Sales volumes are down but don't panic just yet
Market Update – 17th September 2021. In this note we look at what we learned from August ONS figures and look at the John Lewis trading and strategic update.
10 minutes to read
This is the 51st of a series of weekly notes analysing the state of the UK retail market in the light of the COVID-19 pandemic.
Please do not hesitate to contact myself or any of my retail colleagues if you require any further information.
Key Messages
- Retail sales values (exc fuel) +1.4% in Aug
- Weakest non-lockdown monthly growth since Feb 2020
- Retail sales volumes (exc fuel) -0.9%
- Worst non-lockdown monthly performance since April 2012
- Implied shop price inflation of +2.3%
- Inflation higher in non-food (+3.1%) than grocery (+1.1%)
- Sluggish food growth of +0.3%
- Supermarkets hit by a rebound in hospitality
- Online sales decline -4.1% y-o-y
- Online sales at dept stores down -1.7% m-o-m, -14.3% y-o-y
- JLP’s interim losses reduce to £29m
- John Lewis’ HY sales up +12%, Waitrose’s +2%
- Partnership downplays supply chain pressures
- 6.5% of retailers report supply chain problems in Aug.
1. What we learned from the ONS retail sales figures for August
For the first time in many months, a genuinely disappointing set of retail sales figures. We have had far worse figures and many record lows during the pandemic, but the figures for August were bad with far fewer mitigating circumstances.
Retail sales values (exc fuel) grew by just +1.4% in August, the weakest monthly growth outside a lockdown period since February 2020. Retail sales values (inc fuel) looked far healthier at +3.6% year-on-year, but a +28.4% y-o-y surge in petrol sales has got little to do with the high street and flatters the performance of the “real” retail sector.
Volume growth was weaker still – y-o-y retail sales volumes (exc fuel) actually declined by -0.9% in August. This is the first time that volumes have been in negative growth territory outside a period of lockdown since March 2013 (-0.8%) and the worst monthly performance on this basis since April 2012 (-1.4%).
In layman’s terms, this boils down to two things: volumes down means consumers bought less stuff. But values up means that we are in an inflationary environment. The latter has been well-documented, although this is the first time we have seen clear evidence of shop price inflation (as opposed to inflation in non-retail goods). More worryingly, these figures would suggest that it is actually stymying consumer demand.
As ever, much devil in the detail. Of course, the ONS and the media continue to major on the meaningless month-on-month performance (values (exc fuel) -0.6%, volumes (exc fuel) -1.2%). The spuriousness of the “pre-pandemic comparisons” was laid barer than ever, these painting a very artificial picture of positivity: values (exc fuel) were supposedly +7.4% higher than pre-pandemic levels in August and volumes were +5.3% higher. Only the most naïve die-hard optimist would take those figures with anything more than a pinch of salt.
A sluggish performance in food was one of the key factors behind the disappointing overall growth figures. Food sales grew by just +0.3% y-o-y in August, the lowest monthly growth since November 2015 (2015 being the ‘nadir year’ for UK grocers, the only year on record to witness negative growth).
Why the sharp slowdown in grocery sales? The annual comp (+4.8% in August 2020) was not desperately demanding, so the only real conclusion to be drawn is that it must be down to a recovery in the hospitality sector – the supermarkets’ loss is the restaurants’ and pubs’ gain, if you like.
This view is consistent with the latest Coffer CGA Business Tracker, which showed that hospitality sales were up +5.4% (+5.3% like-for-like) in August versus the equivalent month in 2019. So, some crumbs of comfort in that there is evidence of a wider consumer recovery, even if this isn’t necessarily wholly in the retail sector.
Grocery volumes were down -0.8%, implying inflation on food items of ca. +1%. Far lower than many economists would have you believe. And frankly, within grocery, inflation is far more preferable than deflation, maybe not from a consumer point of view, but certainly for the underlying health of the industry.
Non-food retail sales actually delivered a relatively strong performance in August. Y-o-y sales growth of +5.2% may be a deceleration on previous months, but it is decent growth nonetheless. As ever, there were huge discrepancies between individual product categories, driven in no small measure by weird and wonderful comps from the corresponding month last year.
Some of the strongest performance metrics were in carpets (+52.5%) and furniture (+13.4%). Other bulky goods fared slightly less well. Electricals grew by a modest +1.0%, while the performance of PCs and mobile phones (+14.9%) was flattered by a very weak comp (-30.4%). The mini boom in DIY also appears to be receding, with sales up just +2.3% in August. Sales at garden centres / pet stores held up far better (+17.2%).
Clothing sales grew +7.5% y-o-y – decelerating but still respectable growth. Footwear had a very disappointing month, with sales down -0.9% despite a very soft comp (-16.7%). Jewellery had another strong month (+23.2%), while the star performer (for the fifth consecutive month post lockdown) was music & video (+72.2%). Yes, really.
What is the inflationary picture across non-foods? As a generic whole, non-food inflation is higher than grocery (+3.1% vs 1.1%). Within non-foods, it is still relatively modest in clothing (+1.8%), but somewhat higher in household goods (+6.1%). DIY (+7.0%) and carpets (+11.0%) are two of the more inflationary markets, although fuel (+18.5%) is by far the most inflationary category covered by the ONS.
The strange dynamics in the online market continued from the previous month. Significant year-on-year declines, but month-on-month growth. And big differences between food vs non-food and pure-play vs multi-channel operators.
Y-o-y all online sales were down -4.1%. Online pure-plays saw sales decline -6.1%, while online sales of non-food multi-channel operators were down by a more modest -3.3%. Online sales from department store operators slumped -14.3%, but for clothing stores were up +2.3%.
M-o-m stats paint a very different picture. All online sales grew by +1.5%, with pure-plays (+2.9%) outstripping multi-channel operators (+1.2%). In contrast, online grocery declined m-o-m (-1.9%) but were flat y-o-y. The only area of consistency was in department stores where online sales were down on both a m-o-m (-1.7%) and y-o-y (-14.3%) basis. Overall online penetration remained at 27.7%.
There is no denying that these figures are disappointing, but at the same time, it is always dangerous to read too much into one month’s numbers. It would be wrong to conclude, as so many are, that the consumer recovery has run out of steam already. September’s figures are highly likely to show a considerable return to good form, especially for those that persist in analysing month-on-month trends (September is traditionally a high spend month). And, dare I say it, the weather generally has been better in September to date than it was in the whole of August.
2. John Lewis’ trading and strategic update
The John Lewis Partnership’s interim trading results and strategic update have generally been warmly received in the media. I remain to be convinced on either count.
In the half-year period to 31 July 2021, the Partnership reported a loss before tax of £29m, which it called a “significant improvement” on the £635m loss before tax reported in the same period last year. It struck exceptional costs of £98m in the first half, including £24m of property costs related to eight John Lewis store closures and £54m worth of restructuring and redundancy costs.
Better, but still not good. Compared to 2020/21, profit before tax saw an underlying improvement of £606m. But compared to 2019/19, it saw a deficit of £221m. Glass half full or half empty? Very hard to answer with the figures still shrouded in a host of exceptional and one-off costs. The fear remains that short-term cost-cutting measures currently being implemented may be undermined by margin-dilutive longer-term strategic directions of travel.
Given the easing of restrictions, sales performance inevitably improved. Across the Partnership as a whole, sales rose +6%. John Lewis reported a surge in sales of +12% and a +1% increase on pre-pandemic levels. Waitrose reported a more modest rise in sales of +2%.
On the department store side, the latest results show a return to some pre-pandemic sales patterns, with a significant improvement in sales of fashion (+22%), as well as a rise in sales of home (+23%) and nursery products (+18%), while technology decreased as a proportion of total sales. This change in margin mix was obviously favourable, although the Partnership tempered this somewhat by stating “compared to 2019/20, margins remained subdued as sales in lower margin categories remained higher than before the pandemic and inflationary pressures in global freight pushed up costs.”
Nothing to do with the flight to online then? Having nailed its colours so resolutely to the online mast in previous strategic updates, it is clearly not going to deviate now. At the department stores, online sales accounted for 75% of all transactions during the period, compared to 40% pre-pandemic. Like-for-like sales at stores were -20% down on the corresponding period last year.
Online sales at Waitrose increased +11% year-on-year and accounted for 17% of sales over the period in question. This was around 300bps lower than the 20% peak in March 2021. To meet growing demand, Waitrose increased capacity in stores and at a new west London distribution centre during the period. Again, the impact on profitability is questionable.
The Partnership also said it was exploring how to make its two brands work better together. All general merchandise products sold in Waitrose will be sourced by John Lewis by Christmas, while 17 Waitrose stores now have designated John Lewis spaces – a number that will rise to 40 by the end of the year.
The BBC went large on the fact that John Lewis is chartering a fleet of extra ships to make sure it has Christmas stock on time. But the Partnership actually played down supply chain issues generally, pointing to the fact that they have already raised wages for heavy goods vehicle (HGV) drivers and the fact that "[they] are acting at every single part in the supply chain to ensure that Christmas is saved this year. Our customers hopefully won't see anything. We're on track. But so far, we don't see any significant problems."
Are supply chain bottlenecks generally a real issue or just scare-mongering? An interesting survey on the issue in the latest ONS Retail Sales release. Over the last two weeks, 6.5% of retail businesses said that they hadn’t been able to get the materials, goods or services they needed, while a further 8.9% said they had been able, but had had to change suppliers or find alternative solutions. But 72.7% reported no problems. Read into that what you will.
Partnership chair Dame Sharon White struck an understandably cautious tone in terms of the outlook for the rest of the year. While noting that “traditionally, our profits are skewed to the second half of the year because of the importance of Christmas”, she remained wary of the uncertainties around the ongoing pandemic as the UK moves into winter.
For me, the acid test will be Black Friday. John Lewis has traditionally fully embraced the folly that this represents in terms of sales pattern disruption, margin erosion and creation of supply chain bottlenecks. Partly because its “never knowingly undersold” pledge means that it is drawn in by default. If it is to break with the past and plot a brave new strategic course as it seems intent on doing, surely it must redefine its stance on Black Friday? But I’m not sure it will.