rates £/€ monthly average

1.38 1.22 1.14 1.13 1.11 1.08

Note: 2018-2020 figures are forecasts. Forecast for US Dollar exchange rates from KPMG Macroeconomics.Forecast for EURO exchange rates based on market data from Refinitiv.

Source: Bank of England, Refinitiv, KPMG Macroeconomics forecast

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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

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Sterling exchange rates

ERI (narrow)

Source: Bank of England

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Short term outlook for the UK EconConsumer spending (%) GDP (%)

Investment (%)Unemployment rate (%)

Inflation (%)

2020

2017 2018 2019

2017

1.9

2018

1.6 1.2

4.4 4.1 4.0

1.7 1.3 1.5

3.3

— UK economy experienced a period of weaker growth in 2018. If the possibility of an abrupt Brexit is removed and businesses are in a better position to make more targeted contingency plans, we expect a slight improvement in overall economic growth in 2019 to 1.6% (from an expected 1.3% in 2018) followed by growth of 1.5% in 2020- Weak productivity continues to hold back potential economic growth

— A recent pickup in wages, coupled with falling inflation, alleviated some pressure on household budgets- However, economic uncertainty and the need to rebuild household savings are likely to hold back the extent to which earnings growth can drive up

consumption in the near term— More clarity around the Brexit deal would ease some of the restraints we have witnessed in business investment this year

- But many of the other factors contributing to weakness in investment in 2018 – including rising interest rates and global supply chain risks –will persevere

— We expect tightness in the labour market to continue, with the unemployment rate remaining near its 4% historic low. Recruitment difficulties are likely to continue into 2019

Interest rate (%)

Note: Figures represent our central scenario under which the UK secures a transition agreement after Brexit and a relatively friction-free trade deal after that. Figures for GDP, consumer spending, investment and inflation represent % change on previous year. Figures for house prices are house price changes over the course of the year and interest rates are quoted at the end of year

2019

1.3

2020

4.0

1.6

20202017 2018 2019

20202017 2018 2019

0.3 1.71.6

20202017 2018 2019

2.7 2.5 2.12.2

20202017 2018 2019

0.50 0.75 1.251.00

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British Retail Consortium / KPMG retail sales Jan 2019 Jan 2018

UK retail sales (LFL) 1.8% 0.6%

UK total sales 2.2% 1.4%

Online sales – non-food 5.4% 5.3%

Online penetration rate 29.4% 28.2%

Three months to Jan 2019 12 month average to Jan 2019

Food sales (LFL) 1.3%

Total food sales 2.4% 3.0%

Non-food retail sales (LFL) (0.8)%

Non-food retail sales (total) (0.4)% (0.2)%

Online sales – non-food 4.8% 7.0%

Instore sales – non-food (total) (2.6)% (2.3)%

Instore sales – non-food (LFL) (3.2)% (3.4)%

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Other , 37.5%

Apparel & Footwear , 17.3%

Food & Drink , 11.9%Media Products , 9.9%

Consumer Electronics , 7.7%

Homewares & Home Furnishings , 4.8%

Consumer Appliances , 3.6%

Home Improvement & Gardening , 2.8%

Personal Accessories , 2.3%

Beauty & Personal Care , 2.1%

UK retail outlookUK consumer spending UK channel overview

Store versus Non-store Internet retailing, 2018

£ ££

0%

20%

40%

60%

80%

100%

2012 2013 2014 2015 2016 2017 2018 2019F 2020F 2021F 2022F 2023F

Store retailing Non-Store retailing

18% non-store retailing

0

10

20

30

40

50

60

70

80CAGR 2012-2023F

Internet Retailing; 8%

Hypermarkets; -1%

Supermarkets; -1%Mixed retailers; -1%

Leisure and Personal; -1%Home and Garden; -1%

Health and Beauty; 0%Electronics and Appliance; -2%

Discounters; 10%

Home Shopping; -12%Direct selling; 1%

Mar

ket s

ize

in £

, billi

on

0

5,000

10,000

15,000

20,000

Per c

apita

in £

Total Consumer spending Retail spending

100%= £63.9 billion

Note: The market size data is ‘retail value RSP excl sales tax’ at constant prices 2018. Forecasts are at constant 2018 prices. Retail spending is calculated as the sum of consumer spending on food and non-alcoholic beverages, clothing and footwear, household goods and services, and alcoholic beverages and tobacco.

Source: Euromonitor

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Retail think tank: UK retail health index

Paul MartinUK Head of

RetailKPMG

Tim DenisonDirector or

Retail Intelligence

IPSOS Retail Performance

Nick BubbRetail

ConsultantBubb Retail Consultancy

Jonathan De Mello

Head of Retail Consultancy

Harper Dennis Hobbs

Martin HaywardHayward Strategy

and Futures Founder

Maureen Hinton

Group Retail Research

Director, Global Data

James KnightlyChief

International Economist, ING

Martin NewmanFounder

The Customer First Group

James SawleyHead of

Retail & LeisureHSBC

Mike WatkinsHead of

Retailer and Business Insights

Nielsen

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Ret

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The state of retail today Q4-18: 78

Top 10 retail trenand the high street disstressors

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10+1 key trends shaping the retail lan

People and ways of working

Supply chain and fulfilment

Declining marginInternationalisation Innovation Discounters

£ € $

Business model

ReputationNext generation productivity Consumer power Consolidation

Growth Protection and compliance

Cost and Efficiency PeopleCustomerKey

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6 Points that are driving the distress o high streetGeo-political and macro-economic Regulatory and compliance

related costsStructural changes to the sector

Over-supply of physical stores High-levels of debt Lack of leadership talent

Instability both locally and globallycausing increased costs and reduced consumer confidence

Looking forward and back two years there are a long list of key themes which are affecting retailers. 46 new regulations in this period

10 years ago, online penetration was 6%, it is now 29%(a) a shift in how shoppers are using channels

We estimate a 30% over supply of physical stores

Over the last 2 decades the retail sector has accumulated a significant amount of debt (technology, property and employee) often resulting in higher leverage

There is not enough leadership talent across the sector as those that led the growth of 90s and 00s often do not have the toolkit to drive the necessary changes

Note: (a) January 2019 KPMG BRC

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UK Gift card spending

Source: Economic and retail overview for UKGCVA

Consumer sales have recovered from their slight decrease in H1 2018, growing by a modest 3.94%in H2 2018

Despite issues in the wider economy and Retailers in particular having record low sales, the growth in the gift card market in this period has been a very encouraging 10.73% in the rolling year

Digital has shown highest growth at 64.97% overall

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6%

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12%

BRC Food Sales BRC Online Sales Non-food BRC Instore Sales Non-food BRC Non-food Sales UK Gift Card and Voucher Market

Comparison of annual performance



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