Not much to see here - yet
This week’s Retail Note analyses the official retail sales figures from the ONS for July – better than economists predicted, much more nuanced than the media are reporting, but very much a mixed bag nonetheless.
7 minutes to read
Key Messages
• July’s figures surprise on the upside.
• M-o-m retail sales values (exc fuel) up +1.4%
• And m-o-m retail sales volumes (exc fuel) also up (+0.4%).
• QED: consumers spent more and bought more stuff in July than in June.
• Y-o-y retail sales values (exc fuel) up +5.7%.
• But y-o-y volumes (exc fuel) down -3.0%.
• Inflation biting hard, but nuanced between sub-sectors.
• Clothing buoyant, achieving value (+14.1%) and volume (+5.7%) growth.
• Similar positive story in footwear, cosmetics and carpets.
• DIY, electricals and chemists far more challenged.
• Online sales slip -4.3% y-o-y (food -12.3%, non-food -7.5%)
• Online’s post-Covid decline has yet to bottom out.
• Online’s strong m-o-m performance (+5.3%) a reflection of Amazon Prime Day.
• The consumer is challenged, but narrative of meltdown is overblown.
Right conclusions, wrong analysis to get there. Today’s retail sales figures were stronger than expected and have surprised the economist community on the upside (even if they aren’t looking at the most meaningful numbers). But some seem to have already written their pieces before the numbers came out and are now struggling to reconcile their narrative with the figures themselves.
In the immortal words of The Smiths, stop me if you’ve heard this one before…
As I say every month, so much depends on whether you major on the meaningless (month-on-month), the spurious (the pre-pandemic comparisons) or the meaningful-but-hard-to-decipher-because-of-Covid-distortions (year-on-year). Far too much emphasis on the first two, not enough reasoned analysis on the third.
The m-o-m picture
If you can’t beat them, join them. Every m-o-m metric was in positive territory. M-o-m values inc fuel were up +1.3%, exc fuel +1.4%. As you’d expect in an inflationary environment. But so too were volumes (+0.3% inc fuel, +0.4% exc fuel). This completely wrong-footed our economist friends who had penciled in a consensus forecast of a m-o-m decline (yes, decline) in retail sales volumes of -0.2%.
"In the most basic of terms, we spent more and bought more stuff in July than we did in June. No evidence of a massive consumer meltdown that some were / are anticipating. And many more are just assuming."
To cover off some of the other “false positives” from today’s release, retail sales values (inc fuel) were +15.6% ahead of pre-Covid levels (+14.2% exc fuel), with volumes (inc fuel) up +2.3% (exc fuel +3.5%). Excuse me if I don’t go dancing in the street because we spent more in sun-blessed July than we did in a dark and dingy February way back in 2020.
The bigger y-o-y picture
Onto the less nonsensical numbers. Year-on-year values inc fuel were up +7.8% and exc fuel (the most meaningful headline number) they were up +5.7%. But the effects of inflation are very apparent – year-on-year volumes were down -3.4% (inc fuel) or -3.0% (exc fuel).
The caveat that this was against a very strong comp base last year washes less with each passing month as retail sales patterns “normalized” last year – retail sales volumes were up just +0.8% in the corresponding month last year.
The way I look at the mechanics of retail values vs volumes in periods of high inflation is thus: there are basically four Scenarios, from best to worse:
- Values and volumes both positive. Happy days, inflation is having little effect, consumers are spending more and buying more stuff.
- Values are positive, volumes are slightly negative. The market is growing, but people are cutting back a bit on what they buy and are possibly trading down.
- Values are positive, volumes are very negative. The market is growing, but people are cutting back a lot on what they buy and are definitely trading down.
- Values and volumes are negative. Run to the hills and hide.
Much of the media narrative would seem to suggest we are already in Scenario 4, realistically we are only in Scenario 2 and there is a risk we may venture into Scenario 3.
Online – blip or bounceback?
Some depressing resorting to type on the online side, the ONS lazily attributing the better-than-expected overall numbers to the performance of e-commerce, and, in turn, this is story the media have adopted. In fact, the online figures were very much a mixed bag.
Sharp contrasts in m-o-m performance versus y-o-y. M-o-m all online sales were up +5.3%, with clothing up +1.7% and online pure-plays up a massive +10.5%. This arrests the hefty declines we have seen in recent months, but is fairly easily explained. July included an Amazon Prime Day (apparently) and this obviously triggered a spate of promotional activity across the market.
The y-o-y figures paint a very different picture and show that the post-Covid rebalancing has yet to fully bottom out. Y-o-y online sales were down -4.3%, with online grocery down -12.3% and non-food down -7.5%. Only pure-plays were in positive y-o-y territory (+0.6%). Online grocery penetration stood at 8.8%, while overall online penetration increased by 100bps to 26.3%. A quirk of maths surely, or very dubious seasonal adjustment (overall retail sales grow +7.8%, online sales decline -4.3%, online’s share increases rather than decreases???)
Sub-sector performance and inflation
As ever, weird and wonderful figures at sub-sector level, with Covid-affected year-on-year comps (thankfully, increasingly less so) compounded by spiraling inflation (regrettably, more so).
On a value basis (i.e. excluding inflation) grocery sales grew +5.8% (+2.0% July 2021). But stripping out inflation of 10.2%, grocery volumes were down -4.4%. Inflation was lower in non-food (7.5%), meaning that non-food volumes were down by just -0.5% (values +7.0%).
The value vs volume vs inflation equation is playing out very differently across non-food sectors – and the economic rule book is again being well and truly ripped up as demand in supposedly discretionary categories is holding up surprisingly well. Some are firmly in the ‘happy days’ Scenario 1 category as outlined previously. Chief amongst these is clothing, where values were up +14.1% and despite inflation of 8.4%, volumes were still up +5.7%. Similarly in footwear (values +32.6%, inflation 7.6%, volumes +25.0%), cosmetics (values +37.9%, inflation 7.9%, volumes +30.0%) and most counter-intuitive of all, carpets (values +18.8%, inflation 6.6%, volumes +12.2%).
But, of course, other sectors are in the ‘run to hills and hide’ Scenario 4 category. These include DIY (values -10.3%, inflation 11.1%, volumes -21.4%), electricals (values -13.2%, inflation -0.4%, volumes -12.8%) and, perhaps surprisingly, chemists (values -22.4%, inflation 1.0%, volumes -23.4%).
Inflation varies considerably between sub-sectors. Of all the categories covered in the ONS retail sales release, fuel is by far the most inflationary category (34.4%) (all the more reason, in my opnion, it should be excluded from “headline numbers”). Stripping out fuel, shop price inflation was 8.7% in July, below official numbers for both RPI and CPI. Inflation is highest in specialist food stores (12.7%), but note that demand held up regardless (volumes +6.5%), followed by garden centres / pet shops (12.4%) and furniture stores (12.1%).
At the other end of the scale, inflation in chemists is just 1.0%, while electricals (-0.4%) and PCs & telecoms (-3.2%) are actually deflationary. No surprises there, but operating in an environment where your pricing is going down but your costs are rocketing make it a very tough place to be.
Where now?
Sadly, the narrative was already written before these retail sales figures were released. Take the BBC’s current website headline: ‘Consumer confidence hits record low as prices soar.’ Clearly, that wasn’t the key takeaway for anyone who actually read the ONS retail sales data release and actually had the vaguest notion of how to interpret it.
I’m not expecting miracles from the August numbers, as and when they are released. The excessively hot weather this month is unlikely to have had a positive impact on consumer demand. Plus, the ridiculous fixation with m-o-m trends will almost always give rise to a ‘good month – bad month’ perpetual yo-yo. Beyond that, the massive hikes in fuel bills from the Autumn onwards will be another major pinchpoint in the consumer wallet. Let’s not pretend otherwise.
But don’t write the narrative before you’ve seen the evidence. And in the immortal words of Bob Dylan, don’t criticize what you can’t understand.