Shoppers “spooked” by the ongoing news of the credit crunch will hurt retailers in the first quarter of the year – but the market could improve thanks to lower costs, according to a survey out today (23 January).

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The latest Retail Health Index by KPMG and Synovate showed that heavy discounting put margins under increasing pressure in the fourth quarter of 2008, negatively impacting retail health more than expected and more than in the previous three months.


However, the report said, food retailers are unlikely to be hit because of falling input prices.


“Demand will continue to suffer as the recession bites,” the retail panel said. “This fear is founded on economic factors such as falling house prices, credit tightening by banks and signs that jobs will continue to be shed; thus seriously ‘spooking’ consumers.”


The panel said that for food retailers, the impact of a weak pound will not impact margins in quarter one because it will be offset by falling input prices. They are therefore likely to see their margins unchanged, but will continue to pass the reductions in price, where they exist, onto the consumer.

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Pali International analyst Nick Bubb said: “In quarter four, the impact of demand on retail health was in very negative territory, as were margins, which were slightly worse than predicted.


“Overall we see that retailers are fighting very hard to ride out the increasing recessionary pressures, although food retailers are better placed than non-food retailers.”


Although decisive action has already been taken by retailers to drive down costs, the think tank said, the UK government’s move to cut VAT by 2.5% has had “little or no impact on margins”.