FSP Retail Blog

Choose your attitude

The Retail News Index (RNI) has risen strongly since its seasonal nadir in January. The RNI, an index based on the balance between positive and negative retail news stories, is now back to levels not seen since 2006, outside the pre-Christmas period. There is a clear seasonal pattern to the RNI which typically rises during the Autumn before falling back. The index for January 2009 was the lowest since January 2005, so the rise this year is particularly marked.

FSP is currently investigating the significance of RNI movements. Preliminary analysis suggests that retailer results 7 to 9 months after a strong rise of the RNI also improve. If validated, then we can look forward to better retailer results when turnover and profit figures for 2009 are reported early next year.

This perhaps counter-intuitive suggestion is supported by a couple of recent headlines. On 19th June, the FT led its Companies and Markets section with “UK retail rents forecast to drop by a fifth”, between now and the end of next year. Meanwhile, ONS figures for May showed that the overall seasonally-adjusted value of retail sales for the most recent 3 months were up 1.3% against the comparable period in 2008.

Sales up and rent down sounds like good news for UK retailers. This summary of course does no justice to the complexity of the underlying data but is a reminder that good business is still being done. As always there is a choice to be made which needs to be influenced but not determined by the available evidence.

Note:
Retail News Index (RNI) has been produced by FSP to track the mood of the UK retail market. With SnapShop providing retail and economic statistics to give an overview of retail in the UK, FSP expects RNI to compliment the information and add a dimension not currently available. FSP typically reviews over 350 unique items of retailer news in the trade and national press every month. Each item is scored according to the sentiment of the news (i.e. expanding / strong sales growth: positive, store closures / redundancies: negative). RNI is the sum of these scores, indexed against 2005 and averaged over a three month period to eliminate volatility and produce a reliable trend indicator.
RNI will be constantly updated and the general market trend will be published by FSP on a regular basis. More detailed merchandise category splits can be obtained upon request via the SnapShop team.

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Liberty, Equality, Sorority

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Getting our numbers right

Early on in my FSP career I was instructed in the value of “Value”.  The Value of Retail Sales, in the rawest possible form, completely un-corrupted by seasonal fiddles and unaffected by the transmogrification to Volume as defined in ONS speak here:

“The value of retail sales reported via the monthly survey is converted to a chained volume basis using weighted contributions of price indices for various categories of retail goods.”

Right.

So, ONS have their reasons, and the journalists are now on a feeding frenzy as ONS admit they could have done it differently.  What is unequivocal is that despite the re-basing to 2005 (they could do that at any time), what FSP has quoted through SnapShop is still true.  Seems our decision to stick to Value is entirely merited and I asked Geoff, our MD, to explain why

“For exactly the reasons that have got ONS into trouble.  We take the figures as raw as possible.  As soon as you start adjusting figures, there is potential not only for error but for dispute.  Even adjusting for seasonality, e.g. date of Easter, is difficult to get right.  Value is what the retailer sees – most do not formally adjust their figures at all.  And why do we want volume – you can’t pay your bills with volume – value is what matters.
 
“The whole volume issue is fraught because of the issue of comparability.  Is the white shirt included this month really of the same quality as the white shirt included last month?  The price checking is conducted by market research interviewers and once you introduce people, hard facts get edged out by subjectivity and black and white becomes grey”.

For more on what Geoff thinks, you can read Geoff’s view in SnapShop Monthly and see the ONS Retail Sales Unadjusted Value figures along with other key economic indicators our UK Overview

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Lies, Damn Lies and Statistics

The FT headline last week, “ONS admits to getting its sums wrong with overstated retail sales” initially alarmed me. There has been some grumbling that retail sales as reported by ONS have been too optimistic. Were the critics right after all?

Fortunately, the clue to the solution lay in the first sentence, “Britain's supplier of official statistics conceded that since the financial crisis began in August 2007, it has overstated the volume of retail sales growth by 56 per cent.” First the issue is about retail sales volume, a technical concept understood by very few, and not relevant to retailers or those who receive payments from them. For both parties, it is the amount through the till that really matters. Secondly, an over-statement of 56% is not credible. While the statement is statistically correct, it relates to the difference between growth of 2.3% and 3.6%. The cause of the discrepancy is that ONS has decided to move to using a chain linked index, more suited to a time of market volatility, from the fixed base index used previously. There has been no error in the calculations, just a change in the calculations.

The story illustrates three points. First, as the late Richard Ratner, the much respected City retail analyst, insisted, stick to sales values with no arbitrary adjustments for seasonality. SnapShop follows the same line and quotes unadjusted retail sales figures. It is the equivalent to the weekly sales figures by which most retailers run their business.

Secondly, it illustrates that very little can be taken at face value. Journalists need a good story and never allow the truth to prevent them from telling one. The reader needs to be well-informed to pick out the bones.

Thirdly, FSP makes extensive use of statistics and anything which adds to the “Lies, Damn Lies and Statistics” prejudice is not helpful. FSP will continue to strive to be an objective and informed guide to sorting the wood from the trees. I don’t see much decline in the need for such guides in the foreseeable future.

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The new retailing landscape

The performance of the UK economy has been sound throughout the first half of 2008. Why therefore has the reported performance of so many retailers been poor? If they have done badly when the economy was good, what will happen when, as expected, the economy turns down?

Perhaps consumers have been spooked by the media and have been anticipating a recession. Favoured by retailer CEOs, this might be labelled the “psychological” explanation. I can’t say FSP has seen much supporting evidence in its own work. Nor is it apparent in the Office of National Statistics (ONS) retail sales figures. However, it has the benefit that it relieves retailers and the retail property industry of any responsibility to examine their own business models.

An alternative "social" explanation may be that after a very long boom period, consumer fatigue has set in. The fashions have not been compelling. The speed of technological development has outstripped consumer appetite. Living space has grown ever smaller, so there is less room to store new purchases. The population is ageing and older people set greater store on experience than on "stuff". This argument is supported on the positive side by the buoyant sales in London. Its younger shoppers have not become jaded and have continued to shop.

A third group of possible causes of poor retailer performance might be called the “industrial” explanation. Sales over the web have continued to rocket. Sales through grocery outlets have been growing. Sales in London, powered by the fall of Sterling against both the Euro and the Dollar, have been strong. There is evidence from the NSLSP (National Survey of Local Shopping Patterns) that the number of shoppers using the Top 100 shopping locations has been dropping over the last 5 years. This seems to have been driven by the increasing number of retail parks trading with Open A1 retailers. These parks are convenient to use – ample free parking, close to home and retailers which offer a full range.

FSP believes this "industrial" explanation is valid. It may not explain everything, but the changes noted are real enough. Therefore, the prospect for town centre retailing is not for a difficult period, but for a sea-change. There will be a permanent diminution of its market share unless the offering in town centres is made more attractive to shoppers. Like all challenges, this will bring opportunities and problems.

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The fog of war

Analogies between business and warfare can be over-done. Perhaps in the realm of intelligence there is a parallel. Both business leaders and generals need to adapt strategy in the light of “events”. But how do they know which events, what changes are significant? The military, it has been said, is always preparing to fight the last war, not the present. Too often, intelligence systems fail to monitor what is strategically most significant.

It is difficult to be unaware of dramas, such as the current Credit Crunch. Such events throw up immediate challenges. However, they should not be allowed to mask more significant long-term strategic threats. As Steven Covey points out, in Seven Habits of Highly Effective People, the urgent should not be allowed to drive out the important.

There is a strategic threat to the current pattern of UK retailing. It has gone largely unrecognised, and when noticed, it has been seriously misunderstood.

Evidence over the last five years from the NSLSP (National Survey of Local Shopping Patterns) shows a gradual erosion of market share for the major UK retail locations. The annual losses have been modest, perhaps 1.5% a year, but they have been persistent, widespread and largely un-noticed.

The press has recently run a story that the increase in petrol prices has reduced the number of shopper visits to out-of-town shopping locations. This is seriously misleading on several fronts:
The press has recently run a story that the increase in petrol prices has reduced the number of shopper visits to out-of-town shopping locations.  This is seriously misleading on several fronts:

• The data was based on visits to regional shopping centres. Out-of-town retailing more generally refers to stores on retail parks. It is the growth of sales though retail parks, and through grocery stores that are also largely out-of-town, that mainly account for the decline of town centre sales
• The implicit assumption that shoppers drive further to regional out-of-town shopping centres than to those in-town is erroneous
• This is not, as the NSLSP data show, a recent phenomenon

Thus, while a significant change has been identified, it has been misunderstood and incorrect inferences have been drawn. In the possibly apocryphal story of the boiling frogs, it is the very gradual, small changes in temperature that ultimately prove fatal. You have been warned!

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