Retailers face tough Christmas as rising costs offset strong consumer demand warns Retail Think Tank

Retail health during crucial Christmas period is expected to be flat.

Retail health during crucial Christmas period is expected to be flat.

  •  Retail health during crucial Christmas period is expected to be flat
  • Retailers will need to work harder to protect profitability in final quarter of the year
  • Retail health during Q3 2021 grew much slower than expected.

The health of the retail sector has hit a tipping point as significant cost increases bite into strong consumer demand, according to the latest retail health assessment by KPMG/Ipsos Retail Think Tank (RTT) analysts.

Substantial rising costs across every element of retail from wages to logistics and energy have already led some retailers to issue profit warnings and despite expectations of bonanza consumer spending at Christmas, the Retail Health Index (RHI) predicts flat growth for Q4 21.

As rising costs are likely to outweigh demand, retailers will have to work harder in Q4 21 to maintain profitability according to the RHI.  Lower volumes of stock due to availability issues are also expected to have an impact on the bottom line for retailers over the next three months, with very little discounting expected in the run up to Christmas, both for food and non-food retailers.   

Retail health grew 2 points in Q3 21 as predicted by the RTT, with strong sales in July and August.  However, panic fuel buying in September caused shoppers to avoid heading to the shops causing a steep decline in sales and retail health towards the end of the period.

Whilst the RTT had been expecting a gradual decline in retail performance over summer as more hospitality venues and travel opened, rapidly rising wage costs caused by skill shortages, and a drop off in retail sales, accelerated the decline in the sector’s health, which the RTT predicts will continue into Q4 and beyond.

As the health of the sector is expected to remain flat during Q4 21, the RHI remained at 74 points, which is still above pre-pandemic levels.

Commenting on the prospects for retailers for the next quarter, Paul Martin, Head of Retail at KPMG in the UK said:

“Consumer demand over the last six months has seen the retail sector get back to healthy growth levels, however we have now reached a tipping point where the level of demand is not strong enough to offset the huge surge in costs that retailers are experiencing.

“The next quarter is the most important in the retail calendar but a concerning downward trajectory in the sector’s health prospects has already begun.  Consumer confidence is starting to slide as the cost of living rises, but we are expecting consumers to use savings made during lockdown to splash out on a bonanza Christmas this year, given plans had to be shelved last year.  Even so, the health of the sector isn’t likely to improve as retailers struggle to make healthy profits due to rising costs and lower volumes of stock availability.

“With Covid support packages such as rent reductions coming offline, retailers will be disappointed that the Government’s review of business rates has been postponed but will be hoping for positive initiatives to help with the challenging cost agenda.  So far, retailers have been able to protect consumers from rising costs, but that is not sustainable in the longer term.  We are already seeing a few profit warnings in the market, and this is likely to continue after Christmas, with rising insolvency levels also expected as Government support tapers off and costs continue to bite.”

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Strong margins signal few Christmas discounts

Retailers continued to experience strong margins in Q3 21 and this is expected to continue until the end of the year according to the RTT.

Lack of availability of many goods plus strong consumer demand means that retailers do not have to resort to discounting to entice shoppers looking for a Christmas gifts.  In addition, some shoppers planning ahead and stockpiling goods ahead of Christmas means that it is very unlikely that there will be many special offers on the high street over the next few months, whilst at supermarkets,  promotion levels remain close to an all-time low.

As most retailers have now cleared Spring 2020 stock and Open-To-Buy has been significantly reduced in the non-food sector, many retailers have learned lessons from lockdown and are prepared to sell out, rather than be over stocked, to ensure margins stay firm.

Andrew Firth, RTT panel member from Ipsos Channel Performance, observed :

“Despite some inflationary pressures coming through, high demand from consumers is protecting retail margins.  Many of the grocers are happy to absorb some pressure on margins to protect their sales through to Christmas and with consumer demand remaining high they are not seeing the need to drive footfall via huge discounts.

“Limited availability of stock is creating strong pricing dynamics, which means there is no need for retailers to offer big discounts to consumers this Christmas. With media reporting supply issues and encouraging consumers to shop early to avoid disappointment, the psychology of the marketplace will act as a catalyst for consumers buying limited stock at any price.

“What happens after Christmas remains to be seen.” 



Note to Editors:

For media enquiries, please contact: 

Emma Murray, KPMG Corporate Communications

T: 020 7 694 6506


KPMG Press Office: +44 (0)207 694 8773


About the KPMG/Ipsos Retail Think Tank (RTT) and Retail Health Index:

The RTT panellists rely on their depth of personal experience and sector knowledge, and review a comprehensive bank of industry and government datasets and include the following:

Members of the RTT are:

  • Nick Bubb – Independent Retail Analyst
  • Andrew Firth, Ipsos Channel Performance
  • Jonathan De Mello – CWM Retail Consulting LLP
  • Martin Hayward – Hayward Strategy and Futures
  • Maureen Hinton – GlobalData Retail
  • Paul Martin – KPMG
  • Martin Newman –The Customer First Group
  • James Sawley – HSBC
  • Mike Watkins – NielsenIQ
  • Ruth Gregory – Capital Economics

The intellectual property within the RTT is jointly owned by KPMG ( and Ipsos Retail Performance.

First mentions of the Retail Think Tank should be as follows: the KPMG/Ipsos Retail Think Tank. The abbreviations Retail Think Tank and RTT are acceptable thereafter.

The RTT was founded by KPMG and Ipsos Channel Performance in February 2006. It now meets quarterly to provide authoritative ‘thought leadership’ on matters affecting the retail industry. All outputs are consensual and arrived at by simple majority vote and moderated discussion. Quotes are individually credited.  The Retail Think Tank has been created because it is widely accepted that there are so many mixed messages from different data sources that it is difficult to establish with any certainty the true health and status of the sector.  The aim of the RTT is to provide the authoritative, credible and most trusted window on what is really happening in retail and to develop thought leadership on the key areas influencing the future of retailing in the UK. Its executive members have been rigorously selected from non-aligned disciplines to highlight issues, propose solutions, learn from the past, signpost the road ahead and put retail into its rightful context within the British social/economic matrix.

Definitions:  The RTT assesses the state of health of the UK retail sector by considering the factors which influence its three key drivers.

  1. Demand– Demand for retail goods and services.  From a retro-perspective, retail sales, volumes and prices are the primary indicators.  When considering future prospects, economic factors such as interest rates, employment levels and house prices as well as others such as consumer confidence, footfall and preferences are used.
  2. Margin (Gross) – Sales less cost of sales; the buying margin less markdowns and shrinkage.  Cost of sales include product purchase costs, associated costs of indirect taxes and duty and discounts.
  3. Costs– All other costs associated with the retail operations, including freight and logistics, marketing, property and people.

The Retail Health Index – how is it assessed?

Every quarter each member of the RTT makes quantitative assessments of the impact on retail health of demand, margins and costs for the quarter just completed and a forecast of the quarter ahead. These scores are submitted individually, collated and aggregated in time for the RTT’s quarterly meeting. The individual judgments on what to score are ultimately a combination of objective and subjective ones, drawing upon a wide range of hard datasets and softer qualitative material available to each member. The framework follows the example of The Bank of England Agents’ scoring system on economic intelligence provided to the Monetary Policy Committee.

The aggregate scores are combined to form the Retail Health Index (‘RHI’) which is reviewed at that meeting and occasionally revised after debate if members feel it appropriate.  The RHI tracks quarter on quarter changes in the health of the UK retail sector and as such provides a useful and unique measured indicator of retail health.  The index ‘base’ of 100 was set on 1 April 2006.  Each quarter, it assesses whether the state of health has improved or deteriorated since the previous quarter.  An improvement will lead to a higher RHI score than that recorded in the previous quarter, and with a deterioration leading to a lower score. The larger the index movement, the more marked the shift in the state of health.

The RHI has two main benefits. Firstly, it aims to quantify the knowledge of the RTT members in a systematic way. Secondly, it assesses the overall state of health of the UK retail sector for which there is no official data.