Retail performance faces a tipping point in Q3 2023, according to the KPMG/RetailNext Retail Think Tank (RTT), an independent board of retail experts, as the threat of further interest rate hikes and spiralling mortgage payments hit household spend, undermining retail sector health and requiring the industry to respond with investment and its hallmark ingenuity.
The latest data from the RTT Retail Health Index, the industry’s only comprehensive, sector-level quarterly benchmark of retail performance, predicts retail health will dip -1 index point in Q3 to 69 points. This represents the lowest point since Q3 2020 when the UK was in the midst of tiered lockdown restrictions and about to enter Lockdown 2, and -23 points lower than Q3 2008, at the start of the Financial Crisis and the beginning of the Credit Crunch.
This is expected to mark a significant tipping point, with consumer confidence and the resilience seen in Q2, starting to crumble, as retailers and consumers face a ‘third wave’ of disruption as a result of higher interest rates, spiralling mortgage costs and their impact on customers’ spending power. Even before the Bank of England raised interest rates to a 15-year high of 5.25 per cent on Thursday, it was already predicting 1 million UK homeowners will be paying £500 more in mortgage payments each month by 2026, with ‘millions’ of renters being squeezed by record rent increases as landlords pass on mortgage costs to tenants.
James Sawley, RTT member and head of retail & leisure at HSBC UK, commented: “To date, we have been surprised by the resilience of consumer spending underpinned by the labour market, wages, savings, and improved household balance sheets post-covid. However, it now looks like we are in for a long slog of high and sticky inflation and interest rates.”
While former GlobalData director and retail consultant, Maureen Hinton, suggests the spending squeeze will become wider felt, hitting new cohorts: “The poorest have been hit the hardest so far, but the rise in the bank interest rates will spread the pain into new income groups,” she said.
Already in July, this step change is starting to play out. Data from RetailNext’s footfall index, which captures billions of store visits globally each year, showed that even though shopper traffic – a key yardstick of High Street health – remained +2 per cent up year-on-year in Q2, it dipped by -5.2 percentage points quarter-on-quarter. UK consumer confidence also took a dramatic six-point dip in the GfK’s July Consumer Confidence Index, prompting warnings that shopper resilience is starting to collapse as the economic reality of stubbornly high inflation and mounting interest rates sets in.
In its report, the RTT predicts that the disruption caused by an inflationary-driven downturn could take the industry up to three years to recover based on historical parallels. And it suggests this interest rate-driven ‘third wave’ of disruption will have an arguably more significant, deeper felt and longer-tail impact on customer spending than covid and the cost-of-living crisis combined.
UK head of retail at KPMG and co-chair of the RTT, Paul Martin, commented: “Looking ahead to the next 12 months we expect trading conditions for the retail sector to remain challenging. Inflationary driven downturns are usually much lengthier than other financial shocks to unwind, normally three to five years. Inflation and its impact on our economy isn’t going to be a short blip, it is going to be a lot more long-winded.”
Gary Whittemore, co-chair of the RTT and head of sales EMEA & APAC at RetailNext, added: “This isn’t the first storm retailers have had to weather, but the long-term nature of this economic shock means the response needs to be both fast and radical. Retailers need to be sharp in focus, understand their customers better, and get cost and business models right, otherwise failure beckons. To manage these disruptions, retailers will need to know their customers, differentiate themselves from rivals, communicate a strong and meaningful purpose, and execute very well, notably with greater assistance from technology.”
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