In Conversation With: Paul Martin

Terrie Isaac and Justin Duffy talk to Paul Martin, KPMG’s UK Head of Retail, to discuss the key factors impacting retail in the context of the current global crisis. Paul has over 15 years of experience in consulting, market research and the consumer goods sector, and specializes in understanding global macro-economics and consumer trends. Based on his expert knowledge of previous recessions, Paul was able to provide a broad outline of the impact we should expect to see on the retail industry over the coming months and years.

BDA: Thanks for joining us today to provide the KPMG perspective on how you see the market moving. The instinct throughout this crisis has been for businesses to try and protect their cash flow. Are there any other key factors that you feel come into play when protecting business?

PM: I would highlight four key phases that businesses should be taking into consideration in the context of the current global health and economic crisis – react, resilience, recovery and the new reality.

The first phase was the ‘react’ phase, which we saw hitting the UK 10 days to a week before the lockdown measures were announced. It really depended on which side of the essential or nonessential retail equation you sat. If you sat on the nonessential side, cash and liquidity were front of mind during this phase, and connected to that was workforce optimization – do you take any of the government stimulus measures such as furlough, CBILS, CLBILS? There’s been a long list of fancy abbreviations, but for the retail industry, initially they fell between the small business scheme and the investment grade scheme. Thankfully, that has now been upgraded.

On the contrary though, if you sit on the essential side of retail, it was all about guaranteeing the resilience of your supply chain, product availability, and very importantly, the safety of both your customers and your staff.

BDA: Businesses have had to make some difficult decisions when it comes to their workforces, and we’ve seen how long-established relationships with suppliers have been affected. As we head towards a recession, what does ‘value’ really mean to the consumer now? We’re seeing brands discounting heavily and extending sales dramatically; what damage could that be doing to brands?

PM: There are six key drivers of consumption: being value, convenience, experience, choice, purpose, and finally, privacy and safety.

Generally, value rises to the forefront in economically uncertain times, and that will be no different going forward. If you look at the market share gains the discounters were able to deliver from the last financial crisis, it’s quite interesting to see on 1st January 2009 two value supermarkets had 3.7% market share. They now stand at 15% plus, so the value equation is going to be important, but – and this is a big but – the value retailers have historically always placed less focus on online.

We have seen online accelerate considerably in this context, but will there be other things that will be different? Value doesn’t always mean cheap, and that is a really important point. Massive markdown events, which we will see to a degree across the industry, will not be very helpful for the mid-market brands. We already have a challenge around pricing elasticity and margin management in the UK retail industry and if businesses - for understandable reasons - are wanting to clear stock once the lockdown restrictions are eased, going into mass markdown is not the answer. It will not wean the consumer off the drug that is discounts.

What’s been quite interesting is that KPMG’s consumer surveys in recent weeks have showcased that price promotions and special offers have really dropped off the top-five agenda. The focus has been much more around safety of product, availability of product and origin of product. Will price and promotion come back in a couple of weeks? Yes. But I do believe this is a great opportunity to reset the industry’s approach to markdown going forward.

BDA: You’ve touched on online briefly. As a result of the pandemic, it feels like consumers have almost been forced into changing their habits. Do you see the focus on online being a continued trend and will that lead to an acceleration in digital transformation for businesses, particularly at that value end of the market?

PM: Not just at the value end. I do believe that will happen across the entirety of the market. If we look at engagement pre-COVID-19 online sales had a medium penetration of 20% in the UK. Our forecasts pre-crisis highlighted that by 2025 it would likely reach 30 to 35%, and by 2030 it would reach a 50% penetration. I do think that has now been accelerated, and we’ll likely see penetration of 30 to 32% by 2023 and 50% by 2025 potentially.

Looking at China as an example, there was a 28% average penetration pre-crisis. During the pandemic however, online sales skyrocketed to 60% on average, albeit it is important to highlight that there was significant variation across the country. Even though things have calmed down, with various lockdown restrictions lifted, online penetration is still operating at 50% penetration.

Large parts of the consumer base in the UK – and indeed in other markets – will have interacted with the online channel for the first time, and in some cases on a much more regular frequency. These habits do stick and, even when the lockdown restrictions are lifted, people may still be nervous about the prospect of gathering in large crowds. Putting this further in perspective from a statistical point of view, KPMG recently posted April’s retail sales figures, in association with the British Retail Consortium, which showed that the online channel actually grew by 57%.

BDA: We’ve been quite fortunate in the UK, as have other developed countries, to have had access to strong e-commerce retailers. In less developed countries, where online retail isn’t so established and where lockdowns have been stricter, in some cases consumers coming out of isolation are ‘revenge spending’. Do you see there being any longevity to that, or is it something that will spike and plateau before returning to some sort of normality?

PM: I feel very privileged to have access to data from across the world in my position leading KPMG’s retail practice. Indeed, I speak with 20 to 30 different countries every week, and clear variations do become clear.

We have seen volumes in nonessential retail, specifically online, grow over recent weeks. We’ve also seen a very initial surge in spend in countries that have recently emerged from lockdown. However, very quickly this is returning to significantly reduced levels when compared to even the pre-COVID-19 period. There is pent up demand out there, so once people are able to go back to the high-street, some will do just that. Looking at the UK specifically, we have modelled spend across multiple retail categories, and even in 2021, we will likely still see a double digit decline in demand in many categories. What’s more, we don’t expect to get to pre-COVID-19 levels until 2022.

BDA: Do you think retailers should be concerned about consumers rushing back to stores, once restrictions are lifted, given they may not be able to replenish stock as normal due to delays in the supply chain?