Rising costs and increasing demand set retailers a tricky balancing act

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Retailers are facing a tough fourth quarter of 2021 as rising costs outweigh increasing demand, according to a leading group of retail analysts.

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The KPMG/Ipsos Retail Think Tank (RTT), says that costs have already prompted some retail profit warnings despite expectations of a surge in spending at Christmas.

In a statement this week, the RTT said that cost increases were affecting every element of retailing from logistics to energy.

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.”

But the RTT added that so far profit margins had held up and that the level of demand meant that many retailers felt no need to offer big discounts.

Andrew Firth, RTT panel member from Ipsos Channel Performance, said : “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.”