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Medium term history

The UK Retail sector is in the midst of major transformation and reinvention, grappling with changing consumer behaviour and margin pressure as a result of the Coronavirus outbreak. The main features of the sector in recent years include:

Reduced demand - recent political and economic uncertainty has affected consumer confidence and spend, culminating in the worst year on record for UK retail in 2019. Statistics from the British Retail Consortium show retail sales during the crucial 12 week period prior to Christmas fell by 0.4% with toys, gaming, clothing and grocery hit the hardest.

Increased competition - growth of online market places and e-tailers has impacted high street performance especially in certain sub-sectors characterised by players with undifferentiated offerings.

Evolving consumer trends - increased access to information and the growing influence of social media has contributed to the rebalancing of spend from owning physical “things” to experiences which is cannibalising spend in the sector.

Increased costs - the investment required to build a competitive online offering as well as the ‘hidden costs’ associated with operating this channel is putting a strain on cash balances as well as cost bases. In addition to the increase of the national living wage, business rent, rate hikes and FX volatility created by Brexit have impacted Retailer operating margins.

Space optimisation - with the current over capacity and need to attract and cater for more Millennials and Gen Y, the “shopper experience” is becoming a strategic focus. Space optimisation and repurposing is central to this which requires significant capital investment.

Current outlook and challenges

2020 has seen the existing challenges facing the sector exacerbated by the outbreak of COVID-19 with the sector facing unprecedented uncertainty, complexity and change.

The last few months have seen record low sales statistics for the retail sector with Non-Food retail falling 21.8% during the 3 months to May 2020. There have been 3 key phases to retailer’s responses: an initial resilience phase where retailers took advantage of the Government’s support schemes including government loans and furloughing staff as well as taking other critical measures to preserve working capital and ensure financial resilience. Next was the recovery phase where retailers have focused on plans to reopen their business. In phase 3, retailers consider their medium to longer term strategies and how they can use the current situation to not only reflect, but also as a catalyst for much needed change.

As restrictions ease and retailers begin to re-open, there is still significant uncertainty about the level of demand in stores. We are experiencing historically high levels of online sales, whilst this may ease as stores open, consumers have formed new habits which will see the shift to online continue to be more prominent in the future.

There are still fundamental unknowns related to the future form of the UK/ EU relationship including obstacles around tariffs and trade deals for retailers to negotiate. Supply Chain flexibility is expected to be a major focus in a post-COVID-19 and post-Brexit environment. Consumer environmental and social concerns will to continue to become more prevalent and retailers will need to be seen to be making positive changes to stay relevant to their target market – this will not be cheap.


Stress and distress temperature rating

Retail sector temperature assessment as at 1 June 2020, covering medium term history and outlook:

Graphic showing the Retail sector stress and distress temperature rating

Key trends across the sector right now

  • Continued shift to online from traditional bricks-and-mortar
  • International expansion is becoming an increasingly high priority for UK retailers
  • Discounters (food and non-food) continue to take the market share
  • Retailers are witnessing a margin squeeze
  • Importance of convenience: Consumers expect a seamless ‘anytime, anyhow, anywhere’ shopping experience
  • Innovation is key to winning customers and maintaining sales
  • Choice, Privacy and Purpose will increasingly inform purchasing decisions
  • Reputational risk continues to be a top concern for CEOs

Case studies

Leading High Street Fashion Retailer

Supported an international clothing retailer with over 600 stores across six countries and an ecommerce platform selling to over 100 countries to identify initiatives to rapidly reduce its cost base.

Outcome

Using our Retail Turnaround approach, we created financial and operational baselines to identify areas impacted by falling sales and increased costs, benchmarked client data points against peers and undertook a full review of the clients’ distribution centres including both ecommerce and store fulfilment methods.

30 initiatives to deliver c.£50m EBITDA benefit and c.£20m in cash working capital benefits from optimising purchase-to-pay cycle.

Global Retailer

The client, a global retailer, wanted to understand the true profitability of its supplier base and product portfolio in its Central European and Asian operations to identify focus areas and initiatives to improve profitability.

Outcome

KPMG built a repeatable model to assimilate significant quantities of data. This allowed our client to understand economic profit and supplier level together with the breakdown of associated income/cost.

The team identified hypotheses equivalent to c. 15% of net profit including retail space management, distribution processes, inventory management, etc.

KPMG provided the client with ongoing remote access to the tool and refreshed the analysis on a half yearly basis enabling tracking of ongoing performance improvement.

Innovative fast fashion E-tailer

KPMG was engaged to run an early options process and seek additional investment, driven by the client’s short term cash requirement following a challenging period in sales.

Outcome

KPMG aided the Board to market the business, helping them articulate the unique selling points and pitch collateral. This generated considerable interest from a variety of trade investors, financial investors and high net worth individuals.

The process was successful which resulted in the recapitalisation of the business.  The Company’s new private equity partner provided an injection of capital which allowed the company to continue to trade whilst supporting its next growth phase.

Leading high street UK-based Music and Film retailer, HMV

KPMG were appointed administrators of HMV Retail in December 2018. HMV was the largest high street retailer of physical music in the UK with an iconic brand that was founded in 1921. Upon appointment, the administrators continued trading 129 stores while seeking a sale of the business and assets.

Outcome

A sale process was undertaken resulting in some interest, but all interested parties had significant barriers to overcome. The administration team then met with a specialist prospective buyer and after a hugely complex set of negotiations, a successful outcome was achieved - a sale of the vast majority of the estate preserving employment for almost 1,500 staff.


Insights



KPMG UK's national sector teams

Contacts on this page are specific to KPMG Restructuring sector capability. Our Restructuring sector contacts also work as part of KPMG’s national sector teams that comprise members from across our wide range of practice disciplines, e.g. Deals, Consulting, Tax and Audit. To find out more about KPMG’s wider views in this sector, click here.

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