Price pressure

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By: Jeff James

Listed Under: Top Story

Published: Friday, August 05, 2011

Is the VAT increase to 20 per cent hiding the true value of the sports retail sector? The NPD Group investigates

The general conception is that we are slowly coming out of the turmoil that has brought the retail sector close to its knees over the past two years. In some parts of the country new stores are opening for business, thus going some way to revitalising their high street locations.

Many retailers are reporting healthy sales and expanding into new areas, but is the market really in good health? NPD’s Consumer Panel states that the sports footwear and apparel market increased by two per cent in the 12 months to March 2011 when compared to the previous year. Both footwear and apparel sales have grown at a similar pace, so on the face of it the market is looking in decent shape.

PRICING
However, when you start to look at the subject of pricing, another point comes to the surface. The rise in VAT to 20 per cent, which came into force last January, has meant average prices have risen. Most retailers didn’t drop their prices when VAT was temporarily reduced from 17.5 per cent to 15 per cent on December 1, 2008, but by the start of 2011 prices on the high street began to rise - reflecting the tax increase - while at the same time some enterprising retailers offered ‘VAT busting’ deals to attract potential customers.

Does this mean that the market is only growing because of price rises? When studying the level of units sold in the GB sports market, NPD found the sector has remained static. Around 50 million units of footwear and apparel were sold in Q1 2011, a marginal increase on Q1 2010.

Another interesting aspect is that as the cost of full priced items rose, so did the price of reduced goods. According to NPD, items selling at a reduced price have increased by seven per cent on 2010, while the average price of discounted offers has rise by two per cent. Full priced items rose in price by six per cent.

COMPETITIVE
This though is an overall market picture and it would be folly to suggest that every retailer has struggled. Sports Direct and JD Sports have performed consistently well, and it is due to their size that they have been able to keep prices competitive. So it’s no coincidence that these retailers have seen sales volumes rise.

Other retailers have not been able to achieve this, and it is away from the two mega sports stores that the market has struggled. Ten retailers in the top 20 saw volumes on the decline as they entered the first quarter of 2011. Nine of these retailers implemented price increases, with only Matalan able to keep prices in check. Even Tesco and Primark had to raise their prices, with the latter retailer seeing declining sales as a result.

BOTTOM LINE
Outside the leading two sports chains, the ‘tops and bottoms’ market is not so important, but it plays a large enough role to impact on retailers’ bottom lines. Around 50 per cent of sales are attributed to these two types of garments in the rest of the market, and lost value here can significantly hit turnover.

Tesco’s overall apparel loss was 14 per cent in volume, with over 50 per cent of this decline attributed to lost tops and bottoms sales. Shop Direct experienced a 29 per cent fall in apparel volume and a similar percentage decrease to Tesco when it came to tops and bottoms.

A retail success story of the past year has been Marks & Spencer - one of the few retailers to reduce the price of its tops. This strategy appears to have paid dividends, as although overall its apparel business has fallen, M&S’ tops sector has begun to see improvement.

Did retailers jump too soon when it came to increasing their prices? Whether they were forced into it because of rising costs or it was a strategic move, it appears that only a few got the timing right. Consumers are not yet returning to the high street in healthy numbers, so until footfall increases retailers will have to make some clever strategic decisions to keep the numbers in the black.

The NPD Group monitors the sales of sports footwear and apparel in many countries around the world. For more information contact The NPD Group sports team on 01932 355580.