Christmas: a December Disaster

Written By:

Stephen Springham, Knight Frank

19 Jan 2024

12 minutes to read

Categories: Property Sector Retail World Regions UK London

To receive this regular update straight to your inbox every Friday, subscribe here

Key Messages

• Desperately disappointing Dec retail sales figures
• Retail sales values (exc fuel) +2.3 YoY
• Lowest monthly rate of growth in whole of 2023
• Retail sales volumes (exc fuel) -2.1% YoY
• MoM values down -3.6%, volumes down -3.3%
• Monthly performance skewed by an artificially strong Nov
• Negative influence of Black Friday very much in evidence
• Disrupted trading patterns, no incremental growth, margin dilution
• Grocery values +4.2%, volumes -2.7% YoY
• Yet major grocery retailers all report volume growth
• Footwear, cosmetics and off-licences the strongest-performing categories
• Q4 retail sales growth (+3.9%) points to decelerating consumer growth
• Contradictory to more positive macro-economic indicators
• FY 2023 retail sales value growth (+5.1%) second highest since 2001
• But FY 2023 retail sales volumes down -2.8%
• Lower underlying growth in values likely in 2024 (ca. 3%- 3.5%)
• A return to volume growth in non-food unlikely til H2 2024
• A telling reminder of the volatility and unpredictability of consumer markets

Absolutely dire. A few caveats aside, there’s no dressing up the retail sales figures for December from the ONS. Many of the metrics may stretch credibility, but the underlying theme here is Black Friday wreaking havoc with festive trading. Those that still trumpet Black Friday as a force for good would do well to look long and hard at these numbers.

December in isolation

As flagged in a previous Retail Note, November was exceptionally strong. However, given the November figures were released just before Christmas itself (22 December), they got lost in the rush and barely registered on anyone’s radar. But they showed YoY retail sales values up +5.7%, MoM values up +1.2% and, more significantly, volumes in positive growth territory (+0.3% YoY, +1.3 MoM). December was always going to struggle to live up to this seemingly positive performance.

And so it has proved. And some. Even on a more meaningful annualised basis (i.e. YoY rather than MoM) retail sales laboured badly in December. Retail sales values (exc fuel) grew by just +2.3% in December, the lowest rate of monthly growth in 2023 as a whole and the worst monthly performance since the previous December (+2.0%). So, weak growth against a weak comp. Volume growth? Not a hope. YoY volumes (exc fuel) were down -2.1%, a very sharp reverse on the +0.5% reported in November – this figure now being shown up as highly artificial.

I have previously opined (OK, moaned) about the ONS and the dubious practice of seasonally adjusting figures. To quote the ONS: “Seasonally adjusted estimates are derived by estimating and removing calendar effects (for example, Easter moving between April and May) and seasonal effects (such as increased spending in December because of Christmas) from the non-seasonally adjusted (NSA) estimates.” Basically, the ONS exercising the right to expunge Christmas from the December figures, if it so wished. And, indeed, as it did in December 2022.

In the event, there was minimal seasonal adjustment to these numbers. The “purest” figures in the whole 106-page release show that non-seasonally adjusted retail sales values (exc fuel, on Page 61) were up just +2.2% (SA +2.3%) and volumes (exc fuel, on Page 40) were down -2.8% (-2.1%). The ONS clearly deciding that the “pure” figures were already bad enough and did not warrant any further doctoring.

Of course, the main media and economist focus has been on the far less meaningful monthly figures, which were equally dire. MoM retail sales values (exc fuel) were down -3.6% and volumes were down -3.3%. After such seemingly strong (but unreported) figures in November, a sharp downturn in December was always on the cards. Apparently, this marked the worst monthly performance since COVID-ravaged January 2021, a nice hook for our friends in the media.

Any crumbs of comfort?

Not really, no. A read across the performance of the various retail sub-sectors shows considerable polarities – and raises more than a few question marks.

The figures for food simply aren’t credible. Grocery sales values grew by just +4.2% YoY in December, while other industry sources (and the figures from the major foodstore operators themselves) suggest growth around double that. Equally, grocery volumes supposedly declined by -2.7% YoY and -3.1% MoM. Yet, the major grocery retailers that make up a more-than-significant share of the market (Tesco, Sainsbury’s, M&S, Ocado) reported a significant return to volume growth. And the implication of the MoM figure that we bought more food in November than we did in December is frankly ridiculous.

Other inexplicable quirks in the grocery numbers. The retail sub-sector with the highest levels of inflation (10.6%) also saw the highest volume and value growth, namely Alcohol Specialists (i.e. traditional off-licences). Offy sales values surged (remember YoY, not MoM) by +48.4% and volumes were up +37.8%. So, rejoicing in the fact that alcohol prices were higher, consumers rushed out to buy more and not from supermarkets where it is cheaper, but from higher-priced specialists? Really?

Non-food performance was generally terrible. All non-food sales values declined YoY by -0.1% and volumes were down -2.6%. But, of course, this shrouds a myriad of weird and wonderful figures among the various sub-sectors. PCs and Telecomms achieved the 2nd highest level of value growth (+32.3%) after off-licences, and volume growth was higher still (+43.0%). QED deflation of -10.7%. QED excessive Black Friday discounting. QED crushed margins.

Electricals were also deflationary (-4.7%), but didn’t even have the luxury of volume growth (-7.6%, values -12.3%). Ouch. QED sales brought forward to November on the back of Black Friday. Other worryingly deflationary categories included furniture (-0.7%), household goods (-1.1%) and music & video (-4.1%).

OK, there were a few crumbs of comfort, with some categories achieving the retail ‘holy trinity’ of both value and volume growth, with low/manageable inflation. These included medical goods (values +10.1%, volumes +7.1%, inflation +3.0), cosmetics (+8.5%, +6.1%, +2.4%), books & magazines (+7.5%, +1.8%, +5.7%), footwear (+6.1%, +2.0%, +4.1%) and garden centres (+5.0%, +4.7%, +0.3%).

Clothing demand was weak, with values down -0.7% and volumes down -6.6%. Whilst this is at least consistent with the messaging from the fashion operators themselves (apart from those that did not partake in Black Friday e.g. Next, M&S) it is a very worrying sign going into 2024. As a core high street category, clothing actually bucked the trend for much of 2023, as did cosmetics and footwear. While demand is still holding up well for those two categories, clothing is no longer defying gravity.

For a more detailed and visual analysis, please refer to our accompanying dashboard for December.

Online – more mixed messages

Nor does the hackneyed, lazy argument that online triumphed while the high street toiled ring true anymore. As many nuances as answers in the online numbers.

All online sales grew by a seemingly healthy +7.7% in December, which saw overall online penetration rise to 27.1%. Non-store retailers (i.e. online pure-plays) were the driving force behind this (+14.0), with many of the multi-channel operators seeing YoY declines e.g department stores -2.4%, household goods stores -9.9%. Overall non-food online sales grew by +3.6% YoY.

The MoM picture was very different QED the negative impact of Black Friday. Every online sub-sector declined sharply versus November. Non-store retailers (i.e. online pure-plays) saw sales volumes decline -2.1% in December, even after a -1.1% decline in November. All online retail sales values declined -1.7% MoM in December, with non-food down -1.7%.

Online grocery figures were very weak, declining -4.4% MoM and -0.8% YoY. Again, this stretches credibility as it implies more online grocery orders were made in November than in the immediate run-up to Christmas, which surely defies logic and is at odds with what actually happened on the ground. Online grocery penetration remains static at 8.8% and this continues to appear the “new norm” for the market.

Quarterly and full-year performance

Of course, with the December release also come the Q4 and FY outturn figures, which obviously give a longer-term picture of demand across the retail market.

To pick up the quarterly read first. Q4 retail sales values (exc fuel) were up +3.9% YoY, but down QoQ by -0.5%. The YoY figure is comfortably the worst quarterly figure in 2023 as a whole, the previous three averaging growth of +5.5%. The quarterly trend is worrying, pointing to a general contraction in consumer demand, which is hugely ironic given that the macro-economic narrative is increasingly positive.

There would be some comfort in the declining value numbers if they were counterbalanced by a positive direction of travel in volumes (and the implication that inflation is falling). Sadly, this is not the case, in the December numbers at least. Retail sales volumes declined -1.4% YoY in Q4 and -0.8% QoQ. The surprise uptick in volumes in November was not matched in either of the months prior or post November QED unhelpful peaks and troughs of demand around Black Friday and volumes in November ‘bought’ only by discounting.

The FY figures paint a slightly better and more balanced view. Total retail sales values (exc fuel) grew by +5.1% in 2023. This was comfortably above both 10-year (+3.5%) and 30-year (+3.7%) averages and was the second-highest rate of annual growth since 2001 (the highest being the post-COVID bounce-back year of 2021 +6.1%). 2023’s figure obviously requires qualification, but it is nevertheless worth reflecting that the widely-anticipated consumer meltdown simply did not materialise – for all the macro-economic, political and social pressures, the UK consumer still spent +5.1% more in 2023 than they did in 2022.

Obviously, the value figures were inflationary. The ONS figures suggest that shop price inflation (as opposed to RPI and CPI) was 7.9% on an annualised basis, but had fallen to 4.4% by December. Accordingly, retail sales volumes declined by -2.8% for 2023 as a whole. This was actually better than the -3.9% volume decline reported in 2022, but there’s no escaping that the last two years have seen the steepest declines in retail sales volumes since records began in the late 1980s. By way of context, retail sales volumes grew at an annual average rate of +2.7% in the 10 years prior to 2022 and by ca. 2.0% on a longer-term 30-year average.

As mentioned, a number of categories did buck the trend in 2023 and achieve both value and volume growth, despite sticky inflation. Star performing categories were footwear (values +19.6%, volumes +14.3%), cosmetics (+16.7%, +8.1%) and music & video (+10.1%, +10.6%). Clothing sales values for the year grew +5.7% (volumes -1.6%), but slumped considerably in Q4 (values +0.9%, volumes -5.0%).

Online sales underperformed the wider retail market for the second consecutive year. Online sales values grew +2.1% (vs all retail sales +5.1%) and volumes declined by -3.3% (vs all retail sales -2.8%). All the more mathematically curious that, according to the ONS, online penetration rates actually increased from 25.4% to 27.1% over the year, despite this tangible underperformance.

For a more detailed and visual analysis, please refer to our accompanying dashboard for FY 2023.

A step backwards

There are two key takeaways from the latest ONS release: firstly, a reminder and reinforcement of the damage that Black Friday can have on the retail sector over the peak trading period. And secondly, a reality check on some of the consumer optimism coming into 2024 and a fresh challenge to economic logic.

Black Friday – what can I say that I haven’t said on many occasions before? My QED insertions in this Note highlight working examples of the harm it can bring – disrupted sales patterns, unhelpful peaks and troughs in demand, desperate but deeply unimaginative marketing, excessive discounting and promotions, consumer fatigue, margin erosion and brand devaluation. Depressingly, all these negative factors seemingly came to pass, to a greater or lesser degree, in 2023.

The macro-economic outlook for 2024 is undoubtedly better than last year, inflation is receding, interest rate cuts will happen at some point and consumer confidence is definitely improving. Surely this will filter through to retail sales? Not necessarily. The blind focus on inflation and retail sales volumes (supposedly ‘real’ growth) detracts from the bigger picture for retailers. A decline in inflation is deeply unhelpful for the retail sector if it is brought about by desperate discounting on the part of retailers. While economists may rejoice, retailers themselves may actually be burning.

Another criminally overlooked fact is that the retail sector will have to contend with lower underlying retail sales growth in 2024. We would project that retail sales values will grow by ca. 3.0% - 3.5% this year, lower than the +5.1% recorded last year. Whatever happens with retail sales volumes, this means that retailers will see a lower rate of cash growth coming through their tils this year. Economists may be dismissive of value growth, but cash is a much more favoured currency to retailers than the amount of goods they sell.

2024 will not be plain sailing for consumer markets, as the figures for December underline. As already mentioned, retail sales value growth will decelerate as inflation gradually unwinds. And retail sales volumes are likely to return to positive territory. Whatever the ONS says, they are already in grocery and this will be sustained. But non-food is unlikely to return to volume growth until the second half of the year. Until then, we are likely to see an impasse of very low-value growth, low (and slowly declining) inflation and low volume declines.

In short, there is not a definitive direction of travel for the retail sector in 2024. December doesn’t necessarily mark the beginning of a long-term decline, nor is a consumer ‘bounce back’ likely, in that there wasn’t really a ‘bounce away’ in the first place.

Erratic monthly patterns, some good, some bad. But when wasn’t it thus?

The December 2023 dashboard can be accessed here.

The FY 2023 dashboard can be accessed here.